We Haven’t Won Yet: Stripe to a Trillion

In this post I cover why Stripe will reach a $1 trillion valuation:

  • The numbers to a $1 trillion valuation

  • “We are just getting started”, Stripe Founders

  • Reasons like time horizon and writing being a huge competitive advantage

  • Industry tailwinds explained

  • Builders: Products no one else will build

  • Which insiders are still buying pre-IPO

Stripe is one of the fastest-growing companies of all time. How can two young men, barely 30, build something so valuable so quickly? Looking for the answer, I found the very first item on Patrick Collison’s “Fast” post:

Dee Hock was given 90 days to launch the BankAmericard card (which became the Visa card), starting from scratch. He did. In that period, he signed up more than 100,000 customers.

For Dee Hock, that’s an impressive 1000+ customers per day, pre-internet. No wonder Dee inspired Patrick. On Patrick’s blog, you can read other similar pages dedicated to Culture, Fast, Growth, and Questions. Clearly reading, writing and learning are part of the Collison brothers’ DNA and perhaps the key to why Stripe is growing so fast.

Obsessed with growth, Patrick and John Collison, are on track to beat Mark Zuckerberg to become the youngest Founders of a trillion-dollar company.

Rumors are the 10-year-old company is considering a market debut, so it’s a good time to explore how Stripe can reach a trillion.

The Trillion Dollar Valuation Calculation

As Stripe isn’t a public company at the time of writing, we have to piece together the public financial information available.

  • According to the Financial Times, Stripe recorded about $2bn in gross revenues in the third quarter of 2021

  • According to the Wall Street Journal, Stripe’s revenue in 2020 rose nearly 70% to about $7.4 billion.

  • Processing volume at Shopify grew 40% from Q2 2020 to Q2 2021. Shopify is a good proxy for Stripe’s growth as Stripe powers the majority of Shopify’s payments.

Filling in the dots with a simple estimated model around those data points:

By inferring back Q2 2021 using the full-year data, then growing Q2 over 12 months using the Shopify growth rate...

We can estimate Stripe’s annual run rate at Q2 2021 was $9.8bn.

A simple way to value pre-IPO Stripe is to compare its valuation or market cap to its public competitors. Stripe’s competitors are all public, so we can see their growth rates and see how the market values them as a multiple of their revenues. 

As you can see, Stripe is growing way faster than Ayden, so it would be very reasonable to currently value Stripe at a price to sales (p/s) ratio of 20:

20 x $9.8bn = $200bn

Predicting Future Growth

Stripes’ average growth rate for the past five years is 107%. But as we are estimating the future, I will use the pre-Covid 2018 growth rate of 50%. Slowing growth rates as companies mature, called growth persistence, has been studied to be around 85% per year. As growth slows, the valuation multiple of market price to sales (p/s) also lowers as investors pay more faster-growing companies.

So we can now estimate future market caps by modeling a growth rate and the price to sales valuation multiple:

I predict by 2026/27, Stripe will be a trillion-dollar company.

But, Stripe could get there much sooner. For example, if Stripe’s actual growth is higher, the market will value Stripe at a higher price to sales ratio. So Stripe could even hit a trillion-dollar valuation in just a few years. For example, Shopify has similar gross margins to Ayden and is valued at a price to sales ratio of 45.

Naturally, the key to a trillion is growth. So let’s explore the reasons why Stripe will continue to grow.

1 - We Haven’t Won Yet

Patrick and John are avid learners. They seek out and learn from the greatest, then make their own twist. Amazon’s culture is based on every day being “day one”, meaning they are just getting started. Patrick and John have adapted this concept to “We Haven’t Won Yet”.

From Stripe’s culture guide:

We Haven’t Won Yet - People often worry that they’re joining Stripe, or any nascently successful startup, too late. Have all the large problems been solved? Are there still important decisions left to be made and things to be built?

The good news: it’s not too late. Many of the most important problems that Stripe will ever solve are yet to be solved. You will, within weeks of joining Stripe, work on problems that no one here has solved before.

