Square’s IPO Terms Put Valuation Below Latest Funding Round | Hacker News Reader

Square’s IPO Terms Put Valuation Below Latest Funding Round

wsj.com

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.

I'd like to see them get into the enterprise space and build a subscription management platform in the same space as Zuora. They certainly have the domain expertise, design, and engineering talent to do this.

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'.

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.

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.

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.

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

I consult in this space. A few points:

1. Square provides merchant cash advance. This is not a loan.

2. Payment processors like Square have knowledge of a company's credit card receipts but cannot determine a company's cash flow unless they obtain additional documentation from the merchant. Calculating cash flow requires not just incomings but outgoings of cash. Payment processors obviously don't have the latter.

3. Merchant cash advance is a last-resort financing option for small businesses. Despite your implied suggestion that merchant cash advance providers have underwriting advantages over banks, there's a reason merchant cash advance is frequently the most expensive form of small business financing.

Square only offers an advance based upon your cash flow history. There is still risk, but they recoup their loan at a pretty good pace which makes the implied interest rate very high. But- it can be a good deal for the vendor anyhow because it is unsecured, and there is guaranteed cash flow with which to repay it. If you don't make any money, you don't pay anything.

But square appears smart enough only to give the money to people who are fairly certain to have stable enough cash flow to make it work.

On the one actual square example I've seen it looks like the repayment is on the order of 6 months, and is a total of roughly half a month's cash flow.

> If you don't make any money, you don't pay anything

With the transactions, and hence Square's information, being several days ahead of the cash settlement, they might have preferential access to cash in order to recoup from a business that is about to fail.

> These are different from loans because they are not secured.

I'd still call them a loan, just not a secured loan. An "unsecured business loan" is already an established category [1].

[1] http://www.sba.com/funding-a-business/unsecured-business-loa...

That doesn't sound right. An unsecured loan is simply that.

I had no idea that they were in the cash advance space. It reminds me of the recent Bloomberg piece about it - http://www.bloomberg.com/news/features/2015-10-06/how-two-gu...

> 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.

Payment processors have been active in the merchant cash advance space for a long time. What you describe (split withholding) is not new, nor is it something that only Square does. Where split withholding isn't available, merchant cash advance providers set up lock box accounts. This is not a complicated process.

Also of note is the fact that according to Square's S-1, it "fund[s] a significant majority of these advances from arrangements with third parties that commit to purchase the future receivables related to these advances."

In the bay area, a good deal of the restaurants I eat at use square. So do the farmers markets, food trucks, and my coffee shop. I probably personally spend $200 a month through square and $50 through breadcrumb, so there's room to grow.

Key words being 'bay area', which is in no way representative of the market Square needs.

Another challenge for Square is that their core merchants are mom & pop coffee shops or like you said, food trucks - not particularly lucrative segments.

Square's POS can never compete with full-service POS (Aloha, Micros), and even in the quick-service market there is increasing competition (Clover POS, Revel etc). That's why they've moved into payroll, HR, time-tracking, albeit the $5 per employee is ridiculously expensive for SMB's.

Square will obviously have to grow more, but the reason I think they have a future is they're getting merchants who didn't take cards to take them, easily and cheaply. My family is not on the coast and there's still a lot of places that don't take cards for whom square should be a really good solution. Then they can do the classic microsoft strategy: start with the smallest/cheapest and relentlessly move upmarket. Will they ever be the solution for Safeway with hundreds of stores and a very complex discounting system? Probably not. But there's a lot of smaller businesses. Small to medium restaurants should be a key target customer.

Here in Denver I see it all the time. I actually don't really notice it (a problem for them as so many competitors directly cloned them)... until that email receipt arrives.

It's not ubiquitous here, but it's certainly common.

I see their PoS everywhere. It works super well, too.

It's not enough to be ubiquitous and useful in today's market.

Think of the unicorns.

It depends on how you structure your business. If you structure it for hypergrowth, then maybe not.

They are also in the food delivery business

https://www.trycaviar.com/about-us

TIL. I had no idea Caviar was a product of Square.

It isn't. They were acquired: http://techcrunch.com/2014/08/04/its-official-square-acquire...

Which means it is now :)

Square as well as Stripe have really changed PoS space. Before they arrived, the devices for PoS were truely ugly, unfriendly, hard to acquire and hard to use. I see tons of small businesses converting their PoS devices to Square/Stripe ALL the time. They are like iPhone for PoS. The potential is massive. They get huge amount of transaction data which alone is probably worth a billion dollars (customer habits, usage pattern, targeting, BI etc). They can easily expand in to integrated inventory, accounting and tax system which is well beyond billion dollar industry by itself. If you visit any super market or traditional retail space, one thing that would immediately catch your eyes is arcane PoS that literally runs on Win2000 based CE code. Even though it is super critical for running business, innovations in this space have been few and far between. if you have ever even tried to use any small business accounting/tax/inventory software you would know how pathetic and 1990-ish these software are. Given small businesses have limited resources, expertise and savvyness, this space is ripe for disruption. If there was easy to use, realtime, scalable, well integrated PoS system with smart customer focused analytics putting great business intelligence on fingertips of moms and pops, it would be worth its weight in gold for businesses owners. Square/Stripe could easily outpace SAP and Oracle in market cap/revenues if they play their game right and target this market with full force. The cut in credit card translations is small and probably irrelevant part of the story.

