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Stripe: From Startup to $1 Trillion Payment Processor

Stripe: From Startup to $1 Trillion Payment Processor

I’m sure you’re all familiar with hot startups like Airbnb, Instagram, Snapchat, Uber, Doordash, and Robinhood. But, have you ever heard of a startup called Stripe?

Stripe is a payment processor that processed more than $1 trillion in 2023 alone. Even if you don’t know them by name, it’s likely that you’ve seen this checkout page because just 2 companies control 75% of this market. Stripe controls 37.95% of the market, PayPal controls 37.79% of the market, and everyone else only controls 25%. And Stripe seems to be the big tech favorite with companies like Google, Amazon, Instacart, Shopify, Notion, and Kickstarter preferring Stripe.

Zooming out, this means that nearly half of the internet might be making their payments through Stripe. This is especially impressive given that Stripe wasn’t even founded till 2010. Not to mention, they were entering a crowded space with massive legacy players like Visa, Mastercard, American Express, Discover, and even PayPal. Yet, despite all the odds, Stripe has managed to rise to the top with a peak valuation of $95 billion.

So here’s how Stripe went from a college side project to the most valuable private startup in the world.

Humble Beginnings

The story of Stripe takes us to Dromineer, a small village in rural Ireland, to brothers John and Patrick Collison. From a very early age, the brothers showed signs of being academically gifted and showed an interest in computer science, math, and physics. This may be due to their parents, who had scientific backgrounds. By trade, their mom was a microbiologist and their dad was an electronics engineer. As such, the brothers got into coding pretty young.

In fact, Patrick learned to code around age 10 and he wasn’t building simple apps or games. No, by age 16, Patrick won an award for being Young Scientist of the Year when he built a new programming language called Croma inspired by the Lisp family. And the craziest part is that for much of their childhood, they didn’t even have internet access in their village. As you can see, these were no ordinary teenagers.

As they continued tinkering around with coding, the brothers naturally began experimenting with starting online businesses. For example, they started a company called Auctomatic which was started to help eBay store owners track their inventory. This company would be accepted into the prestigious Y combinator, and by the time the brothers turned 20, they would sell Auctomatic to Live Current Media for $5M.

Little to say, Patrick and John had little interest in pursuing education despite getting into MIT and Harvard respectively. They would soon get into iOS app development and use the money they made from small apps to pay for college. They were surprised by how easy it was to make money from iOS apps because Apple had made the payment portal so convenient.

And that’s where the idea for Stipe came from. Payments were so easy on the iPhone but so difficult everywhere else on the web. They quickly realized that charging customers was one of the biggest pain points of building an online business. There were really only 2 solutions back then, the legacy finance institutions which really only worked with big corporations, and Paypal which focused on end consumers.

The Collison brothers had a different target market: developers. At the end of the day, developers have substantial say in which payment platform a company uses, especially when we’re talking about small online businesses. The brothers were essentially solving their own problem. They had been the target customers for a service like Stripe in the past when they were building other online businesses. And if they could become a developer favorite, they could become a company favorite.

With that in mind, they moved to Buenos Aires for a month and built the first working prototype of Stripe. They wanted to make accepting payments as seamless as possible. Stripe famously works with just 7 lines of code. A startup just has to add 7 lines of code to its site for Stripe to work and that’s it. This simplicity is what made Stripe a developer favorite. And being previous Y Combinator founders helped a ton with getting early feedback and users.

In fact, one of their first customers was a YC company called 280 North. And its founder, Ross Boucher liked the product so much that he decided to ditch his startup and join Stripe. With this early interest, the brothers would begin approaching investors, and in 2011, they received a $2 million investment from Elon Musk, Peter Thiel, Sequoia Capital, and Andreessen Horowitz. At this point, Stripe was just in private beta, but in September 2011, they launched to the public leading us to the legendary rise of Stripe.

The Genius Of Stripe

At this point, you might be wondering how Stripe works and how it makes money. Well, Stripe is a payment processor which means that Stripe can collect payments from credit and debit cards in any currency. Stripe processes $1 trillion a year and they charge 2.9% of the transaction value plus 30 cents for every transaction.

This a genius business model because Stripe is essentially able to take a cut of every single payment that goes through them without having to deal with end consumers, delivering products, providing customer support, and whatever else. That’s why Visa is a $500 billion company. They process trillions in transactions every year and their gross margins are literally 100%. Stripe basically brought this extremely profitable business model into the Internet age.

And it’s not just legacy processors that they were displacing either. Stripe’s biggest advantage over PayPal is that users don’t need to create an account. Also, Stirpe isn’t known to randomly withhold funds like PayPal does. You could say that Stripe is the perfect fast-follower company. Fast-follower companies don’t do anything new. Instead, they copy the competition and make things noticeably better.