Examining Patrick’s reading list gives us an insight into his thinking. Particularly interesting is the book “The Beginning of Infinity” by David Deutch.

Deutch’s thesis is, unlimited human progress is happening, and we are at almost the very beginning of it. Plus, we always will almost at the beginning of it. So the more we understand, the more we realise we don’t understand anything.  Patrick seems aligned with this thinking.

“Our goal definitely isn't to sell Stripe” - Patrick Collison

Stripe Climate is an excellent example of how Patrick and John use Stripe to impact the world outside finance, along with the “beginning of infinity” principle.

It looks like they're just getting started. 

2 - Time Horizon as a Competitive Advantage

A long-term time horizon is Buffett, Bezos’, and Musks’ secret weapon. Note these great CEOs are all owner-managers. Long-term thinking is just tough to implement for non-owner CEOs. As Stripe is owner-managed, time horizon is a competitive advantage.

Are Stripe’s competitors prepared to invest multiple years in making their developers more productive?

Stripe’s competitors are listed companies, and that means hitting quarterly earnings targets or their share price gets punished. A project that takes five years to realize a return won’t be implemented because the results may not even take effect in the tenure of the current CEO.

A long-term time horizon is a huge competitive advantage because Stripe can do things their competitors can’t, as Stripe is not focused on short-term profits. 

3 - Writing as a Competitive Advantage

Imagine if all great thoughts, ideas, and processes were documented for everyone to use? This documentation is what Stripe has achieved by making writing part of their culture. Stripe team member Patrick McKenzie explains in his personal blog:

Stripe is a celebration of the written word which happens to be incorporated in the state of Delaware. We produce prodigious amounts of it internally, most of it widely visible within the company. My favorite job perk might be that library; it includes everything from a crackling memo about current state of book publishing (relevant to our interests) to experiment writeups about using machine learning to counter credit card fraud (relevant to our interests) to market analyses of SaaS adoption in Japanese businesses (relevant to our interests).

Stripe’s internal library is a huge asset. Externally Stripe is world-famous for excellent documentation. This acts as a customer success tool and a marketing tool. People want to work with tools they can easily and quickly work out how to use. Patrick McKenzie’s blog is also an example of how writing by Stripe employees works for Stripe’s marketing and recruitment.

Everything is documented. Stripe’s payment competitors do not have this written word asset, and even if they tried to build it now, they are a decade behind.

4 - Team

Sure, Stripe can hire exceptional people. Just look at Stripe’s board:

Impressive, right?

But there is something more fundamental happening. Patrick’s second-order thinking comes into play building the team at Stripe.

Patrick explains that a rapidly scaling human organization is an unnatural thing. Most organisations and communities that we are involved in, religious, family, work, school, do not double every year. Stripe is aware that growing Stripe so fast means team members are working outside cultural norms. 

Being aware of a problem is the first step to fixing it. People are always the most problematic asset to find, retain, grow and get to work together and Stripe is moving ahead here. 

But what if you make your team all in charge and feel that way, like mini-CEOs?

When I’ve dealt with people at Stripe they come across as confident, I felt like they are in charge. Stripe’s type of service is the opposite of subservient. They take command of the situation in a pragmatic way, like a really good salesperson always keeps control of the conversation. Others have noticed this too, as David Phelps tells The Generalist:

One thing that’s always impressed me about Stripe is that their CS [customer success] people always operate as though they’re CEOs. They talk a bit about their lives, talk about the vision of the company, offer to run projections, and offer to negotiate deals to support.

5 - The Product Flywheel

Stripe draws customers in with credit card processing then does everything financially for them. No real insight here as this is common knowledge, the classic land and expand strategy. Stripe’s real advantage is they also have all the data to build products others cannot.

But there’s more. Stripe accesses its customers' customers.

