The archive · Money & Fintech · Financial decision · 2014–2015
Square priced its IPO at $9, halving its $6B private valuation to go public
After eight straight losing quarters, Square priced its IPO at $9 a share — a $2.9B valuation, down from $6B privately and below its own $11–13 range.
Square
What the business is
Payments and point-of-sale services for small- and medium-sized businesses, starting as a card reader that plugged into a phone and broadening into software and consumer-branded products.
How it started
Square started as a simple card reader that plugged into a phone, then spent years positioning as a hip consumer brand as much as a payments and point-of-sale service for small and medium businesses. A little more than a year before the IPO it had raised $150M at a $6B valuation — its Series E priced shares at $15.50 — and TechCrunch noted that CEO Jack Dorsey, also Twitter's CEO, added uncertainty about where his attention would go.
What happened
Square's late-October S-1 update showed the trouble: third-quarter net revenue of $332M against a net loss of about $54M, with Starbucks transaction costs of about $41M in the quarter and $118.5M across the nine months to September versus only $95.2M in related revenue. Losses had run eight consecutive quarters, its consumer-facing businesses had generally flopped, and other point-of-sale services were pressing. Square set an $11–13 range on November 6 — up to $403.7M raised, a valuation of about $4.19B — then cut the price to $9 on November 18, roughly $2.9B and below the $6B private round from a year earlier. Vinod Khosla left the board before the listing, and Shopkeep CEO Norm Merritt told TechCrunch that Square had 'a lot to prove': 'They really don't have a proven profit model yet.'
How it ended up
Priced at $9 a share on November 18, 2015 — roughly $2.9B, under half the $6B valuation of its last private round and below the $11–13 range it had set twelve days earlier — Square was set to start trading on the NYSE under the ticker SQ the next day.
Background
Square began as a simple card reader that plugged into a phone and grew into a payments and point-of-sale platform for small and medium businesses — processing transactions, selling software around them, and trying to build a hip consumer brand along the way. A little more than a year before its IPO it had raised $150M at a $6B valuation, one of the frothiest numbers of the 2015 private market. Then the S-1 landed, and the public market got to price the company from scratch.
The updated filing showed why investors balked. Square reported third-quarter net revenue of $332M with a net loss of about $54M, and losses had now run eight consecutive quarters. The Starbucks partnership was a live wound: $118.5M of transaction costs in the nine months to September against $95.2M of related revenue. Its consumer-facing businesses had generally flopped, point-of-sale rivals were gaining, and Shopkeep's CEO told TechCrunch Square still had 'a lot to prove' — 'They really don't have a proven profit model yet.'
Square first set an $11–13 IPO range on November 6, valuing the company at about $4.19B, then cut the price to $9 on November 18 — roughly $2.9B, under half the $6B its last private round had implied. The cut came as Fidelity marked down its Snapchat stake and BlackRock marked down Dropbox, making Square's down-round debut the public face of the 2015 chill on late-stage tech valuations. The pricing drew 175 points and 175 comments on Hacker News, and Square was set to open on the NYSE under SQ the next day.
What has to be true
- Eight consecutive losing quarters meant Square needed IPO cash more than it needed a high price; waiting for profits was not an option its balance sheet allowed.
- The $6B private valuation had no public-market anchor — Series E priced shares at $15.50 — so the IPO reset the company to what buyers would actually pay.
- The Starbucks partnership was an open wound: $118.5M of costs against $95.2M of transaction revenue in nine months made Square's margins look structurally bad.
- Cutting from an $11–13 range to $9 showed demand being tested twice; with Fidelity marking down Snapchat and BlackRock marking down Dropbox, Square's cut became the unicorn chill made public.
- Competitors such as Shopkeep said out loud what investors worried about — no proven profit model — so the final price had to be conservative enough to clear the market anyway.
What can be applied
Cutting an IPO price gets a cash-hungry company public, but it tells the market the seller accepts the lower number; the discount only pays off if the business later proves the price wrong.
Aftermath
As of November 19, 2015, Square had priced at $9 and was set to open on the NYSE under the ticker SQ — a company valued at roughly $2.9B, less than half the $6B private mark from a little over a year earlier. It was still losing money: adjusted EBITDA had turned negative in the third quarter, losses had run eight straight quarters, and the Starbucks deal was still weighing on results. Whether the stock would hold above the offering price after the open was untested; the company was betting that its SMB payments business would eventually make the discounted price look cheap.
Sources
- Square Prices Its IPO At $9
- Square Plays Safe On Initial IPO Price To Entice Investors
- Updated Square Financials Show Q3 Revenue Of $332.2M, $53.9M In Losses
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