Stripe IPO Greatly Depends On Square Post The IPO

  • Leading e-payments company Stripe recently raised $90M in $5B valuation.
  • The company controls 14% of the online transactions segment, and it’s a prominent acquisition target.
  • A successful IPO for Square could accelerate Stripe IPO plans for 2016.

The electronic and mobile payments market is gaining tremendous traction in the recent years with Paypal Holdings (NASDAQ:PYPL) becoming an independent company, Square going public, and many new players entering the market. The amazing growth potential of the e-payments market has attracted some of the largest tech companies like Apple (NASDAQ:AAPL) and Samsung Electronics (OTC:SSNLF) as well as financial institutions like Visa (NYSE:V), Mastercard (NYSE:MA), and JP Morgan Chase (NYSE:JPM), all trying to gain substantial market share in the crowded market.

While these giants try to penetrate the e-payments market, the San Francisco-based startup Stripe has been active in the field since 2010 and succeeded in achieving a central role in the industry. The e-payments market contains three main segments: in-store payment, online and in-app payments, and peer-to-peer transactions. As shown in Chart 1 below, Stripe has an impressive 14% market share in the online e-payments market after PayPal that controls more than 40% of that market together with its subsidiary Braintree. Square, by the way, is not even competing in this segment.

Stripe_Chart 1_111915

Stripe has an impressive list of partnerships that enable the service to maintain and grow its leadership position. Last year, when Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR) launched the new buy button, it was Stripe that was chosen to power these in-apps purchases, Apple chose Stripe to power the Apple Pay in-app purchases and AliPay uses Stripe to enable international purchases.

Stripe’s biggest advantage over its competition is its developer-friendly interface, that allows a quick and easy integration of Stripe capabilities within apps or online stores. As Stripe has such a broad network of partnerships and an easy-to-integrate solution, it is not a big surprise that the company controls 14% of the online payments market.

Business Model

As mentioned above, Stripe is an electronic payments company offering processing solutions to online and in-app transactions. However, unlike many other electronic payments companies, Stripe offers a comprehensive infrastructure that include payments platforms, cross-device checkout services, in-app capabilities and many other ready-to-use solutions. Like other e-payments players, Stripe uses the same per transaction charging model charging 2.9% + 30c for every successful transaction and lower fees for businesses processing large amounts of money.

Stripe also distinguished itself from competition by having the broadest solution supporting transactions in more than 100 currencies, all international cards, and even Bitcoin (0.5% fee per transaction). As the company still hasn’t disclosed any information about its revenue, and estimates in this case could be very broad, I cannot add better color on the company’s sales than this quote by CEO Patrick Collison, saying “think the valuation jumped because of the surprising momentum of the business. Right now, we are ahead of our 2015 projections of revenue, and transaction volume from merchants.”

Stripe Funding and Valuation

Compared to many other unicorns, Stripe raised a modest amount of $280M in six equity funding rounds between March 2011 and July 2015. In the latest series E funding round, Stripe raised $90M from credit card companies Visa and American Express as well as from the leading venture capital fund Kleiner Perkins Caufield & Byers, evaluating the payments startup at $5B. Other prominent investors include VC firms Sequoia Capital, Andreessen Horowitz, and Founders Fund as well as Peter Thiel and PayPal founders Elon Musk and Max Levchin.

The rising interest in leading FinTech companies like Stripe drove leading financial companies and VC firms to invest in the market's most promising company. As shown in Chart 2 below, Stripe's valuation was hiked sharply to $5B in the latest round. However, not much money was raised, which could indicate either low operational expenses or impressive free cash flow.

Stripe_Chart 2_111915

Next Steps for Stripe

When Apple, Samsung, JPMorgan, and other giants penetrated the electronic payments market, it became a more crowded and less profitable alternative for many players. The tech and financial giants that have recently entered this market cannot not allow themselves to maintain a marginal business on the books for long. To increase their market share and drive transaction volumes up, they will need to acquire some of the small pure-play companies like Square, Stripe, and even PayPal. I believe Stripe is a probable acquisition target. However, that acquisition could take place regardless of whether the company goes public.

The chances of Stripe going to IPO in 2016 depend strongly on Square’s IPO results and how its stock is perceived in the market. If the Square IPO fails and the stock subsequently drops, Stripe will probably halt any plans for its IPO. However, a successful Square IPO could accelerate Stripe IPO plans.

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