I think the problem is that though Square really did change things there (I agree w/ you), the space now is very competitive with a lot of different players, and it's not clear what Square can do that their competitors can't. It doesn't seem like there's really much lock-in or network effects that are helping them out.

At least for a while they had powerful brand name recognition and a head start.

Bigger, badder competitors (i.e. VISA) seem like they haven't been interested in competing with Square, and you can leverage momentum & recognition against smaller newcomers.

I dunno, I think the effects of brand recognition is perhaps overstated. I think one of the chief problems Square has run into is that while their products are great, merchants are looking at the bottom line - they would pay for an inferior but functional PoS solution if it means cheaper rates.

Square has more recognition with the public at large - but that also has little pressure on merchant adoption. After all, you're not going to refuse to swipe your card at the coffee shop because their PoS isn't Square.

Anecdotally over the past couple of years I've seen a proliferation of other PoS systems (all iPad-based) at merchants around me that are decidedly not Square. Square may have carved out the market initially, but the vacuum is being rapidly filled with players that aren't Square.

In the case of VISA, they have to be very careful when it comes to anti-trust issues. It already cost them six billion dollars last time around.

The last thing VISA wants to do, is take over the entire payment system. That's why they're not really attempting to compete with Square or PayPal. They could trivially buy someone like Square.

VISA's golden goose is exactly where they're sitting today: no serious anti-trust burden, massive margins, low overhead brand-based business model. The minute they start trying to own everything, the goose gets shot. Today they do $5.4b in profit on just $12.7b in sales - what can a very modest business like Square offer them on top of their massive 42% net income margins to offset the anti-trust scrutiny they'd be taking on? Absolutely nothing.

If VISA tries to take over the payment processor space, Discover and Mastercard will immediately go in for the kill on anti-trust.

VISA are investors in Square.

They can easily expand, but they already have established competitors in that space, such as Xero and Quickbooks. Give a shot to Xero, it definitely has all the things you desire for.

I think you really hit it on the head, Square really needs to integrate a real inventory, accounting system and you might have a real winner. I've used all the competitors, but so far go back to square. Their software is great for small inventories, but do no scale well. Intuit's software is pretty antiquated and integration is really pathetic and they are really dishonest with their fees.

Square more ancillary offerings are really terrible though, like their online store and loins. They are also offering more services with "hidden" fees like instant deposit which they charge an extra fee if you read the fine print. They are also losing out in online transactions with google, amazon, visa, mastercard, and amex doing half ass jobs.

The B&M marketplace is in for a big shift with the chip and pin starting to commence. I've only used it twice, but so far the machines that read them are ridiculously slow and cumbersome. I'm still waiting on my Square reader to see if they have a good solution.

This is a big pie, and Square needs to capitalize on its good start if not be overuse by the old goliaths.

It seems like a good strong business could have been built on the initial function of accepting credit card payments. What if (I wonder) Square had stuck to that and not tried to become a huge multi-billion dollar company? There's lots of room in the world for modestly sized companies making respectable profits.

I agree that their product set is unfocused to their detriment. But I would disagree that core payment processing is small or low margin. In fact, their margins are north of 30%. And small business payment processing is massive even without considering international and online, two massive areas where Square has completely dropped the ball.

I don't love the lending business because it seems a bit outside their competency but I can understand continuing it since it's currently hot and they do have decent visibility into borrower ability to pay, etc.

> 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).

tldr: Long Shopify, short Square.

I would look at https://squareup.com/appointments as an example of where they can go.

Basically, small business services of all kinds are on the table. Their job is to make it easy to run a small businesses. The first product was the little reader you put in your iPhone. It's been expanded since then, but the market is essentially "everything that small business owners struggle with".

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.

Facebook was a great example of this pattern.

EDIT: See https://en.wikipedia.org/wiki/Initial_public_offering_of_Fac.... It lost about half of its value before it started its ascension to today's valuation.

Except that it's almost tripled in price?

Yes, but before it tripled in price, it actually lost almost half its value.

https://en.wikipedia.org/wiki/Initial_public_offering_of_Fac...

So buy at IPO with options? In FB's example that'd have performed particularly well eh?

>So buy at IPO with options? In FB's example that'd have performed particularly well eh?

There are no Options trading on IPO's. Typically options start trading 3 months after an IPO.

Oh, interesting. I looked up recent IPOs on Nasdaq and ones from last month have options now. First Data (FDC) has been trading only 3 weeks and has options. But really low volume and ridiculous spreads. RACE has been trading only 3 weeks for less time and has more options. Perhaps they are exceptional due to their size?

