
Square’s IPO Terms Put Valuation Below Latest Funding Round - pierrealexandre
http://www.wsj.com/articles/square-outlines-ipo-terms-1446812826
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JonFish85
To me the biggest question is what, exactly, Square does? Years ago they were
the company that made it easy for people to accept credit card payments who
otherwise wouldn't want to / be able to (mom & pop stores, farmers' markets,
etc).

But you don't build a multi-billion dollar company just there, it seems that
the margins are too thin and the volume just isn't there to make up for it.

Since then, they've done their Point of Sale device (not just the dongle),
which I haven't heard much about. They also have their small-business-loans
side--are they a bank / lending agency? They say that it's technically not a
loan, but it's close enough for me.

They also do (did?) payroll services for small businesses?

I guess when I look at them I see them with a lot of irons in the fire, but
with none of them doing particularly well. To me it seems like they've tried a
bunch of things, none of them has really stuck, so they want more money
to...do what? Keep trying them?

Full disclosure, I worked for a company for a few years that was in a similar-
ish space, so I am probably biased against them. We fought a lot of similar
battles, of trying to create a margin inside of credit card margins, and I'm
fairly convinced that it's not a way to scale a billion dollar business.

~~~
numlocked
Re: their small business 'loans' \-- with the caveat that I am not an expert:

The "loan" distinction is important not for semantic reasons but practical one
-- they are offering small businesses _cash advances_. These are different
from loans because _they are not secured_. There are no assets put up as
collateral. However Square believes they can do this better than other
services because they can effectively secure the advance by taking a piece of
each card swipe at the merchant's point of sale system. But if the business
goes under, Square has no claim on any assets.

I don't totally understand why/when merchant cash advances work, but I believe
that adequately captures the 'how'.

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x0x0
Seeing a business' cash flow should give you great insight into their ability
to repay. Just a few of the things you can calculate that a bank can't:
microtrends in income, repeat customers (and trends thereof), changes in
transaction size as well as volume, etc. Plus it's easier to collect on that
loan.

~~~
TheSpiceIsLife
I don't follow why a bank can't see cash flow? I live in Australia, and here
almost everyone is using PayPass by MasterCard or PayWave by VISA - both are
contactless PINless card payments. All those transactions have to go in to the
merchants bank account.

~~~
x0x0
Um, sure -- but they get bulk deposited, not individual transactions. The
merchant account is what sees the individual transactions, and that bank
generally isn't the one businesses go to for loans afaik.

~~~
TheSpiceIsLife
Oh yeah, true. Excuse my ignorance. Although in Australia the merchant banks
also do business lending.

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akg_67
I am not surprised. Majority of tech IPOs in past year are trading below or
near IPO prices. The investors in public market have learnt from the past.
Most of these companies are coming to public market later when most of the
upside has already been squeezed by private investors. Most IPOs come across
nothing more than offloading to greater fools. Buying at IPO makes no sense.
Wait till prices stabilize after the IPO at actual value (new lows) before
buying.

~~~
will_pseudonym
Facebook was a great example of this pattern.

EDIT: See
[https://en.wikipedia.org/wiki/Initial_public_offering_of_Fac...](https://en.wikipedia.org/wiki/Initial_public_offering_of_Facebook#Subsequent_days).
It lost about half of its value before it started its ascension to today's
valuation.

~~~
tomp
Personally, I think that Mark made a great move with the IPO. It's really
silly to have an IPO at price $x, when it's well-known that the price will
jump to $y > $x on the first day of trading. It's basically a reward for the
elite, for the investors that have enough capital to be approached by the
underwriting investment banks. It's money that most companies leave on the
table, but Mark played it optimally.

~~~
jegutman
Huge mix of incentives here. I agree with you from a financial perspective,
but it's just more complicated (for all kinds of dumb reasons).

A) Publicity. Do you want good headlines or bad headlines from the IPO?

B) Secondary sales: It's kind of silly, but if / when you go to sell more
shares the people who have made money are more likely to buy (against all
logic) because some of them think of the money they made as a cushion against
losses.

C) Banks want to please their customers. Think of this as part of the fee for
the IPO. Typical underwriting fees are 7%, but they could be 10%, all
arbitrary, but they basically charge some extra points that they choose to
give to their clients in the form of IPO allocation for continued business.

D) Those same banks in (C) might be the people who help the executives moves
large blocks of stock in the future (not easy to sell 10 million shares of a
company without having large price impact). Executives in particular want a
good relationship with their underwriters and if they're too aggressive on
price they might not get it.

Agreed that none of these are super compelling, especially for a very long-
term owner like Zuckerberg.

~~~
tomp
A) Facebook doesn't need publicity.

B) Sure, but you want to encourage long-term investors, not short-term
traders.

C) Sure, but how does Facebook benefit from that?

D) I'm pretty sure there's enough competition in the market that a single bank
rejecting the block trade won't impact the final execution price too much.

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sjbase
To me it makes sense that post-IPO market cap would be lower than private
valuation. Investors in public companies are well known for having short-term
interest: "we want growth in every metric, and we want it next quarter."
Anyone who has worked for a public company has felt this pressure.

VC, PE, etc. arguably incorporate more information about potential future (2
year, 3 year, 10 year) growth than public investors.

