The cheapest $600 million of all time (and the beginning of the post-COVID world)

March 2021 in Silicon Valley

Welcome to Silicon Valley Outsider, a newsletter for aspiring startup founders and investors who live outside the SF Bay Area.

🍎 Quick Bite: A great interview with Semil Shah, a VC and Silicon Valley Insider, on the state of venture capital.

🤑 Stripe raises at an $95 billion valuation

I’ve written about Patrick Collison before — beautiful personal website, smartest dude in Silicon Valley, “Big and Booming” per my rankings — and, surprising few, it’s time write about him again.

This time, it’s because his startup Stripe (a payments processor for internet businesses) just raised $600 million at a $95 billion valuation. That makes Stripe the most valuable startup in the United States and the second-most valuable startup in the world (behind Bytedance, of TikTok fame).

While the valuation is undeniably impressive, I imagine some Outsiders might be confused:

Does Stripe, a behemoth that folks are calling the next Google or Facebook, really need to raise more capital?

The short answer is no. The longer answer is also no, but because they can raise hundreds of millions while only taking only a tiny sliver of dilution, why wouldn’t they?

When startups raise money, they have to give their investors something in return. That something is ownership — shares of their company — and the transaction represents a bet that the company will someday “exit” (i.e., sell to another company or start trading its stock publicly) at a much higher valuation, allowing the investor to sell their shares for a profit.

The catch is that percentage ownership of a company is a zero-sum game. There are only 100 percentage points to go around, so taking money from new investors dilutes (shrinks) the share of the company owned by existing investors and startup employees.

And that’s where valuation comes in. If you want to raise $600 million and your business is worth $600 million today, you’ll have to take 50% dilution to do so. (That’s massive: a typical venture round usually results in about 20% dilution to existing shareholders.) But if you’re Patrick Collison and your startup is worth $94.4 billion before taking on an additional $0.6 billion investment, your dilution is much smaller. You get $600 million, and your personal stake is diluted by just over half of one percent.

Not a bad deal for Stripe — and only time will tell whether it was a good deal for the investors. (My bet: absolutely, yes.)

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🌞 SF’s pain is Miami’s gain

The post-COVID world is coming, and — somehow — the Miami meme just won’t pass. I still don’t totally buy that Miami is on its way to becoming a new hub of entrepreneurial activity, but Keith Rabois and Delian Asparouhov need to have inspired a sizeable cohort of entrepreneurs and investors to make the move.

Some other influential folks that I know have made the cross-country trek include: Sizhao Yang (creator of Farmville), Arianna Simpson (Andreessen Horowitz Crypto investor), Jon Oringer (founder of Shutterstock), Jack Abraham (co-founder of Hims and Atomic), Anthemos Georgiades (CEO of Zumper), and David Blumberg (VC investor).

The real reason Miami has had such staying power, however, has little to do with its weather and a lot to do with San Francisco continuing to be a mess. SF has had a string of losses recently: school board members gone rogue, continued attacks against Asian Americans, and, of course, a motion to recall California Governor Gavin Newsom.

It’s very easy to tell a negative story about the future of Silicon Valley and positive one about an upcoming golden age of Miami tech.

🌉 San Francisco is coming back

But, honestly, I’m not sure that the negative story about the downfall of San Francisco is true. The resurgence is already happening:

All of the above is possible because San Francisco has had an incredible COVID-19 reponse. Per the New Yorker:

By January 1st, San Francisco, a city of almost a million people, had seen just a hundred and eighty-nine deaths… Some eight million people live in the Bay Area; just more than twenty-six hundred have died of COVID-19. Roughly the same number of people live in New York City, where, by the end of the year, there were more than twenty-five thousand deaths. In Los Angeles County, which is home to ten million people, four times as many have died as in the Bay Area.

That’s no small feat, and there’s no major metro area in the country that has done a better job through the pandemic. Today, 48% of all San Franciscans over age 16 have received at least one dose of a COVID-19 vaccine. That’s remarkable.

I fully expect this summer to see a resurgence of activity in the SF Bay Area and in Silicon Valley. The shutdown for COVID-19 was stifling, but worth it — because it means that we can and will get back to normal times safely far before the rest of the country.

And once the in-person SF activity starts back up again, I predict we’ll quickly wonder why Silicon Valley’s place as a tech hub was ever in question.