By Derek Andersen
The Collison Brothers and Story Behind The Founding Of Stripe

Updated: Bloomberg is reporting tonight that Stripe just raised an $18MM round with Sequoia at a $100MM valuation. Here is the story of how their startup was founded, and two names you’re going to be hearing a lot about: Patrick and John Collison.

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In 2005 at the age of 16, Patrick Collison was the recipient of the 41st Young Scientist of the Year for his work with Lisp. His brother and co-founder John Collison scored the highest-ever score received by a student for the Irish Leaving Certificate. Before Patrick’s last year of High School he left early to attend MIT.

During his first quarter of freshman year, Patrick founded Auctomatic and joined Y Combinator as a Winter 2007 company. Its path would not last long. At the age of 19 and ten months after incorporating, the company was bought by Live Current Media for $5MM where Patrick became the Director of Product Engineering in 2008. Meanwhile younger brother John attended Harvard the fall of 2009.

In early 2010 John and Patrick began working on Stripe together. At the time Patrick was working on several side projects and they debated why it was so difficult to accept payments on the web. They sought to solve the problem and see if it was possible to make it simple – really simple. The next 6-months they played with it, showed it to friends, and saw how people interacted with it, iterating along the way.

Within 2-weeks of building the prototype they had their first transactions with a Y Combinator company called 280 North.  Eventually its founder Ross Boucher (their first customer) would join Stripe as one of the first employees.

In the beginning they weren’t sure how big the market was or if they could provide the user experience that they wanted. They also didn’t have the answers to whether or not they could fully address issues like fraud, non-US payments, and solving similar problems that Paypal does but in user-friendly way.

Stripe originally partnered with a payments company but after they started taking it seriously they realized that the only way to control the entire experience the way they wanted to was to control all aspects of the process. They brought everything in house.

After 6-months they determined they were onto something big and that they could create the user experience that they wanted. Both John and Patrick started working on it full-time in the fall of 2010. The company was still bootstrapped, but the founders were starting to realize that as a payment startup they would need institutional credibility that an investor could provide. According to them they “didn’t look great on paper.” (To each his own standards but in my book they qualified as extremely legit. Note first two paragraphs above) John became the President and Patrick the CEO.

Growth

The team’s friends in turn invited their friends. “Initially it very much spread through a word of mouth process. That was surprising to us because it’s a payment system not a social network so it’s not something you’d think would have any virality whatsoever. But it became clear that everything else was so bad and so painful to work with that people actually were selling this to their friends,” Patrick recently said in a TechZing interview.

(Charts courtesy of Compete and Alexa. Translation: they are likely completely inaccurate)

Funding Process

Their first funding came from Y Combinator. Patrick knew Paul Graham through his involvement with Lisp and Auctomatic, and once they told him about what they were doing he offered to fund it. Considering he made hundreds of thousands of dollars on Patrick’s previous company it had to be a no brainer. His Auctomatic co-founder is also YC Partner Harj Taggar.

What’s interesting is that unlike 99% of YC companies, Stripe didn’t actually go through the standard startup bootcamp process. Patrick had already been through it once and didn’t feel the need to do it again. The amount YC invested was in the $20k-$30k range. That next summer they met with Peter Thiel after he spoke at a YC dinner, and the founder of PayPal offered his insights into the Payments market and his learnings from PayPal. After their meeting he offered to invest. They raised $2MM and added other usual Silicon Valley suspects like Michael Moritz and Sequoia Capital, Andreesen Horowitz, and SV Angel.

“Elon and Peter have been very insightful,” Patrick says. “They have sharp opinions on what PayPal did right and wrong. They have deep appreciation for how difficult it is to get there. They fought this battle for many years and it’s really helpful to have someone who can talk about the future in 15-years, but also someone who can empathize and sympathize with the day-to-day considerations. I don’t think there are that many people who can straddle both sides of that. “

Company and Domain Name

When they first started working on the site it was called /Dev /Payments. As you can imagine it caused some problems. “(The name) is horrendous to say. Plus most schemas don’t allow slashes in company names. So we decided we needed to change it.”

Names like PayStack and PayDemon were on the list but eventually they started to look any names they could think of and seeing what was present on the domain. Stripe.com had a lukewarm reception at first, but over time is seemed to have emotion and importantly was not associated with any other specific company or brand.

The domain owner was an MIT alumni and the subsequent sale for tens of thousands of dollars was relatively smooth. In June of 2011, roughly 18-months after the company began, the first designer joined the team and synced the brand and messaging which lives throughout their product and website.

The company’s office is in downtown Palo Alto and they currently have 17 total employees. Their hiring litmus test is that they’ll hire you as long as you’re someone the team would want to come into the office on Saturday, just to hang out with you. If not then they’re not getting the job.

Security, 7-Day Waiting Period, Costs

While their merchant approval process is instant, Stripe has a mandatory 7-day waiting period for each transaction before you can get your money. The founders say that’s the only way to do the fast and simple setup.

“Because it’s seven day that gives us time to really get an accurate picture as to the profile of the business. And because Stripe provides the easiest setup process of any payment system on the internet, that creates an attractive fraud target. We feel confident in our system and ability to detect that, but we can’t do it overnight.

“It has taken a ton of work and there’s a good reason that no one has done this before. But it’s also the one part of the product we’re unwilling to compromise. We always wanted a payment system that we could just go live with immediately and not have to fax documents or wait till the next day or call us.”

At 2.9% (plus $0.30 per transaction) Stripe is hardly the cheapest solution to process a credit card. But Stripe’s argument is that when you add up the monthly fees, setup fees, gateway fees, PCI fees, International Credit Card fees, and others you’re actually paying a lot more than you think. For instance if you try to process a card unsuccessfully then other providers will charge you a fee for the unsuccessful attempt. “We wanted to make sure that we only make money if you make money. It’s a messaging challenge for us to explain to people that they’re paying more for their credit card processing then they think,” Patrick said.

I’m excited to see what they guys accomplish and how they grow. There’s a lot of interesting startup competition in the space like Paypal haters WePay, Square, Dwolla, and even Gumroad. Clearly Stripe is hitting a cord with developers and other segments desparate for a better solution. When they release their traffic and dollars processed totals, people are going to be blown away.

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Credits: Thanks to TechZing for an in-depth podcast they did with Patrick where much of the material came from. Also to Wikipedia and Fast Company who has a good article worth reading.