Not that this would help with FB a whole lot since it'd have dropped a fair amount by the time you could buy options.

The rules aren't based on time, but basically on diversity of shareholders (there need to be a lot of shareholders and a lot of shares outstanding) which makes sense.

You need 7m publicly held shares outstanding (many IPOs don't do this, a lot of shares are controlled by underwriters and insiders who can't sell at the IPO) at least 2,000 shareholders and some minimum trade volume. There's a minimum share price too, but that doesn't effect IPOs.

Do you know where I can get the official docs on how options are controlled?

CBOE probably has them, or possibly through your broker, but they handle compliance so the nuance of the rules isn't terribly important (if you can buy or sell options for a security through your broker they have already met the standard).

The numbers I mentioned are in the Federal Register, but quite a while ago. The numbers are still current, though other parts may have changed:

http://www.gpo.gov/fdsys/pkg/FR-1994-02-07/html/94-2716.htm

Facebook's IPO flopped because of a glitch in the nasdaq where orders weren't being filled for hours and then multiple orders were being filled. It was not because investors didn't like the stock

I don't think the NASDAQ glitch had anything to do with it. FB flopped for many months after the IPO, not just on the first day. A much more likely reason for the decline that lasted months and brought the price down to $18/share is that investors didn't like the stock.

NASDAQ glitches don't curse a stock for months at a time.

Edit: https://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&...

Edit 2: Actually it looks like it took well over a year before the stock rebounded above IPO price.

Right. The stock flopped because it came out at a time when Facebook was still trying to transition to mobile. Their revenue from PC's was fine but they seemed to be missing the boat on mobile revenue and analysts were unconvinced they could monetize mobile.

Then they had a quarterly report that blew the lid off of mobile revenue and since then the stock has been a rocket. They executed mobile well and that's what the market was looking for.

They've only gotten stronger as Twitter has floundered after coming out strong. I do not have a position in Twitter but if they figure out how to add users (what Wall St. wants to see) they too will explode higher. They have said they do not expect any significant user growth this year and not until some time next year as new strategies get put in place.

If my wife starts using Twitter then I'll load up on the stock.

The glitch was also an anomoly to the nasdaq system as the typical ipo behavior was usually to buy up shares.

Rather in FB's case, there was a flood of order cancellations (in response to the news) entering the system that would reset the ipo book, preventing the ipo from going off.

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.

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.

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.

It stills screws everyone who is dumb enough to buy at the IPO price and the general public who is dumb enough to believe its real. They paid the Aug 2013 price to get Facebook in 2012.

Except the long-term investors.

In any case, the predicted price before the IPO was exactly the IPO price. That's fair. If your view was that FB has a lot to grow and the IPO price is too low, you would buy it. If not, you wouldn't. Back then, nobody knew its price is first going down a lot, and then up even more.

That seems a bit circular.

If there is no value left to get out of a company then the company is worth nothing. If there is value to be got, then there is some correct price. We might disagree on the price but if there are any future profits the company has a price.

I guess it depends on how much it'll cost to access those profits. It might turn a profit if it receives another $500mn in cash to keep operations running. But what if it can't, and it needs another $1bn worth of runway to reach it? There's always the hope of a profit down the road, but taken to the extreme, $1 of profit down the road in 10 years isn't worth the $10bn it'll take to get there (I know this is a very extreme example).

How have private investors "squeezed the upside" of a company before IPO? Dividends?

/Not being facetious

Inflate the price, lock in their returns.

If Facebook had few investors and not much equity sold, they would have the option of offering at a cheaper price to the public -- fewer folks to be paid back. The GP comment is also suggesting they might IPO earlier, when more of their value is potential instead of actual, which also makes it cheaper and more profitable (but riskier.)

By having more private equity (or VC) rounds before IPO, more of the risk-to-money conversion happens before random members of the public can participate by buying shares.

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?

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.

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."

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.

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.

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.

The way I'd look at it is that they had the chance to scale their business through Starbucks and the massive influx of money through the system was a major dud for them. That might be terms specific to the Starbucks deal, but ultimately that level of scale didn't help.

And at a numbers perspective, their revenue rose 54% last year, but so did their losses ($104m -> $154m). If their losses track their revenue growth percentage-wise, then scaling does them no good.

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.

  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.

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

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.

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.

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

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

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.

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

try this https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&c...

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

https://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web...

Search Google for the post's title.

You can actually now just click 'web' in the below-title links!

23 minutes ago | flag | past | web | 4 comments

Is that an extension or are you on mobile?

Edit: Thanks!

> [...] when you're logged in, stories on /newest and on /item pages have 'past' and 'web' links. Click on 'past' to search HN for previous stories with that title. This helps with finding duplicates. Click on 'web' go to a Google search for the story title.

See https://news.ycombinator.com/item?id=10223645

That's pretty cool! Good tip.

I can't reply to the comment under this but this is HN feature. It's on top of this page right under the title.

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.

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

Reply on news.ycombinator.com