Stripe co-founder says high interest rates kill Silicon Valley’s ‘weirdest’ ideas

Stripe co-founder says high interest rates kill Silicon Valley’s ‘weirdest’ ideas

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

“In general, the impact of higher rates is pretty good,” John Collison, president of the online payments company, told CNBC in an interview at the company’s annual conference Wednesday. “A period of free money is not a healthy time in Silicon Valley.”

Collison founded Stripe with his brother Patrick in 2010. The company has since grown, become a startup darling and is racing toward a $95 billion valuation by 2021, making it one of the world’s most valuable venture-backed businesses, behind Elon Musk’s SpaceX.

Stripe has had to take a big haircut along with the rest of the industry as soaring inflation and rising interest rates, starting in 2022, are pushing investors out of the riskiest assets, driving up borrowing costs and forcing startups to tighten their belts.

Stripe cut its valuation to $50 billion in a 2023 funding round. A recent employee tender offer valued the company at nearly $65 billion, The Wall Street Journal reported.

“Valuations are a product of interest rates,” Collison said. Still, he said, “Stripe’s business is the healthiest it’s ever been.” Of the drop in ratings, he added, “We’re not going to lose any sleep over it.”

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

While many tech companies are taking a hit in 2022 and 2023, Collison says the rising interest rate environment is successfully weeding out the “weirdest” startup ideas, leaving the best ones to be funded.

He points to “overfunding” ideas that are few and far between, and “zombie companies” taking too long to collapse.

“That’s not good for dynamic capital allocation in the broader economy,” Collison said. “You want people to work on the most valuable ideas, and not on the small ones.

Following prolonged borrowing costs, the Federal Reserve began raising rates in 2022, and raised its benchmark rate last year to the highest level since 2001. Rates have remained steady since then, and recent statements by Fed Chairman Jerome Powell and other policymakers have reinforced the notion that cuts will not happen in the next few months.

Collison says there’s more pain to come.

“The high rate point is that they have to hurt, and they haven’t hurt enough yet,” he said. “We just have to assume that injuries take longer to arrive.”

One of the parts of the tech market that’s fueling the higher-rate environment is artificial intelligence, where “it seems like there’s a new round of AI funding every week,” Collison said.

This week, Perplexity announced a $63 million funding round that pushed its valuation past $1 billion. SoftBank and Jeff Bezos are among its backers.

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

“I can’t remember a time in Silicon Valley where it felt like there was a lot of interest in the technological advancements that were happening,” Collison said of the AI boom. “It’s just a fun time to be in tech, in general.”

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

“We don’t have a timeline that we announce as a public company,” he said. “What we’re quite focused on is making sure there’s good liquidity for the workers.”