Square valuation drops 30 percent in IPO pricing

Ronny Kerr · November 6, 2015 · Short URL: https://vator.tv/n/4144

Valued at $6 billion in the private market, payments company could be worth $4.2 billion in IPO

After filing to go public a couple weeks ago, Square this morning announced that it would sell 27 million shares in its upcoming initial public offering (IPO) at $11 to $13 a share, suggesting a best-case $4.2 billion valuation once the mobile payments company hits the public market.

Based on its last funding round, Square was valued on the private market at $6 billion, amounting to a 30 percent drop in a year. But nothing has significantly changed the Square business except for the fact that it’s transitioning from the private to the public market.

For unicorns, this news is not an exception but increasingly the rule. In fact, 40% of the unicorns that went public since 2011 are now trading either flat or below their private market valuations, giving statistical credence to the intuitive consensus that most unicorns are overvalued.

As Steven writes in the above piece, it’s obvious that private financing valuations can’t be fully trusted when you see companies like Slack and Snapchat becoming unicorns, the team communication platform in its first year of existence and the mobile chat app before even generating revenue.

With Square, the reasons for bringing its sky-high valuation back down to earth a little are hidden in plain sight.

For one, the IPO market is in a poor state right now. In the third quarter of this year, for the first time since 2011, "average IPO returns were negative (-4%) and more IPOs ended the quarter below their offer price than above it," according to Renaissance Capital.

Secondly, Square isn’t profitable. Its revenues are growing--$560.6 million for the first six months of 2015, a 51 percent increase over the same period a year earlier--but that growth is slowing. Net loss for that period was pegged at $77.6 million and gross profit was $164 million.

Last but not least, there’s the issue of Square’s part-time CEO, Jack Dorsey, who returned to Twitter to replace CEO Dick Costolo. And Twitter, whose investors have been consistently displeased with the company’s performance and lack of growth since its IPO two years ago, needs just as much attention as Square.

In August, the social networking service dropped below its IPO price of $26, but has since rebounded slightly to today's share price of $28.

Investors and analysts are skeptical that Dorsey, as permanent CEO of two once-heralded tech companies with lagging financials, can turn two ships around. Add to all these factors the very real threat of competition--neither Square’s mobile payments nor Twitter’s information network are completely defensible services--and you have a recipe for pessimism.

It will be interesting to see whether the increasing realism of the public markets--and their sobering effect on unicorns filing for IPOs--will eventually tone down private market valuations.

Ronny Kerr

All author posts

Related Companies, Investors, and Entrepreneurs

Twitter

Startup/Business

Joined Vator on April 9, 2008

What is Twitter?

Twitter is an online information network that allows anyone with an account to post 140 character messages, called tweets. It is free to sign up. Users then follow other accounts which they are interested in, and view the tweets of everyone they follow in their "timeline." Most Twitter accounts are public, where one does not need to approve a request to follow, or need to follow back. This makes Twitter a powerful "one to many" broadcast platform where individuals, companies or organizations can reach millions of followers with a single message. Twitter is accessible from Twitter.com, our mobile website, SMS, our mobile apps for iPhone, Android, Blackberry, our iPad application, or 3rd party clients built by outside developers using our API. Twitter accounts can also be private, where the owner must approve follower requests.

Where did the idea for Twitter come from?

Twitter started as an internal project within the podcasting company Odeo. Jack Dorsey, and engineer, had long been interested in status updates. Jack developed the idea, along with Biz Stone, and the first prototype was built in two weeks in March 2006 and launched publicly in August of 2006. The service grew popular very quickly and it soon made sense for Twitter to move outside of Odea. In May 2007, Twitter Inc was founded.

How is Twitter built?

Our engineering team works with a web application framework called Ruby on Rails. We all work on Apple computers except for testing purposes.

We built Twitter using Ruby on Rails because it allows us to work quickly and easily--our team likes to deploy features and changes multiple times per day. Rails provides skeleton code frameworks so we don't have to re-invent the wheel every time we want to add something simple like a sign in form or a picture upload feature.

How do you make money from Twitter?

There are a few ways that Twitter makes money. We have licensing deals in place with Google, Yahoo!, and Microsoft's Bing to give them access to the "firehose" - a stream of tweets so that they can more easily incorporate those tweets into their search results.

In Summer 2010, we launched our Promoted Tweets product. Promoted Tweets are a special kind of tweet which appear at the top of search results within Twitter.com, if a company has bid on that keyword. Unlike search results in search engines, Promoted Tweets are normal tweets from a business, so they are as interactive as any other tweet - you can @reply, favorite or retweet a Promoted Tweet.

At the same time, we launched Promoted Trends, where companies can place a trend (clearly marked Promoted) within Twitter's Trending Topics. These are especially effective for upcoming launches, like a movie or album release.

Lastly, we started a Twitter account called @earlybird where we partner with other companies to provide users with a special, short-term deal. For example, we partnered with Virgin America for a special day of fares on Virginamerica.com that were only accessible through the link in the @earlybird tweet.

What's next for Twitter?

We continue to focus on building a product that provides value for users.

We're building Twitter, Inc into a successful, revenue-generating company that attracts world-class talent with an inspiring culture and attitude towards doing business.