Square's roller-coaster IPO points to rising competition
The exploding mobile-payments industry is attracting several companies, threatening Square's dominant position and throwing cold water on its IPO this week.
The latest "unicorn" IPO – a startup with a valuation of over $1 billion – endured a roller-coaster ride in its push to raise money from ordinary investors this week.
Square Inc., the mobile payments company that popularized the iPad-compatible scanning square, surprised on the downside Wednesday by setting its initial public share price at $9 per share. That was a big drop from the initial price range of $11 to $13 it set earlier this month and the $15.46 that private investors paid during Square's last round of financing. But on its first day of trading Thursday, the stock quickly made up roughly two-thirds of that deficit, reaching as high as $14.78, before settling around $13.18 a share by 2 p.m. EST.
The reason for the volatility: Competition has muddied the future for Square.
"The way that Square was valued as a private company is they were just going to disrupt everything and change payments," Andrew Chanin, CEO of PureFunds, a fund that includes mobile payments companies, told Reuters. "And the reality is not that."
Cuts in valuation are becoming common among tech startups. Fidelity recently revalued their Snapchat shares from around $30 to $22.91. DropBox Inc also recently dropped from a $10 billion valuation to $4 billion. The cuts are likely due to increased cautiousness from public investors compared with private investors.
Square, however, faces additional challenges. The company, founded by Twitter-cofounder Jack Dorsey, originally focused on payment services. Its original Square Reader made credit card transaction simple, by offering a strip reader that attaches to mobile devices and plugs into headphone jacks. The small, white squares were widely seen at Starbucks locations and used by smaller businesses.
Square has since expanded into other aspects of the financial industry, from person-to-person money transfers through Square Cash to processing payroll through Square Payroll. Easy-to-use design and a lack of competition enabled Square to hold onto a significant portion of the market.
But the rapidly growing market – Forrester Research expects it to triple to $142 billion between 2014 and 2019 – is quickly attracting big and small companies alike.
Apple, the tech behemoth, released Apple Pay, a method to pay for transaction via credit card through an iPhone, in 2014. Apple’s plans for a person-to-person payment system have emerged this month. The service has the potential to see money being sent over iMessage.
Smaller companies around the globe are also entering the market. GoCardless from the United Kingdom allows business to easily process direct debit transactions. The company raised $7 million in a private investing round in 2014 and is in talks with investors for another round soon. Adyen in Amsterdam and Tipalti in Israel are also entering the market.
Square is "competing with Visa and American Express and PayPal, and more and more with Apple and Google," said James Gellert, CEO of Rapid Ratings, which rates the finances of companies, to Reuters. "These are formidable competitors."
A year ago, private investor valuations placed Square at $6 billion. It's telling that the company chose to set the initial share price at $9, equatable to a $2.9 billion valuation.
The initial low share price triggered a ratchet, or protection rule for investors set during a financing round, forcing Square to sell additional shares, according to Reuters. The company sold close to 25.7 million shares in total.