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  We generated net losses of $85.2 million, $104.5 million, and $154.1 million 
  in 2012, 2013, and 2014, respectively. As of December 31, 2014, we had an 
  accumulated deficit of $395.6 million. For the six months ended June 30, 2015, 
  we generated a net loss of $77.6 million. As of June 30, 2015, we had an 
  accumulated deficit of $473.2 million. 
Could someone explain the motive to go public while operating in the losses? Isn't the public market more averse to companies operating in the negative.

Also wouldn't the timing act more as a distraction for Jack?

Basically there are three reasons to IPO, one you are "forced" into it because the number of individual investors has crossed a predefined threshold of 499, second you are scaling the business and this gives you access to the public markets for capital, or third you are running low on cash on hand and nobody is willing to lead a new round with your current structure.

Given the wailing and gnashing of teeth this time last year [1] when Square raised $150M on a $6B valuation, it is entirely possible this is their last change to raise capital. If it doesn't work, and they can't cross the line into operationally cash flow positive they will become one of the larger unicorns to die this season. I really hope it isn't the case because I love their product and their service, but the S-1 doesn't paint a picture of hope. Doing some back of the envelope calculations I can't see any scale where they are profitable given their current fee structure.

[1] http://www.theverge.com/2014/10/6/6918211/square-funding-sin...

A somewhat off-topic FYI, but the JOBS Act increased the private holder cap from 500 to 2,000 shareholders as long as no more than 499 of them are accredited.


That's, uh, pretty weird actually. It means you have to know whether your RSU'd employees are accredited investors to know whether you have to go public?

Nah, there's a line that takes care of that;

> The new rule excludes from these calculations people who obtained equity under the company's equity compensation plans and investors who purchased securities pursuant to the crowdfunding exemption discussed in this alert.

That's the reason for the R in RSU. It's not an actual SU until liquidation event.

Minor nitpick: it's actually the U that makes it not actually stock. Owning Restricted Stock counts as being a shareholder, but Restricted Stock Units aren't Restricted Stock.

> Doing some back of the envelope calculations I can't see any scale where they are profitable given their current fee structure.

“We lose money on every sale, but make it up on volume”

So they keep their current fee structure as long as possible to build volume then switch over to something that will make money when there is no way to further raise funds?

That's some funny math right there.

Welcome to Silicon Valley

> I can't see any scale where they are profitable

What are your calculations? Square, Stripe et al are making massive margins on debit card transactions right now. Thanks to recent regulations (the Durbin amendment), the average debit interchange fee is 0.89% all included.[1] Square charges 2.75%. That means they're netting around 1.5-2% on debit transactions. That's huge for a payment processor.

Sure, they have higher costs for credit cards, and their easier sign-up probably means more losses from seller-side fraud. But if they can control fraud then 2.75% is still a healthy gross margin even on credit transactions. And it's crazy big margin for debit.

[1] http://www.federalreserve.gov/paymentsystems/regii-average-i...

What percentage of their transactions are debit transactions, though?

A lot. In the U.S. debit is over 40% of transactions and growing.


Those aren't Square specific numbers, though.

> Doing some back of the envelope calculations I can't see any scale where they are profitable given their current fee structure.

Here is a more optimistic analysis from Re/Code: http://recode.net/2015/10/14/squares-ipo-filing-its-complica... that looks at the numbers minus the Starbucks deal and concludes that their core business is healthy and has a path to profitability.

Thanks for that, this comment is worrisome from the article

"While Square will be a much smaller business from a revenue standpoint after the Starbucks deal lapses, it will be a faster-growing one with a much better shot at profitability."

So what is their target valuation when they go public? If they were going for $1 - $2B valuation? I think the world might buy that, but since their last round was at $6B, their investors would probably be pushing for $10B (because if you recall the Box IPO you remember that none of the late stage investors want to take a down round into the public markets) and that is like "Square 10 years from now" valuations.

So lets watch this one closely and see if they can get commitments for all their shares on the road show. And if not, we'll probably see a giant recapitalization or maybe a firesale to PayPal or something.

Agreed, that is the biggest challenge for them, and the First Data IPO (which is probably the best comp for them) has been challenging.

OTOH Square is on pace to hit $1B revenue / year and growing quickly vs. anybody else in the processing space, but it will all come down to how the market thinks about their business and their ability to cross the chasm from very small merchants (which makes up the majority of their business and they have locked up because other processors / ISOs cannot compete with their customer acquisition costs) into the next tier of small businesses...

