Stripe co-founder says high interest rates drive out ‘weird’ ideas in Silicon Valley

Rising interest rates have depressed tech stock valuations and had a chilling effect on Silicon Valley. Stripe’s co-founder says it’s necessary.

“Overall, the impact of higher interest rates has been pretty good,” he told CNBC at the company’s annual meeting on Wednesday, “It wasn’t a big deal when money was free in Silicon Valley. Not a healthy period“

Collison founded Stripe in 2010 with his brother Patrick. The company earned a reputation as a startup darling and was valued at $95 billion in 2021, making it one of the world’s most valuable venture-backed businesses, second only to Elon Musk’s SpaceX.

Stripe has been forced to join the rest of the industry in making deep cuts starting in 2022 as rising inflation and interest rates drive investors out of riskier assets, drive up borrowing costs and force startups to tighten their belts.

Stripe has cut its valuation by $50 billion in a 2023 funding round. According to The Wall Street Journal, the company’s latest employee buyout offer values ​​the company at about $65 billion.

“Valuations are a product of interest rates,” Collison said. Still, he said, “Stripe’s business is the healthiest it’s ever been.”

Stripe processed $1 trillion in funds last year, a 25% increase from 2023, the company said in its annual letter.

Collison said that while many tech companies took a hit in 2022 and 2023, the rising interest rate environment succeeded in weeding out “weird” startup ideas and allowing the best to get funded.

He noted that there is an “abundance of money” for some good ideas and that “zombie companies” take too long to go bankrupt.

“It’s not conducive to dynamic capital allocation in the broader economy,” Collison said. “You want people to work on the most valuable ideas, not marginal ones.

The Fed began raising interest rates in 2022 when borrowing costs were at long-term lows, and last year raised its benchmark rate to the highest level since 2001. Interest rates have held steady since then, and recent statements by Fed Chair Jerome Powell and other policymakers have supported that idea. Confirmed that: The cuts will not come in the next few months.

Federal Reserve Chairman Jerome Powell speaks during a news conference at the Fed’s William McChesney Martin Building on March 20, 2024 in Washington, DC.

Chip Somodevilla Getty Images |

Collison said there was more pain to come.

“The thing about high rates is that they should hit, but they don’t hit enough,” he said. “We should assume that damage takes longer to arrive.”

Collison said part of what’s driving the tech market in a high-interest-rate environment is artificial intelligence, “it seems like every week there’s a new round of AI funding.”

This week, Confused announced the closing of a US$63 million round of financing, bringing its valuation to more than US$1 billion. SoftBank and Jeff Bezos are among its backers.

Stripe is benefiting from this excitement in its own way. OpenAI, Anthropic and Hugging Face are among the AI ​​startups using the company’s payment processing technology.

“I can’t remember a time when Silicon Valley was so interested in technological advancement,” Collison said of the artificial intelligence boom, “broadly speaking, it’s an interesting time in the tech industry.”

As for Stripe’s future, an eventual IPO has been a source of speculation for years due to the company’s high valuation and list of high-profile backers eager for a return on investment. Collison said Stripe is “in no rush” and that executives are focused on providing liquidity to employees through secondary stock sales.

“We have not announced a timetable for becoming a public company,” he said. “What we are very focused on is ensuring good employee mobility.”

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