‘We Haven’t Won Yet’: Stripe Finds Growth Has a Cost

Chiefly, employees have been concerned that Stripe’s payment processing margins will thin as larger customers negotiate better deals from the company and its competitors. To make up for that, Stripe has been looking for a second act—higher-margin successes that could buttress its core business. It has, for instance, tried to sell customers additional financial services and software products. But many of those newer bets, which include banking services and corporate credit cards, haven’t taken off yet. Meanwhile, executives have struggled to pull off some of the company’s major software development priorities.

(See Stripe’s org chart here.)

Last summer, a broad slowdown in e-commerce sales walloped Stripe’s customers, slowing the company’s own revenue growth more than it had anticipated, people familiar with the matter said. Gross revenue hit $14.4 billion in 2022 and grew significantly slower than the prior year, The Information was the first to report.

‘Advice for the Wartime Manager’

As questions of a recession swirled and the stock market sold off, Stripe executives tried to prepare employees for tougher times. Over the summer, a Stripe executive sent around a memo with “advice for the wartime manager” as the firm curbed hiring and tried to get expenses under control.

“Q: How could things be going so well and everything feels impossible, all at the same time?! A: Serving 1000s of large users is very different than serving a handful of smaller users,” wrote Qi Jin, then an engineering executive at Stripe. “This scaling situation is nothing unexpected in a high-growth company like Stripe,” he added in the memo. He left the company in November.

In a companywide meeting in November, CEO Patrick Collison said Stripe needed to cut 14% of its staff in part because that year it had burned more cash than ever as it invested in growth initiatives, according to a person at the meeting. That was a big shift from the previous year, when it generated hundreds of millions of dollars in earnings before interest, taxes, depreciation and amortization.

The layoffs took some employees by surprise. In the late summer, dozens of product-focused employees flew to Mexico City for an off-site, learning about the local economy and taking cooking classes. One executive assured the employees their jobs were safe. Most of them were laid off a few months later.

The strife has made clearer what a number of executives have said told employees in meetings to motivate them: “We haven’t won yet.”

A Growing Business With Margin Pressure

Founded in 2010 by two Irish coding geeks, brothers Patrick and John Collison, Stripe built a seemingly surefire business model—a tax on a chunk of internet sales. The firm’s origin story focused on simplicity: Stripe only required customers to add seven lines of code to start getting money from customers.

The healthy growth rate it achieved—without burning much cash—helped generate sky-high expectations among investors. Before tech stocks crashed, Stripe started preparing for a public listing that could have been the second biggest ever in the U.S., after Alibaba, according to Dealogic data. One Stripe investor called it the next Google, comparing it to a giant whose high-margin advertising business spits out cash.

But payment processing is a different animal-–Stripe executives knew the company’s payment processing margins would shrink over time, as it expanded to larger customers in a sector filled with competitors.

Some of the Silicon Valley customers that grew up with Stripe, such as DoorDash, got bigger, giving them more power to negotiate prices. They have renegotiated deals with Stripe to reduce its cut of transactions, a person familiar with the matter said. And Stripe often has to fight for new and existing customers because it faces well-heeled competitors, including publicly traded Adyen and privately held Checkout.com.

Matt Risley, a partner at venture capital firm QED Investors and the former chief financial officer of buy now, pay later company Klarna, said companies in his startup portfolio are looking to lower costs, in part by renegotiating deals with Stripe. “Since the bubble burst, there’s been more of that,” said Risley, whose firm hasn’t invested in Stripe.

“It’s a commodity business at the end of the day,” Risley said. “There are things you can do at the edges to strengthen your hand and to command a premium, but the width of that premium can be whittled away.”

Stripe is banking on continuing to expand its customer base, not just rely on old clients. In a public memo last spring, the Collison brothers wrote that the company had attracted a “rapidly growing group of businesses,” adding 1,400 new customers every day in 2021.

