From Uber to Stripe: Wall Street Pushes Silicon Valley to a New Direction
By Lior Ronen (@Lior_Ronen) | Founder, Finro Financial Consulting
Something has cracked in the intersection between Silicon Valley and Wall Street. For a long time, valuations of privately held tech companies have been increasing based on expectations for potential future growth in user base or revenues. Valuations that rely solely on top-line performance and user numbers and that ignore financial performance or potential profitability remind me of the “eyeballs” valuations that were common in the late 90s, in the peak of the dot-com bubble. Back then, that ended in a crash that severely impacted not only Silicon Valley but also Wall Street.
In the last few years, low interest rates around the world have pushed investors to private and public equity markets. Worldwide stock prices have been constantly rising in public markets, and, consequently, investors are looking for the next Google or Facebook in the private market while ignoring many financial and business elements.
Only a few months ago, Uber was the next big thing in the tech world, mostly due to its impressive revenue growth and the increase of its users around the world. Every investor tried to put a hand on some shares in the secondary markets just moments before the IPO. Pre-IPO Uber sustained big losses, and it was struggling to shake off the shadow of its founder and ex-CEO Travis Kalanick—including the problematic corporate governance and financial performance he had left behind before his ousting. One sentence from Uber’s S-1 (later appearing also on Lyft’s S-1) caused many investors to flinch:
“We have incurred significant losses since inception, including in the United States and other major markets. We expect our operating expenses to increase significantly in the foreseeable future, and we may not achieve profitability.”
Wall Street did not see such a warning in a high-profile IPO since the big IPOs of the dot-com era, and investors showed their lack of support in the company by selling stock in large quantities. Today, the company is traded in a market cap of $49B, which is almost $30B lower than the company’s valuation in the latest private market round. Wall Street investors refused to adopt the private market valuations and could not look away from the problems of the business model and increasing losses.
Much like Uber, WeWork also arrived at its IPO with a lofty valuation based on very high growth rates and expectations for an even higher increase in future sales. WeWork’s S-1 highlighted the company’s failed corporate governance that former CEO Adam Neumann had built, and—just like Kalanick—Neumann found himself ousted from the company he founded. WeWork’s case is even more extreme than Uber’s, since WeWork canceled its IPO and started a company-wide deep reorganization to fight for the life of the company.
While the “new” valuation model—based on growth expectations while ignoring profitability—was pushed back by Wall Street investors, the “old” valuation model—based on profitability, a strong business model, and a broad user base—is taking center stage again with Stripe’s entrance into the top 10 most valuable startups. Chinese financial service giant, Ant Financial, which is owned by Jack Ma and Alibaba, is at the top of the list, and some claim that Stripe is currently on a pathway to replace it.
Stripe is probably the biggest financial company that is still unknown to most people. Stripe’s part in the daily lives of individuals and in the tech market is so significant and fundamental that it is strange how little it is recognized outside of the tech industry. Stripe primarily provides payment processing services for transactions taking place online through the web or an app. Its most outstanding clients include Google, Facebook, and Amazon, but, in fact, almost every American or European SaaS company uses Stripe behind the scenes. Unlike PayPal, Stripe users do not need a Stripe account to use its services because once they enter their credit card details, Stripe uses them to process the payment behind the scenes.
Stripe is such an integral part of the tech industry these days that it is compared to AWS. Currently, every company that wants to sell something online will approach two vendors in the beginning: AWS and Stripe—which is highly significant. Stripe has figured out the basic needs of young software startups, and after years of primarily offering them a simple payment processing service with reasonable fees and simple integration, it has also started Atlas, a service in which Stripe helps founders incorporate their software startups in the United States, open a bank account, and then link that account to Stripe’s services. This way, Stripe is setting the foundation for a long-term relationship with potential clients from the very early stages of the business.
To increase the company’s revenues from existing clients and to expand the company’s long-term services, Stripe has launched two new services lately: (1) capital, flexible, and immediate financing for existing clients and (2) corporate cards for existing (corporate) clients. Stripe’s business model is based on providing necessary financial services, and it plays a central role in the tech industry, dominating its niche in the payment processing market. This makes Stripe not only profitable but also a very lucrative investment, especially in light of the recent failures of Uber and WeWork.