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Why Stripe co-founder John Collison is undaunted by a looming recession

John Collison makes the case for two trends that might bolster fintech and other internet-based businesses as the world braces for a widely expected US recession next year.

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John Collison, President and Co-Founder of Stripe.

It’s a challenging time for large fintech businesses. 

Coinbase,Klarna and Robinhood - three of the most prominent fintech firms - have all announced thousands of job cuts in recent weeks in the face of mounting fears of a US recession. 

For those that recently became public companies the tumult is exacerbated by a severe depression in stock prices while for those raising cash in the private markets, down rounds are expected.

John Collison, co-founder and president of Stripe - the world’s largest fintech company valued by its last $95bn round of private funding - however, says there is no current impetus to raise fresh capital, either through a typical venture round or an IPO for the company.

The current economic turmoil may even be offset by deeper long-term trends, Collison said speaking at Money 20/20 last week.“Part of what motivates us is that only around 10 to 12 per cent of commerce takes place online. We think there's still a huge amount of room to run there,” he said. 

Over the longer term, he adds, the internet economy will come to a form up to 50 per cent of the real economy meaning today's headwinds such as high inflation and potential lower global consumer demand may be offset for businesses that benefit from digitalisation.

“We think that there are secular forces at play where offline activity is being, transformed into online activity,” he said. 

“The broad trend of offline interactions moving online - grocery delivery is often much more convenient for people -  that doesn’t really change in a recessionary environment,” he added.

Could the trend be similar to that which took place, after some initial market panic in the early days of the pandemic, when companies benefiting from an accelerated shift to online services skyrocketed?

Inferior (but better) goods

In classical economics, ‘inferior’ goods are those that see their demand go up as incomes rise. An example might be a supermarket’s own-brand products.

Collison says internet-based goods, in certain cases, might benefit from the same rule.

“I think a lot of the time people are using the internet to actually strip out costs from a supply chain and that can you sell directly to the consumer. That's why I think we may see an opportunity for certain startups where people get more price sensitive in a recession,” he said. 

“People are more focused on cost in a recession. So as a result internet retailers actually have an advantage versus offline retailers because of that reduced cost,” he added.

The fintech space could be a beneficiary of this trend directly too, Collison says.

“You see these effects in open banking…it is an obvious way where if you're a retailer you can strip costs out of your supply chain where you can move people to a lower-cost payment method,” he said. 

“I think the focus on that tends to go up during a recessionary environment. In the middle of last year, when everything was going through expansion, it was a hard sell to people - cost savings - because people were much more focused on expansion,” he added. 

Collison says fintechs now have the opportunity to “put together a different pitch” based on lowering companies’ cost bases.

"There are lots of opportunities if companies position themselves smartly," he said.

Secular forces

John and his co-founder and brother Patrick Collison have long talked about “growing the GDP of the internet” as their central mission in founding Stripe.

The company, however, has continued to expand its array of services in recent years in particular those that bring it into sharp competition with financial incumbents, banks as well as other fintechs.

This has led them to process hundreds of billions of dollars each year, a volume of transactions that grew 60 per cent in 2021. 

In March of 2021, the company also announced its biggest injection of cash to date, a $600m funding round at a $95bn valuation. Investors included some high-profile names such as Allianz X, Axa, Baillie Gifford, Fidelity, Sequoia Capital, and Ireland’s National Treasury Management Agency.

Given the normal cycle of fundraising, this has led to speculation as to whether the company will raise further cash and/or list on public markets any time soon.

With many companies struggling to maintain valuations achieved in 2021 given dire public market conditions for fintech businesses, it begs the question of whether Stripe’s $95bn round can be maintained.

“The honest answer is, I don't know. We haven't tried, we're not looking to raise money,” said Collison noting its rapid growth rates during the covid pandemic.

"Stripe, the business, has grown and improved a lot since even that fundraising round. So you offset two factors against each other. The business has grown a lot, but multiples have compressed a lot,” he said.

“What's happening, I think, generally, in the startup fundraising environment is at you see, everyone's time horizons are shrinking, right,” he added.

This means companies whose future earnings are further away such as venture-backed and loss-making tech firms are being most sharply hit.

“I think the thing to not forget is it is the same business at the end of the day. The quality of the business tends to be relatively similar. Stripe has the same product offering, the same market positioning, as we did six months previously,” he said.

“It's not a great thing for fintech companies, in a handful of different regards, but it's also not a bad thing to have seen the valuations of various fintech companies pare back. If you look on an absolute basis, at how a lot of publicly-traded fintech companies are valued these days it's still eminently reasonable.” 

People, he adds, can get too fixated on looking at the numbers going up and down for public and private tech companies and says businesses should worry more about the fundamental aspects of the business.  

“I don't think anyone would say that companies are trading at valuations on the floor. Fintech companies can still raise capital at reasonable valuations. I think you're seeing that for the public markets and the private markets.” 

“We're still very much long the internet economy, and we think it still needs investing in.”

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