Jack Dorsey: “I Believe That The Square Wallet Experience Was The Peak”.
Square Inc. Concerns have resurfaced about a possible tech bubble even after a strong debut on the stock market for the latest highly valued but loss-making technology start-up.
The stock price for San Francisco firm Square soared out of the gate Thursday morning, after the mobile payments company gave investors a scare, pricing its stock much lower than expected. SQ 45.22 % ’s initial public stock offering could prove to be a signpost for technology startups that have long been tapping private investors for deals at lofty valuations.
Square, a US mobile payments firm founded and run by Twitter co-founder and chief executive Jack Dorsey, fared well on its outing as a public company on the New York Stock Exchange. During an interview with Re/code on Thursday, Square CEO Jack Dorsey hinted that his company may resurrect the defunct Square Wallet, which was pulled last year after failing to be adopted by consumers and vendors. Square set its IPO price at $9 per share Wednesday night, a significant drop from the $11 to $13 range that had been forecast, causing some to question the viability of all highly valued tech companies planning to go public. I asked him to clarify whether he was talking specifically about doing something similar again at Square, or that the industry would move in that direction more generally. But Square’s share price popped to $11 by the opening bell Thursday, peaking at nearly $15 by midmorning, and then closing at $13.07 per share, a 45 percent climb from the initial price. “You can look at it as a glass half empty-glass half full scenario,” said James Angel, a professor of finance at Georgetown University. “They left a ton of money on the table — $4 per share times however many shares they offered is a lot of money — but it’s a good sign that demand is higher than anticipated.” The company’s conservative IPO comes after years of financial floundering.
Square – known for its small white readers that plug into smartphones and tablets – was valued at $3.2bn before trading began, well below the $5.85bn value implied in last year’s private funding round when it raised $150m. The company had problems selling customers on Square Wallet during its last incarnation, as detailed by Fast Company’s cover story on Square from last year. Square, which sells payment-processing hardware and software to small businesses, lost tens to hundreds of millions of dollars each year since its inception in 2012.
It still makes a loss after six years of trading, while Twitter – another company yet to make a profit – recently fell below its 2013 $26-a-share float price for the first time. Though Square’s main product—its payments-processing platform—has been widely adopted by small businesses, the company has struggled to attract and retain users for the other items in its portfolio. Private investors, who recently valued tech startups at $1 billion or more, in some cases may shy away from new deals, as investors grow more worried that the prices there no longer indicate levels in the public market. “We are likely to see more IPOs but at lower valuations,” said Sean Madnani, technology investment banker and senior managing director at Guggenheim Securities LLC. “Private capital for some companies is expected to dry up” unless they are willing to raise money at lower values, he said. To raise much-needed funds, the company announced in mid-October that it was going public, but even its initial pricing suggested that its $6 billion private valuation was inflated.
Some analysts have speculated that he will be quick to pass the reins over to a fresh pair of hands at Square, leaving him free to concentrate on turning Twitter into a profitable business. It has been a difficult time for tech flotations globally, with French music streaming company Deezer and Caribbean telecoms firm Digicel both pulling their listing plans in the past six weeks. The hot start to trading Thursday — which also happened to be Dorsey’s birthday — came as a relief to investors, and it signals a growing interest in electronic payment services such as Square’s. “Usually when a company cuts the price below the initial range, it’s a really bad sign,” Angel said. “The fact that Square cut the price and then saw extra demand shows there’s more interest in the company from nontraditional IPO investors.” Dorsey uses the IPO proceeds to try to expand the company into a larger payments and business-services competitor to big banks and financial-technology companies. Because of the lower prices that Square and other technology companies have had to settle for in recent deals, many private investors will be reluctant to invest more, leaving a discounted IPO as the best option to get more money.
Private start-ups have enjoyed a flood of investment in recent years from venture capital firms in California and from private investors hoping to grab a piece of the next Apple or Facebook. But Canaccord Genuity analyst Bob Liao said traditional investors on Wall Street appear “increasingly sceptical” of the lofty price tags being placed on private companies. In private fundraising rounds, Square shares were valued in 2014 at $15.46 and in 2012 at $11.01. “Sometimes you just need to get the deal done,” wrote Fred Wilson, a veteran venture capitalist and managing partner at Union Square Ventures, in a blog post Thursday. “Jack Dorsey did the right thing at Square.” Mr. Wilson’s description of the deal was “absolutely right.” He said that Square had “a long-term view on our business.” A Square spokeswoman said Mr. IPOs since 1980 that priced below the range, Square’s deal was one of just 1.6% that traded at least 40% higher on its first day, said Jay Ritter, a finance professor at the University of Florida who studies the IPO market.
Square and its bankers called investors late Wednesday, in particular seeking out buyers that saw big potential for Square’s new businesses, such as selling payroll software, data analysis and cash advances to the more than two million sellers who use Square’s devices to take credit- and debit-card payments, people familiar with the process said. Square’s ratchet gave those newer investors roughly 10 million more shares, representing some $90 million worth at the IPO price, or roughly 3% of the company’s shares outstanding, not counting future shares issued to employees. “Square had to choose between the lesser of two evils,” said Wesley Chan of Felicis Ventures. A high price could turn off public investors and send the stock even lower after the offering, he said, while a low price triggers the dilution of the ratchet. “Both are not great choices, but I would have chosen what Square did.” Aaron Levie, chief executive of Box Inc., BOX 1.98 % an online storage company that went public in January, faced a similar choice in his own IPO in January, which also had granted a ratchet to some late-stage investors, and priced its IPO at a level triggering them.