Along those lines, great article from Bill Gurley about revenue multiples: http://abovethecrowd.com/2011/05/24/all-revenue-is-not-creat...

Doing some back of the envelope calculations I can't see any scale where they are profitable given their current fee structure.

Could you explain? I'm sure you have much more experience reading such numbers[1] than I do, but at a glance they look viable if they can grow to something around double their size.

Ignoring Starbucks and doubling the amounts for 1H 2015 to make it annual, they'll have about $1000M of revenue from transactions, and will pay about $600M of transaction costs. They'll have about $500M of operating costs for 2015 and $100M of various other costs.

If in 201X they were to be double this size, they'd have $2000M of revenue, and $1200M of transaction costs. If they can keep their operating and other costs below $800M, they'll be profitable. Of their expenses, "Transaction and advance losses" will probably scale linearly, but all the rest plausible to be significantly sublinear.

Is this simplistic scenario clearly impossible for some reason?

[1] https://www.sec.gov/Archives/edgar/data/1512673/000119312515...

Most of those losses are because Square subsidizes the actual cost of credit card processing (i.e. charges stores less than what Visa charges). There are a bunch of ways to mitigate this:

- the termination of the Starbucks agreement in 2016 (this already saves $27 million/year based on the 2014 numbers)

- raising flat-rate processing fees for businesses in the future

- reduce the cost of transactions by adding more fraud-prevention measures that make credit card processors happy (e.g. Chip and PIN)

- create a new business that allows Square to cut out the credit card networks by owning both sides of the transaction

- create a new business using the information from being in the credit card processing flow that is profitable enough to subsidize the credit card processing

Right now, I suspect they're trying to "pull an Amazon" -- they're operating at a loss, but they hope investors will like the brand and the vision enough that they'll put money in anyway.

> charges stores less than what Visa charges

Their flat rate of 2.75% is substantially more than what Visa charges for "card present" transactions. The highest cost cards are 2.4% but they're going to be a small portion of most stores' card mix. I'd think most shops cost Square 1.1-1.5% across all their transactions. Debit volume exceeds credit volume in the US -- most people are swiping their bank check cards, not commercial purchasing cards and the highest end reward cards that require pristine credit -- and the Durbin amendment capped the interchange fee on debit cards (when swiped a-la-Square Reader) at 0.05%+$0.21 per transaction. That means 2.75% is 98% profit for Square on a big debit card swipe.


The only place Square's subsidizing the transaction fees is on very small purchases where the flat ~$0.15 of the interchange fee amounts to more than 1-2% of the total transaction, and with AmEx where, if Square hasn't negotiated better than sticker rate, they could be paying 2.85-3.5% depending on business type.

If they're losing money on the one thing they charge money for, what's the business? And how are their competitors doing it? PayPal's historically offered merchants with volume as low as 1.9%. They offer 2.7% flat rate (no per-transaction flat fee either) for their swiper.

On a percentage basis that's true, but if the transaction is small, such as a $3 coffee, then the actual debit fee is (($3 x 0.05%) + $0.21) ~= $0.22, but Square would only charge $0.0825 in fees. I suspect those losses add up at the transaction volume that Square sees.

paypal got onto our website by offering 2.3%, matched our CC fees.. received an email about a month ago [1] to 2.9% thinking about removing them - I am frustrated.


Whilst interchange is indeed the largest part of processing costs, there are still assessments (0.13%) and brand fees (FANF, cross border fees (1.25% for Visa), etc) that increase the cost of processing over interchange.

Square can only hope to make a decent margin on its 2.75% pricing by 1. seeing a preferred distribution mix on card types (such as, high debit card usage; less Amex; less expensive rewards cards; high cards qualifying at card present rates & no downgrades) and/or 2. special interchange discounts with the networks based on growth initiatives and/or fraud tools.

If they can't generate enough $$ from processing revenue, they'll need to use card processing as a loss leader for other services (loans, analytics, marketing)...

In Ashlee Vance's "Elon Musk" book, Elon discusses this very issue with Square drawing on his own experiences with PayPal. Elon states that the notion of controlling both sides of the transaction, or better put, how to avoid the end user from withdrawing from their digital bank account is what he criticizes most about Square. He believes that, like PayPal, they have to create new ways for users to be able to utilize the money Square is holding onto for them by either creating businesses around say a Square-owned debit cards (ala PayPal debit card), extending the payment capabilities to partners, and essentially, just finding ways to keep the transactions within their network is what is going to practically eliminate most of their costs.

