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Billion Dollar Unicorns: Square Files for IPO Below Last Round of Financing

Posted on Tuesday, Nov 10th 2015

I have constantly questioned the prudence in the venture funding of companies at unjustifiable valuations. I believe that some of these Billion Dollar Unicorn companies, when scrutinized through the stock market investor’s lenses, will see their valuations whittle down to more acceptable levels. Last week, mobile payment processing company Square filed their IPO and as predicted, they failed to sustain their valuation.

Square’s Financials

Square was founded in 2009 by Twitter’s Jack Dorsey and his friend Jim McKelvey. They set up Square to help small business owners accept credit cards as a medium of payment for their goods and services. Today, they offer a free software app with low cost hardware that is able to convert mobile devices into Point-Of-Sales (POS) solutions in minutes. Additionally, they also provide analytics, inventory management, open ticket management and receipt solutions for their customers. Their customers include cabs, coffee shops, lawyers, landscapers, retail stores, and restaurants. Square’s core market is the US, but it also has a presence in Canada and Japan.

Square has seen strong revenue and market growth. Last year, it processed $23.8 billion of transactions, which were generated through 446 million card transactions from 144 million payment cards. Square earns revenues by charging its customers a 2.75% transaction processing fee for all transactions. For the six months ended June 2015, revenues grew 51% over the year to $560.6 million. It ended fiscal 2014 with revenues growing 54% to $850.2 million. In 2012, Square had entered into an agreement with Starbucks that enabled it to process credit and debit card payment transactions for all Starbucks-owned stores in the United States. Revenues net of transaction costs and for their agreement with Starbucks were up 67% for the six-month period ended June 2015 to $198.8 million. For the year, these adjusted revenues grew 73% to $276.3 million.

Square is yet to turn in profits. For the six months ended June 2015, losses have reduced marginally from $79.4 million a year ago to $77.6 million this year. Losses had grown from $104.5 million in 2013 to $154.1 million in 2014.

Square’s Future

Square is looking to expand its profitability through alternate business services. Some of its business lines include merchant cash advances and appointment-booking and even a payroll software, which are aimed at helping improve profitability. For now though, they are all small contributors to their overall revenues and margins.

Its Starbucks agreement is ending soon. In August 2015, Starbucks eliminated the exclusivity provision from their contract in exchange for an additional processing fee. Starbucks will be allowed to transition to another payment processor starting this month. Square expects Starbucks to transition to another payment processor soon. While Square’s revenues will take a hit because of the Starbucks deal, its profitability should improve. Under the current provisions, the Starbucks deal was a loss-making transaction that also involved a stock compensation payout.

When Square was set up, there weren’t many players in the space, but since then competition has increased significantly. But not all of these players have stuck around. Last month, Amazon closed down its credit card reader program that was aimed at the small and medium businesses. Analysts believe that PayPal too isn’t very focused on their mobile card reader offering. On the other hand, there are the likes of Apple that has launched its own mobile payments service last year. Google too is expanding its footprint in the market.

Earlier this year, Google acquired mobile payment company Softcard to allow the mobile wallet to be pre-installed by AT&T, T-Mobile, and Verizon Wireless on Android phones sold in the US, and Samsung bought LoopPay to launch Samsung Pay. Then there is the consortium of over 70 US retailers who have formed a Merchant Customer Exchange to operate their own application CurrentC within the mobile payment services. To make matters worse, the processing fee generated through these transactions is modest and needs to be shared with banks, credit card networks, and other financial intermediaries. There is an ongoing price war that is making it all the more difficult for companies like Square to turn their service profitable.

Finally, there is the looming question of its leadership. Jack Dorsey may be quite capable, but investors have their concerns about his leading two technology companies – Twitter and Square – both of which require serious focus to turn profitable and deliver growth. Both of Jack Dorsey’s wards are popular, useful services, but they seem like unattractive businesses.

Square has been venture funded so far with $590.5 million from investors including GGV Capital, Government of Singapore Investment Corporation, Morgan Stanley, Goldman Sachs, Silicon Valley Bank, Barclays Investment Bank, JP Morgan Chase & Co., Citi Ventures, Rizvi Traverse Management, Starbucks, CrunchFund, Richard Branson, Kleiner Perkins Caufield & Byers, Tiger Technology Global Management, Sequoia Capital, Visa, Khosla Ventures, Jim Pitkow, Marissa Mayer, David Lee, Andrew Rasiej, and Robin Chan. Their last round of funding was held in October 2014 when they raised $150 million at a valuation of $6 billion. Earlier this month, Square filed their S1 to go public and announced that they will be selling their shares at $12 each to raise $386 million at a valuation of $3.9 billion, significantly short of their $6 billion valuation last year. It remains to be seen how the market treats Square post IPO.

More investigation and analysis of Unicorn companies can be found in my latest Entrepreneur Journeys book, Billion Dollar Unicorns. Unicorns will also be discussed with some special guests during our 1M/1M Roundtable programs over the next few weeks. To be a part of the conversation, please register here. The term Unicorn was coined in a TechCrunch article by Aileen Lee of Cowboy Ventures.

This segment is a part in the series : Billion Dollar Unicorns


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