November 19, 2015
Mobile payments processor Square had to sell its stock with significant discount at a price of $9 to complete its initial public offering. The discounted price plummeted the company's valuation to $2.9 billion, an enormous drop from $6 billion two years ago. With an original target of $11 to $13 dollars per share set by Square last week, the deep discount signaled that investors are becoming wary of once-hot startups that have not proven they can make money. The current price is more than 40% below the $15.46 reached a year ago when Square raised $180 million as a privately held company.
Square's shares are scheduled to begin trading on Thursday on the New York Stock Exchange under the symbol "SQ." The debut will test investors on their willingness to risk their money on a small FinTech company like Square, which is trying to compete with stronger players in the financial services industry.
The IPO discount also leaves Square at a risk of unprofitability for the first time in its six-year history. The company expected to go from $282 million to $346 million in the IPO before paying its investment bankers and other fees. However, it was able to raise only $231 million.
Wall Street seems to have second thoughts on Square CEO Jack Dorsey’s performance, who had also co-founded Twitter in 2006 and is the CEO of Twitter as well. Interestingly, even Twitter shares are dropping lower their IPO price of $26 set two years ago with Dorsey’s shares going down 28% this year. Like Square, Twitter still didn’t report a profit and is also struggling to broaden the audience of the service.
This deal is representative of companies that are falling out of favor with investors, said Jeremy Abelson, Portfolio Manager at Irving Investors. These are companies that are spending a lot to grow their top line but still have a tough path to profitability.
As stated in The WSJ, Square’s late-stage private investors like JPMorgan Chase and Goldman Sachs will be protected from the discount effect by what is known as a ratchet, which guarantees them a minimum boost by issuing them more public shares since the IPO has been priced below the agreed minimum.
Even though both of Dorsey’s ventures are struggling, they brought their CEO significant funds; his share in Twitter is worth $560 million and $640 million in Square right now.
As a reminder, on November 6, 2015, Square filed for an IPO. At the upper band, the company was valued at $4.19 billion, significantly lower than the latest funding round valuation of $6 billion in October 2014. We have discussed Square’s IPO and what it meant for FinTech valuations. Even though the company was looking to raise funds through the IPO to assist venture capital exits, it could not justify the $6-billion valuation. Square was listed as one of the hottest startups from Silicon Valley. As a unicorn, Square is one of the most valuable companies focused on financial technology today.