I'm about a third through the book. I like a lot of the content but I do not like how Vance ties most things to Musk's ego - even when they are hardly related and seemingly would have barely crossed Musk's mind at the time. He often seems to intentionally paint a darker picture where the facts don't warrant it.

Probably false. It has been reported that gross margins on Square transaction processing are around 30% which is believable at its 2.75% fee.

I keep waiting for Square and Dwolla to merge in some form as that seems like a great way for Square to start cutting out the credit card companies.

Dwolla is an extraordinarily unscrupulous business.

They marketed their service for years as 'free from chargebacks' and then (without notice!) silently deleted transactions which had, in fact, been charged back: http://venturebeat.com/2012/03/07/tradehill-sues-suing-dwoll...

Dwolla is nothing more than a fancy front-end on top of a credit union in Iowa. I tried to use it for my business back in 2011, but it was just too slow -- takes 2 weeks for money to get in (1 week transfer from their bank account to Veridian and 1 week from Veridian to your bank account) and 2 weeks for money to get out (same in the other direction). Very disappointing.

Harassed as many people as I could for information on FiSync so I could try to offer integration to local credit unions and banks and couldn't get any real information out of them on it; it was a phantom program back when I was looking.

its a bit different these days.

I know Dwolla's FiSync protocol is being adopted by more banks and is zero-cost, but for Square to provide the consumer coverage most merchants expect they would have to wait for FiSync to get to a much larger scale.

How would Dwolla help Square cut out the CC companies?

I think FiSync and Square both benefit from a vertical merger (I'm considering then to be in separate market spaces rather than competitors; which certainly could be debated). Both get a near term benefit of the expanded customer base which should help them expand. FiSync would benefit Square as would Dwolla Credit as a credit card alternative

Credit cards won't be immediately replaced as they are accepted virtually everywhere. I think Square could be positioned well to replace credit cards though using the old Microsoft model of embrace, extend, extinguish.

Embrace credit cards in the short game. Extend with direct payments (bank to bank and alternative line of revolving credit). Extinguish; pull the plug on the credit card companies once they achieve high enough rate of adoption.

I recently read how Salesforce is worth nearly $50 billion but has never turned a profit[1][2].

[1] https://en.wikipedia.org/wiki/Salesforce.com [2] http://www.npr.org/sections/money/2015/10/09/447249562/episo...

Salesforce did a lot of acquisitions worth billions of dollars.

Looking at their financial statements, net loss for last FY was 250MM but depreciation and amortization was over 700MM.

In other words, the loss they show is just a paper loss. They make money. Unlike Enron which was making paper profit but they were actually losing money.

>Looking at their financial statements, net loss for last FY was 250MM but depreciation and amortization was over 700MM. In other words, the loss they show is just a paper loss. They make money.

If they consistently do this then they're not making money. Depreciation/Ammortization is just an accounting method to distribute investments over time. If you're consistently returning a net loss it's not just a timing issue. In this case maybe Salesforce is like Amazon and continuously reinvests free cash flow so they don't return a profit to shareholders and instead reinvest it into new business. Is that what you mean?

Yeah, that's exactly what I mean.

Wall street rewards growth over profits so incentives for Salesforce are to keep purchasing businesses which at least break-even (e.g. Heroku) which in turn show growth in revenue but don't necessarily translate into growth in profits.

As long as Salesforce keeps buying these businesses, they can keep showing paper loss forever without actually being in any danger of running out of cash. And while they are doing this, their shareprice might double or triple.

It sounds crazy that it actually works but I'm not the one who is going to argue with markets.

> Wall street rewards growth over profits

That's not true, or at least it's only partially true. In the end, Wall street values discounted cash flow. As Bill Gurley has said:

> So growth is good, correct? There is a reason to save growth for last. While growth is quite important, and even thought we are in a market where growth is in particularly high demand, growth all by itself can be misleading. Here is the problem. Growth that can never translate into long-term positive cash flow will have a negative impact on a DCF model, not a positive one. This is known as “profitless prosperity.”

In other words, as long as you can show sustainable double digit growth, you can afford to value based on growth. If you don't and all of the sudden you can't maintain a positive DCF, the Street will hit you hard. SFDC, Amazon, etc are all teetering on the brink of collapse and equally becoming the next Walmart/Exxon.

