Stripe’s co-founder says high interest rates have killed the “wackiest” ideas

Rising interest rates have plunged tech valuations and had a chilling effect on Silicon Valley. The Stripe co-founder says it was necessary.

“Broadly speaking, the effects of higher rates are pretty good,” John Collison, president of the online payments company, told CNBC in an interview at the company’s annual conference on Wednesday. “The period when money was free was not a healthy period in Silicon Valley.”

Collison founded Stripe with his brother, Patrick, in 2010. The company has grown to become a startup darling and is on pace to be valued at $95 billion in 2021, making it one of the most valuable venture-backed businesses , after Elon Musk’s SpaceX.

Stripe has had to take a major cut along with the rest of the industry as rising inflation and rising interest rates starting in 2022 have pushed investors away from the riskiest assets, raised borrowing costs and forced startups to tighten their belts.

Stripe has cut its valuation to $50 billion in a funding round in 2023. The recent public offering to employees 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.” Regarding the downgrade, 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 took a hit in 2022 and 2023, Collison said the rising interest rate environment has managed to weed out the “wackiest” startup ideas, leaving the best ones to get funded.

He pointed to the “overfunding” of marginally good ideas and “zombie companies” that take too long to fail.

“This is not good for the dynamic allocation of capital in the wider economy,” Collison said. “You want people to work on the most valuable ideas, not the marginal ideas.

After a prolonged period of the lowest borrowing costs, the Federal Reserve began raising rates in 2022 and raised its benchmark rate last year to its highest level since 2001. Rates have held steady since then and the Fed chairman’s latest statements Jerome Powell and other politicians have reinforced the notion that there will be no cuts in the next few months.

Collison said there is more pain to come.

“The point of the high rates is that they have to hurt, and they haven’t hurt enough yet,” he said. “We just have to accept that the pain takes a little longer to set in.”

One part of the tech market that is moving through the higher medium is artificial intelligence, where “there seems to be a new round of AI funding every week,” Collison said.

This week, perplexity announced a $63 million funding round that boosted its valuation to over $1 billion. SoftBank and Jeff Bezos are among its backers.

Stripe is taking advantage of the euphoria 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 in Silicon Valley where there was this much interest in technological advancement,” Collison said of the AI ​​boom. “It’s just a fun time to be in technology, in general.”

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

“We don’t have a timeline that we’re announcing to be a public company,” he said. “The thing we’ve been quite focused on is making sure there’s good liquidity for employees.”

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