Maybe we should stop comparing the two valuations so equally?

~~~
URSpider94
How could it make sense for pre-IPO investors to value a company more highly
than the public markets would pay? Where, then, would those investors be
hoping to earn a profit?

Put another way, the public markets are an auction to the highest bidder. If
there are a group of people out there (let's call them VC's) who think that
Square is undervalued at the IPO price, then they should be buying up all the
shares that they can get their hands on, until the price reaches their
expectation of a fair valuation.

I would say that an interpretation more consistent with the facts is that the
expectation value of Square has dropped significantly since the last fund
raising round.

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drcode
Technically, given that the last funding round had a stipulation saying "We'll
give you more stock if the valuation falls short" I think it's arguable
whether the public figures for the last round really represent a true
valuation number.

I think a better headline would be "Journalists who reported the last
valuation didn't dig enough to see that the contract actually stipulated a
lower valuation."

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ogezi
Square probably has solid fundamentals but a mixture of factors has caused
this problem in which they find themselves: bad performance of other tech IPOs
so far this year and the nature of its CEO's job. The performance of other
tech IPOs this year has left a bad taste in the mouths of the public markets.
Jack Dorsey is also the CEO of Twitter and is not fully committing to either
Square or Twitter. I think they'll do fine but unfortunately I'm not the
market.

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pbreit
Crazy that it's around Stripe's valuation and crazier it hasn't gotten in to
Stripe's business yet.

Typically $300m in margin on $1b in revs would get you $6-8b but there's just
too much negativity on Square right now with the part-time CEO, stream of
negative media and chaotic product set.

~~~
nemo44x
It's across the board in technology mainly. Tableau was beaten down pretty
badly until they recently made the case all too obvious they're ripping the
cover off the ball.

Other names like Hortonworks (at IPO level today) and New Relic (great
quarter, improved guidance but smacked down today) have had better than
expected results and are not getting much love from the public markets.

If software was truly in a bubble we'd see biotech prices in the public
markets where companies like Stripe would be valued at 12 billion right now.

I think it's a good time to begin collecting long term positions in some of
these small cap tech companies that have been offering IPO's as they may not
be "cheap" but they are massive growth stories and certainly and bubbly.

Some names have done well though like Tableau and Palo Alto Networks. It's a
mixed bag.

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mpdehaan2
Seems to say current valuation is below previous valuation.

The really bad scenario is 'current valuation is below current levels of
funding'

So it sounds like they are ok, they aren't just going to reap as large of
rewards. Crunchbase says they have taken $590.5 million in 9 rounds, so that's
still a crazy huge amount to be valued at.

------
myth_buster

      Many highly valued companies armed with private capital 
      have stayed away from the IPO market. 
    

I think this might become a norm in the short term

    
    
      * as the late stage funding rounds appear inflated,
      * an FED rate hike seems imminent and
      * arguably, public market may not have the same risk/return 
        appetite as those investing in late stage rounds.

------
rory096
Is this an example of the misleading late-stage valuations Sam Altman
mentioned recently?[1] What were the terms of the latest raise?

[1] [http://blog.samaltman.com/the-tech-bust-
of-2015](http://blog.samaltman.com/the-tech-bust-of-2015)

~~~
pbreit
I would say, No. Square's trajectory has definitely diminished. $300m in
margin on $1b in revs should easily support a higher valuation. And most of
the preferential terms apply to acquisitions, not IPOs. The "ratchet" is at
the $12 midpoint so likely will not come into play. The late stage investors
are not going to make money until Square goes above the $15.46 they invested
at.

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trjordan
If you think there's a tech bubble on because the latest private round came in
higher than the IPO, consider what the explanation would be if the IPO
valuation was 3x the VC round.

~~~
nilkn
This could be evidence of the beginning of a balloon deflation rather than a
bubble bursting.

------
yc1010
IMHO Square has more of a real business than Facebooks and Twitters of this
world do and actually have solved real world problems.

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reviseddamage
imo Square should have stuck to POS only and dominated that field completely.
They should worked that field till saturation. Once they were near to
complete, use the line item records from individual customers at POS and
convert to rewards. Once that is saturated, then move to e-commerce for P2P.

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spdionis
Can't read the full article without registering. Any alternative source?

~~~
vskarine
try this
[https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&c...](https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CB4QqQIwAGoVChMIkdvF9sn8yAIVF-
RjCh23Pgzh&url=http%3A%2F%2Fwww.wsj.com%2Farticles%2Fsquare-outlines-ipo-
terms-1446812826&usg=AFQjCNFdXBoOiaTlPJQ8De1ADL207r4S2A&sig2=GriAtjbULuXpFlrQbwzHJQ&bvm=bv.106923889,d.cGc)

~~~
password03
Hmm, didn't work for me. Try this one:

[https://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web...](https://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CCMQqQIwAGoVChMI0eWtktf8yAIVhF4PCh3NzAEn&url=http%3A%2F%2Fwww.wsj.com%2Farticles%2Fsquare-
outlines-ipo-
terms-1446812826&usg=AFQjCNFdXBoOiaTlPJQ8De1ADL207r4S2A&sig2=dIWZTxqUMaKEE8vkVX3hlg)

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ogezi
Square probably has solid fundamentals but a mixture of factors have caused
this: bad performance of other tech IPOs so far this year and the nature of
the CEOs job. I think they'll do fine but unfortunately I'm not the market.

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jgalt212
Expanding losses, part-time CEO, what's not to love?

