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Comment by nonchalance | Hacker News Reader

> More recently, it had been in acquisition talks with Square, which also fell through, possibly because Braintree is asking for too high a valuation.

> According to industry sources, Braintree has been asking for $1 billion, which seems unrealistic.

It would seem that other suitors are trying to pressure Braintree to lower their target

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Square processes $10b. BrainTree processes $10b.

How is Square valued at $4b and BrainTree can't sell for $1b?

Growth, and probably Stripe plays no small part.

That's not how valuations work. There are a lot more factors than current revenue. Their business models are somewhat different.

Maybe it's because Square has a higher percentage of small merchants on their service, who can't negotiate better rates?

Isn't valuation is based on not only current revenue and business model but also forecasts and potential?

Square has a bit of a different opportunity than BrainTree as they are focusing on simplifying a real-world payments platform vs online and mobile payments. There seems to be less competition and a larger market for Square vs. Braintree I think.

What are the first and second derivatives of those numbers with respect to time?

That's the right question to ask. The absolute values are important but not as important as the trends.

Valuation is based on growth and expected future profit more than current revenue or processing volume. If two companies both process $10bn, but one makes 3% and is growing 25% YoY while the other makes 1% and is growing 5%, they should have radically different valuations.

Growth potential, total potential market size, other possible revenue sources (e.g. Square Marketplace).

Square probably has better gross margins than Braintree because they target a different market: small businesses.

The value Square adds to that market is much more substantial: free POS system, mobile wallet app, promotion in their marketplace, Jack Dorsey's autographed photo, etc.

Braintree (and Stripe) target ecommerce startups. Their value-add is streamlined APIs and tailored customer service. That value-add is nice but relatively smaller and less scalable to boot. As soon as those sites get big they will negotiate for lower rates they can get from a commodity processor. No doubt the big customers in their portfolio already have and we just don't know it.

Square's got a whole world of small business to expand into, a much larger market than ecommerce startups. And their margins are more sustainable; it takes an awful lot of growth for a merchant to justify switching out all their POS systems and other Square lock-in, just to shave a few basis points off their processing rate.

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