The Long Road to Public Markets

Via an effort internally called Project Ocean, Stripe’s finance team has been trying over roughly the past three years to get the company ready for the reporting requirements and controls of a public listing.

All the while, Collison, the CEO, has maintained he isn’t in a rush to go public, even though the company is older than many other well-known startups were when they listed in recent years. Even Thursday, the company was hedging its bets by telling employees it would either go public or do a private market deal within the next year to give employees liquidity. Going public “is the most common path, and while it remains the default outcome, we’re going to assess both private and public options for enabling effective and orderly trading of Stripe’s equity,” the company wrote in a memo.

Two people familiar with the matter told The Information the process is more likely to result in Stripe raising new capital privately rather than going public. Stripe has been in fundraising conversations in recent months.

Stripe has also been trying to solve the margin problem. Over the past several years, it launched a number of products outside core payments processing. It started offering banking as a service products, including software that allows e-commerce firms like Shopify to essentially offer bank accounts to merchants, as well as software products such as billing and invoicing subscriptions. Mike Clayville, Stripe’s sales chief, referred to customers who use a half-dozen different Stripe products as “zebras.” The company has said 96% of its larger customers use multiple Stripe products.

But three former employees said those products are often difficult for salespeople to sell to customers that already use Stripe for payments processing. In employee all-hands meetings in early 2022, Collison said the company was behind its competition in building out its banking products, another former employee said.

Still, Stripe is going after—and landing—large customers. It announced a major partnership on Monday: a deal for Stripe to start processing a significant portion of Amazon’s payments in the U.S. and Europe. Stripe executives boasted that the deal adds to a string of larger corporate payments partnerships with companies including Ford, BMW and Zara.

Stripe also doesn’t appear to be hard up for cash, so it likely won’t need to raise money in a public listing. Collison last year shared with employees that “Stripe has cumulatively consumed less than $150M after 12 years of operation,” referring to the company’s cash burn. The company has raised roughly $2 billion from venture capitalists in its history.

Reining In Costs

While Stripe had been a relatively lean company throughout its earlier history, its ranks started to swell in recent years. Headcount doubled between 2021 and 2022, from roughly 4,000 to 8,000 workers. This growth put the company in a near-constant state of reorganization, with employees going through a revolving door of new managers, former employees said. In contrast, Stripe’s smaller, publicly traded competitor, Adyen, kept a leaner workforce. Adyen’s CEO wrote that it was “not led by short-term trends such as the pandemic-related ecommerce.”

As Stripe laid off employees in November, Collison wrote in a memo to employees that Stripe has “always taken pride in being a capital-efficient business and we think this attribute is important to preserve.” Internally, he has talked about reducing the amount of “muda” at the company, a Japanese phrase for wastefulness that auto executives also use.

The company is taking other steps to cut costs. It has started reducing how much it pays new engineers, going from issuing pay packages at the 90th percentile of the tech job market to the 75th percentile, according to a person briefed on the matter. The company had increased pay a couple of years ago as hiring tech workers became more competitive, another person said.

Meanwhile, executives have tried to keep employees in a mindset of grinding to win deals and get software projects done. Mark Cavage, Stripe’s head of financial services engineering, told a large group of employees last year about his time launching Amazon Web Services more than a decade ago. Back then, he said, Amazon employees slept at the office and ordered pajamas off the e-commerce site.

Executives have also tried to figure out where to curb the company’s ambitions. After work on Sonic floundered, they decided to cleave different parts of the work into smaller projects and extended timelines on the work.

Alex Johnson, an analyst who writes a newsletter about the financial technology industry, said Stripe’s streamlining hadn’t surprised him. Over the past four years, the company has appeared to be “getting into the mode of throwing stuff at the wall,” he said.

“Low interest rates and superhigh tech valuations in the private market—and investors dying to get an allocation in Stripe—I think convinced them they can expand the scope of what they’re doing without looking at the downsides,” Johnson said.