Square’s initial public offering has been hotly anticipated since the payment company first announced its plans, but Wednesday it was dealt a small blow when it priced at $9 per share, missing its expected range of $11 to $13 per share.
Telis Demos and Corrie Driebusch of The Wall Street Journal described how the company was forced to pricing lower than it originally planned:
Skeptical investors forced Square Inc. to sell shares in its initial public offering for less than the mobile-payments startup had hoped, further souring the market for new technology-company stock.
The six-year-old company, founded and run by Twitter Inc. Chief Executive Jack Dorsey, priced at $9 a share late Wednesday, according to people familiar with the matter. That is beneath the projected offering range of $11 to $13 and even further below the $15.46 at which Square raised money last year from private investors.
The poor showing came even as the broader stock market rallied Wednesday, with the Dow Jones Industrial Average up 247.66 points at 17737.16.
The IPO was one of the highest-profile offerings in months, and the result is further evidence that public investors are growing more skeptical of the enormous valuations that venture capitalists are putting on private technology companies.
Matthew Lynley and Katie Roof of Tech Crunch detailed some of the trouble facing Square:
Square, which started off as a simple card reader that plugged into a speaker adaptor, spent years trying to differentiate itself as a hip consumer brand as much as it was a point of sales and payments service for small- to medium-sized businesses. But the company has had to fend off growing threats from other point of sales services, and its consumer-facing businesses have generally flopped.
And, of course, there was its disastrous deal with Starbucks, which hindered the company’s performance. As just one example, the Starbucks deal cost Square $118.5 million in the nine months ended September 2015, while only bringing in $95.2 million in transaction revenue.
In its last filing with the SEC late October, Square showed widening losses and slowing revenue growth. The company reported a net loss of about $54 million, with Starbucks transaction costs hitting about $41 million in the third quarter. It said it had net revenue of $332 million in the third quarter, while in the same quarter last year, the company had net revenue of $227 million and a net loss of $37.7 million. The filing also noted that Vinod Khosla stepped down from the board.
Square, to be sure, needed to raise money — among other things that’s what necessitates an IPO. The company has shown net losses for eight consecutive quarters. It’s still facing the nagging results of its deal with Starbucks, which has hurt the company’s performance. In the past quarter, Starbucks transaction costs hit the company for about $41 million,
“I think they still have a lot to prove. I do think they have a challenge ahead of them,” Shopkeep CEO Norm Merritt said. “They really don’t have a proven profit model yet. They have some pretty dramatic open questions about their business. Their margins are a lot lower than you would expect.”
Leslie Picker and Mike Isaac of The New York Times explained how Square’s status as a unicorn isn’t helping it in its plans to go public:
Square is not the first I.P.O. of the so-called unicorns — private companies valued at $1 billion or more — to go public below its latest private valuation. But it is the largest in recent years.
Of 140-plus unicorns, Square ranked among the top 15 percent.
“The unicorn thing has gotten way out over its skis,” said Max Wolff, chief economist at Manhattan Venture Partners. “Square’s I.P.O says people are a little bit less caught up in the prospects of what you can become and are more grounded in what you are.”
Many investors have shifted their focus toward measures like earnings, which Square does not currently have, and away from revenue growth.
That shift in perspective can be seen with mutual funds, which have poured billions of dollars into private companies in recent years.
Lately, a number of funds have been discounting their positions in prized start-ups. While Square was on the road speaking with investors, it emerged that Fidelity had marked down the value of Snapchat by 25 percent. Dropbox, which provides cloud-based file storage, was devalued by BlackRock earlier this year.
From the beginning, Square has had challenges that caused it to face a trying process to go public. Its detractors have long been skeptical of the company’s business model, taking a small percentage of every credit card transaction it processes and splitting it with financial intermediaries, credit card networks and others, making it harder to achieve large-scale profitability.
Ryan Mac of Forbes had comments from CEOs of other technology companies on what they thought about Square’s future as a public company:
Etsy CEO Dickerson avoided commenting specifically on Square, but noted that a company chasing “headline valuations rather than fundamentals” could be in for a rough time as a public company. With Etsy’s market capitalization dropping below the $1 billion mark recently, Dickerson has felt some of the pressure, though he argued that the underlying metrics that he focuses on for his business, including adjusted EBITDA and free cash flow, remain “strong.”
Leaders of other private companies are also closely monitoring Square’s IPO to see how public investors react to another technology company stressing long-term growth over profits. ShopKeep CEO Norm Merritt, whose merchant services company competes directly with Square, called the market “more perfect than we give it credit for” but doubted that Square’s IPO would have a heavy knock-on effect for future listings.
“Frankly, I hope they do well because it will help us,” he said. “But if they don’t do well it’s not something I’ll wring my hands over.”
There’s no doubt that plenty of people will be watching Square’s debut as the so-called “unicorn” company moves out of fantasy land and into the world of constant public scrutiny. As Salesforce CEO Marc Benioff declared at a recent conference in San Francisco earlier this month, those CEOs of billion-dollar startups who wait too long for their IPOs are making a mistake and missing on the critical discourse that comes with being a public company.
Dickerson agreed, noting that he was happy that Etsy went public when it did. Still while Etsy’s been able to clear the IPO hurdle, its CEO said that there has been little respite in the shift from private to public.
“It’s surprising when people talk about an IPO as an exit,” he said. “It’s actually an entrance into a totally new world.”