[0] - http://abovethecrowd.com/2011/05/24/all-revenue-is-not-creat...

>It sounds crazy that it actually works but I'm not the one who is going to argue with markets.

It can be a great tactic if the businesses you build/buy are the same your shareholders would buy with the dividends you'd pay out since you'll save them some taxes. Since the mother company can also hope to add some value to the businesses it buys the end result can be quite interesting. Buffet's Berkshire is based on this kind of setup.

It means the business has positive free cash flow; it takes in more money than it spends in a year (i.e. it's not going bankrupt), but the paper value of assets it owns (largely intangible goodwill from acquisitions) is written down, meaning that they take a loss.

This is generally a win, if you're expanding, because it means you pay no tax on your free cash.

>It means the business has positive free cash flow

Note that this isn't necessarily true. You can have negative Net Income, positive EBITDA but negative FCF (what really matters).

showing a paper loss when you are actually profitable means you are overspending short term. It is not healthy for a business. It is no different than a person with a good job and salary who is hundreds of thousands in debit. You are basically spending future money that you have no earned yet. In the case of startups that future money is VC money

If they are spending their own money then they are not in debit...it is only if they are borrowing. Either case it is a paper loss except in the former case the example you give is reversed.

If you know how to create value by investing money, you should do that. If you've run out of ideas or expertise, by all means, profit.

A share price reflects the future value of the company's profits, not the past value. If the investing public believes that a large infusion of cash from the IPO will help you achieve profitability, they'll gladly invest.

Look at a company like Amazon, their net income was stunningly negative for a very long time [1] -- it's barely positive today -- yet their market cap is north of $250B. There is plenty of room for companies making losses to go public if they have a realistic plan to make profits in the future.

[1] - http://i.imgur.com/M9igHQK.png

Same logic as angels and venture capital... you don't buy for profit, you buy for growth. As long as their growth numbers are great, profit numbers don't have to be.

In 2012, they lost $85m. In 2014, they lost $154m. How much bigger are were they in 2014 relative to 2012? If it's more than 2x (and I have no doubt it is), they're on the right track. If they're 5x bigger, they're doing fantastic - revenue growth is outpacing red ink growth by a healthy margin. That means sooner or later, they'll not only be profitable, but tremendously so.

Square is a category-killer, in a key category.

"That means sooner or later, they'll not only be profitable, but tremendously so."

Says who? Growth is great, but it doesn't necessarily mean that profits are in the pipeline (e.g. Groupon).

And on top of that, what exactly is it that Square does that it's going to be profitable on? Is it the Point of Sale devices? Is it their Square Readers? Is it their small-business loans? They're not a terribly focused company, and maybe that's a reflection of their CEO doing double-time (completely speculation on my part).

Personally I see this as their last-ditch effort to grab some cash, to exit before the market gets worse. Their investors don't want to be left holding the bag when the IPO market gets cold, so it's better to cash out now while the name Square is worth something than to bet that they'll get bigger/better in the future.

What is a category-killer? From what I can tell, they are a middleman to another middleman (you could call them the third wheel), only one of which has the leverage in this world (it's not Square).

We read about them because... I'm not too sure actually, I guess it's because they are burning VC money and have a splendid website.

I should add that, as a customer of Square's customers, I breath a sigh of relief every time I see a restaurant or small business using Square for point of sale. It means I'll get email receipts, that I won't have to calculate tips, that I'm unlikely to get mischarged, that my credit card info isn't passing through some half-assed amateur homebrew system, etc. It means I'm not trying to understand whether to push X or the green button for credit rather than debit, it means I can write a nice signature with my finger rather than some terrible low-res scratch with a bad plastic pen in a tiny box, etc.

As someone who uses other people's payment systems, Square makes me happy. It's a product that respects the users.

I'm a happy Square user too.

But too bad we don't actually make them money.

Point of sale. They're building toward a monopoly on point-of-sale devices in small businesses. A lot of restaurants and locally owned shops have ditched their old registers in favor of Square registers, and Square gets a cut of all their sales. They can expand outward from there, getting into the enterprise market for chains, replacing the ugly, expensive bloatware.

Really complex retailers with broad product lines, like supermarkets and big box retailers, will continue with highly customized in-house solutions. But for retailers with only dozens or hundreds rather than thousands of products, and limited budget to buy fancy solutions, it's a godsend.

