Breaking Down Braintree’s Chances At $1 Billion

Welcome to the latest edition of PYMNTS.com’s VC Voices: a weekly column where we bring you commentary from the best of the best around the world of payments investment. Want to know what the biggest backers of our industry’s innovators and disrupters think? We give our VCs 500 words of unedited space to do with as they please, so you’ve come to the right place.

This week, we’re joined again by Matt Witheiler, principal at Flybridge Capital Partners. Matt gives us his take on Braintree’s ongoing valuation saga, and shares some lessons on payments and exit rounds.

By Matt Witheiler, Principal, Flybridge Capital Partners

The payment rumor mill has been busy these past two weeks bringing us talk of Braintree making the rounds to sell itself for a reported $1B+. For those not keeping track at home, the story goes something like this: fledging payments gateway in Chicago sees massive growth, raises $70M from top-rate venture capital firms, faces competitive pressure from other developer-friendly gateways (namely Stripe) and (reportedly at least) tries to find a home at Google, Square and PayPal.

Assuming the rumors are true, why may Braintree, once the darling of the startup payments world, be on the block and why has it struggled to hit the $1B mark? Hard to say precisely but let me take a stab.

The pressure to sell is the easier of the two to understand. Having raised as much capital as Braintree has, the company undoubtedly has a high valuation. How high is impossible to say but it’s easy to imagine the company being valued by their investors at $300M+. A $1B exit would be a great outcome for everyone involved, especially given the short timeframe since the company first raised money (June of 2011). But why the move to sell now and not wait longer to presumably go public or get acquired for an even bigger price? Two possibilities: either the exit opportunity provided itself (in which case perhaps they’re just shopping around for a better price) or the risk of continuing alone was too much to bear. While the former may be true, it quite possibly could be the latter. In a world where processors take ~ 3 percent of gross volume, where the competitive landscape has matured rapidly (with downward pressure on price) and where volume matters in getting to scale, it can be imagined that the board decided that now was the golden moment. Get out and get out big.

The reason the company may be struggling to hit their targeted $1B number is a bit more nuanced. There’s a bit of math that can inform the discussion. In early July, right before the holiday, Braintree released a press release that indicated they are handling “$10B in payments annually.” Given the 2.9 percent fee the company makes, at $10B of annual transaction volume you have a $290M revenue business. The math here is imprecise – it doesn’t take into account the per transaction fee, nor does it account for the discounts that their largest merchants get – but it’s close enough for government work. Applying the approximately 2.5x revenue multiple that the public markets trade processing companies at, Braintree would be “worth” $725M – short of the $1B mark. How do they make up for the $275M gap? There has been a lot of talk by the company recently about Venmo, a mobile p2p transfer startup that Braintree acquired last year and has converted to a mobile wallet. Could this be what Braintree argues fills the gap, what generates a “strategic” multiple? Maybe, but I’m not sure the argument holds water.

Unlike in the wild world of the consumer Internet, where companies with nominally $0 in revenue can sell for $1B , payments companies are generally valued by revenues and cash flows when it comes time for acquisitions at big prices. The payments world has seen its share of sub-$500M acquisitions at “strategic” multiples (i.e. those wildly different than similar public / private company multiples) including Revolution Money ($300M) and TXVia (undisclosed but reportedly a price similar to Revolution Money’s). But few if any companies in the space have hit wild multiples without real revenues to back them up. It’s just not clear that the acquirers in the payments space value eyeballs, consumer traction and sex appeal.

This is all speculation and your guess for why Braintree is selling and what price they may get is as good as mine. I think the only moral of the story is that in the payments world, so far the only thing that delivers large exits is large revenues.