The best example of this is Google. None of their big products are novel concepts whether it’s email, search, browsers, cloud storage, or video sharing. They just did all of these better. And since people already know what all of these are, Google didn’t have to worry about educating customers, they just had to convince them to switch over.

Stripe did the exact same thing with the payments industry. They saw what PayPal, Visa, and Mastercard weren’t doing well, and fixed it. For example, Paypal likes to inject themselves into the checkout process and make themselves known which takes away from custom checkouts. Stripe, on the other hand, operates more like a white-label company.

They give developers full control of how they want to integrate Stripe. Payment processing was just the first business though. As they went further and further down this rabbit hole, they realized that there were several adjacent markets that they could serve such as security.

Imagine you’re a business owner processing payments, you’ll have to deal with credit card numbers and other sensitive data regularly. And the bigger you grow, the bigger target you’ll be for hackers and bad actors. This is naturally a security nightmare, giving Stripe the perfect opportunity to step in and securely handle that data. What’s most interesting about this business though is that Stripe allows enterprise customers to export their data to direct competitors if they want.

This might sound counterintuitive but it worked out really well for Stripe. You see, by giving customers the option to leave at any time, customers actually felt less need to leave because they knew they could do it whenever they wanted. Also, knowing that customers had this option made Stripe hyper-obsessive about creating the best product possible and maximizing retention.

Stripe was basically forcing themselves to deliver value to their customers every day to stay relevant. And while this gave them a very small moat over the short term, it helped them have the most satisfied customers and the best product on the market.

Organic Growth

One of the most interesting parts of Stripe is that they never really engaged in marketing. They didn’t hire a bunch of institutional salespeople or run insane promos to get companies to sign up. Rather, Stripe mostly just grew through word of mouth which is surprising given that we’re talking about a backend payment processor and not a social network. But it turns out that all of the other solutions on the market were so underwhelming in comparison to Stripe that engineers couldn’t stop talking about it.

Stripe’s value proposition for businesses was also quite straightforward. Stripe pretty much cost the same as all the legacy players but their engineers far preferred it. And given that Stripe made it easy to move to someone else, it was a no-brainer to give them a shot. Pretty soon, we saw Stripe portals on some of the hottest startups and businesses, and as their customers grew, so did Stripe. Just 2 years after starting, Stripe raised $18 million at a $100 million valuation.

And, later that same year, they raised another $20 million from Sequoia Capital, Founders Fund, and most importantly American Express Ventures. So even big credit card companies wanted to get behind Stripe instead of competing against them. And Amex was just their first strategic partner. Soon, they attracted other strategic investors including the likes of Visa and Google.

These sorts of investors usually don’t get involved until later on in a startup’s lifespan, but they can have a huge impact thanks to their credibility. For example, when Google started using Stripe, it suddenly became acceptable for other big tech companies to use them as well.

Despite achieving so much success without the payments processing world, Stripe never stopped expanding. For example, in 2012, they launched Stripe Connect which allowed businesses to seamlessly send over payments to multiple sellers.

This was especially useful for businesses like Shopify and Lyft because they have to manage payments between multiple buyers and sellers. Similarly, in 2018, they launched Radar 2.0, a fraud detection and validation tool to help customers detect and reduce credit card fraud.

Around the same time, Stripe launched Atlas which helps new startups with incorporation and early legal paperwork. Regardless of what exactly they were launching though, their target market was always the same which brings us to Stripe’s secret sauce.

Stripe’s Secret Sauce

The secret behind Stripe’s insane growth over the past 14 years is the customers they serve. Whether it’s with payment processing, fraud detection, or startup paperwork, Stripe is targeting customers that the big players overlook. With payment processing, companies like Visa and Mastercard are primarily focused on making life as easy as possible for customers like Walmart and Home Depot, not small websites.

It’s the same thing with fraud detection. Credit check and fraud prevention companies like Experian and Equifax are serving players like Amex and Apple, not startups and local businesses. By giving smaller businesses an industry-leading solution, Stripe was quickly able to cement themselves as the go-to platform for this demographic. And as these smaller businesses 50Xed and 100Xsed, so did Stripe.

Looking forward, Stripe is planning on replicating this exact same strategy but at a much larger scale. This primarily relates to global expansion and more specifically, expanding to underserved developing countries. For example, in 2020, Stripe acquired Paystack which was quickly becoming the Stripe of Africa. Stripe has also gotten involved in up-and-coming payment companies in the Philippines and Pakistan. Stripe has also gotten heavily involved in the startup funding space with the idea being that they can start these potential future giants with Stripe integrations from day one. So, how did Stripe go from 0 to $1 trillion in payments within just 14 years? Well, Stripe bet on underdogs and gave them solutions that only big players had access to. And as these underdogs became household names, so did Stripe.

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