And, because the customers are making a major, high-risk, customer-facing commitment, they're going to be very sticky, very unlikely to switch. Basically, Square is entering a market where the established players are too slow and coarse-grained to reach a lot of potential customers, and then they'll have a terrific barrier to entry. That sounds like a good deal to me, from an investment point of view.

A lot of restaurants and locally owned shops have ditched their old registers in favor of Square registers

Some citations would be nice

Do you go to independent restaurants or small businesses? Here in Minneapolis, where "buy local" is a serious thing, we do it all the time. But if you only shop and eat at national chains, you won't see it.

I'm always curious why it's seems it's always this Hail Mary play, in attempt to win the lottery.

It's betting on a future, and the future is unpredictable.

"Too Big To Fail" is not the terminology I would ever want towards something I develop - I think Titanic.

I understand that businesses do not start out profitable from the get go, but $700 million in debt?

First Data, the largest merchant acquirer (spun out of AMEX years ago) is going public on Thur. with $18B in debt. They were taken private 7 years ago for $30B. Go figure.

Edit: Here's First Data's S-1:


Well that sounds like a classic LBO style series of events, which should be in a separate category from IPOs that are reached through somewhat more natural means.

We've already seen this. It's going to be spectacular failure.

Here are some reasons that could be at play.

1. Shove it through while public market sentiments are still positive and accepting or riskier bets.

2. The numbers can only look worse in the future.

The fact that the company is in the red, in itself, is not a reason to stop going public. Companies like FireEye are in the red but have multiplied in market cap since going public.

> Companies like FireEye are in the red but have multiplied in market cap since going public.

FireEye debuted at $20. It hit a peak of ~$85 shortly after the IPO. Its closing price today is $28.76.

As of September, 40% of the companies that went public in the past year with market caps above $1 billion were below their offering prices[1]. The market for IPOs has become even tougher since September. Just look at Pure Storage[2] and CytomX[3].

In my opinion Square is getting out to market while they can.

[1] http://www.bloomberg.com/news/articles/2015-09-14/many-of-th...

[2] http://www.wsj.com/articles/pure-storage-trades-below-ipo-pr...

[3] http://www.bizjournals.com/sanfrancisco/blog/biotech/2015/10...

> Could someone explain the motive to go public while operating in the losses?

The motive is to raise capital. The same as the motive to go public any other time.

> Isn't the public market more averse to companies operating in the negative.

In very broad terms, on average, sure, probably. But there's lots of factors in how the public markets react to a firm's offerings, and profitability is far from the only consideration.

Lots of good answers on here, but I'll just add the minus the horrible Starbucks deal (which may have been worth a shot, but is killing them now) they're very close to being profitable and may achieve that very shortly.

"we lose money on every sale, but we plan on making it up in volume" (TM)

This is a really honest question:

How do you sleep at night being the founder of a company with half a billion dollars in deficit? How do you go to work everyday? Is this "normal"? Is this expected?

I really don't understand how that situation can happen.

Edit: I just looked up their numbers. They have large revenues, but still. Such deficits would scare me.

Remember Amazon went public in '97 and took another 4-5 years to turn a small profit. To answer your question, smart investors are more concerned with the long term strategy than whether the company is turning a profit in the present moment. It is far from uncommon to raise a bunch of capital from the public market to invest in growth.

This is not a comment on Square's prospects, but their business model is clearly one that is betting on getting to very big scale before turning a profit.

Where did your inline quote come from? I tried googling the first line and it just led me back to your comment.

Thank you! Page 26 if anyone else was wondering.

The bet here is that as opposed to a good value company (which can kick off an occasional dividend based on its profits) it's a growth company, and the opportunity here is to capture future growth. AMZN is a similar proposition.

I suspect the gameplay is something different. Square when IPO'd will be in position of strength to make some waves of disruption in the market. That in itself will set Square to be the King of payment systems.

What if Twitter was going to be packaged up for sale, or already was, and there was a buyer lined up for a sale within 3-6 months?

That buyer would have to be insane. Other than a pivot (Periscope?), there is no 17bn dollar business there, only a circle jerk and bot traffic.

So, it's like HN?.

On a more serious note:

Twitter has a large following of powerful/smart people who don't leave over night. Sure, over time these people could leave, but why would they? What would a twitter competitor offer that twitter can't offer?

The primary function of an IPO is to raise money.

What are you using logic for? This is the next Jobs we're taking about.

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