I was having breakfast on the 40th floor of the Salesforce Tower in London talking to a friend about Stripe. We discussed Stripe’s new banking service, Stripe Treasury. Way beneath us, we could see the head office of Natwest Bank, one the largest banks in the UK and home to 1000’s of employees:

Looking at the scale of banks like Natwest it appears like banking is really complicated and take a lot of people to run. Not with Stripe Treasury. With Stripe Treasury customers can set up banking services for their customers in a few lines of code:

Anyone can create their own bank, e.g. hold funds, pay bills, earn interest, and manage cash flow with a single integration

My friend and I, sitting eating breakfast, could open our laptops and using Stripe Treasury set up bank accounts for our customers. Just like the Natwest bank and thousands of staff. Stripe Treasury is a truly magical banking API.

A traditional monolithic bank, versus a few lines of code. How can the big banks compete with that?

6 - Building Products No One is Going To Build

Stripe communicate their product strategy through Stripe Sessions:

Our strategy is very deliberately to serve both ends of the continuum (startups and enterprises), and every point in between. This ensures we can provide the most powerful functionality to the youngest companies in the world, and that we can provide the most forward thinking technology to the largest and most established.

Serving both ends of the market, startups, and enterprises is traditionally a challenging strategy. But, no surprise, Stripe is pulling it off. On the startup end is Stripe’s $500 one-off fee business incorporation product, Atlas:

In July 2021 Stripe went on to report that 20,000 businesses had started by using Atlas and that these businesses had generated over $3 billion in revenue. In just under a year, 5000 brand-new companies were born using Stripe Atlas. As of July 2021, Stripe Atlas businesses employed 99,000 people

7 - The Covid Accelerator

BTB and McKinsey found that SMEs significantly accelerated their adoption of technology, undergoing ‘three years’ worth of innovation in just three months of the lockdown period. As such, Stripe found new types of businesses flocking to adopt online payments:

In just the first three months of lockdown, new customers from that lockdown period had done $9bn in revenues. Clearly, Covid boosted Stripe.

However, the question is this: Was Covid a one-off boost to adoption and improved efficiency? Or will it have an after-burner effect on growth? My view is Covid will have a long-lasting positive impact on growth. Certain people and businesses would have never adopted online payments, but Covid forced them to do so. It’s more than just speeding up adoption. It has changed people’s views and experiences with technology. Which, in turn, has improved long-term efficiency. For example, video meetings are now perfectly acceptable, without Covid that could have taken 7-10 years, if ever being, to be just as acceptable. Covid didn’t only speed up adoption but it changed habits for good.

8 - Growing Market Share In An Industry With a Strong Tailwind

PWC predicts cashless transaction volumes will more than double by 2030.

So the market will double, and naturally, the market leader will get the majority share of the growth. Past growth rates give us a clue to market share:

Source: CB Insights

Stripe’s market share within these three competitors has risen from 12% to 43% in 5 years.

Stripe’s continued growth will be driven by three factors:

  • Grabbing higher market share

  • In a market that is doubling 

  • Building new products no one knew would exist

9 - Notable Insiders Are Buying Stripe Shares

Early 2021 Stripe held a liquidation event for Stripe employees at a $95bn valuation. Let’s see bought Stripe shares in that opportunity:

  • Sequoia. Whose famous partner Mike Moritz, (one of the best VCs that ever lived) also happens to be on the board at Stripe

  • Shopify. One of Stripe’s biggest customers for payment processing.

Yes, both Sequoia and Shopify know exactly what is going on at Stripe.

Sequoia and Shopify got in whilst other buyers missed out. In this liquidation event bids from investors exceeded $4 billion but only about $1 billion of those bids were filled.

There are actually two key points here:

  • Notable growth lending insiders are still buying at a $95bn valuation.

  • At a $95bn valuation, current shareholders and employees believe Stripe still has a long way to go.

Very promising signals from investors and company insiders.

To Stripefinity and Beyond

With Stripe, you've got the Collinson brothers' brains, learning trajectory, second-level thinking, and execution. These are the best of the best Founders, on the road to one trillion.

But, once at a trillion, is this still “The Beginning of Infinity” for the Collisions? My guess is yes, they are just only getting started.

Like this post and want to read more as I continue to document potential new investments?