Square and its Silicon Valley problems

It is a very odd world where a near $3bn valuation of a six year-old company via an initial public offering is reported as a “disappointment”. Yet this is the one we are living in today, with the flotation of payments company Square on the New York Stock Exchange. 

The mood in the air is definitely one to be wary of, especially for those playing at a later stage in venture capital. Yet at the same time, Square has secured a valuation of a bit under three times 2015 revenues, based on the $892.8m in revenue it made in the first three quarters. More importantly the $243m it raised buys it a decent amount of runway to get to profitability. 

Yet the prevailing logic at present in the press is this is “a disappointment”, because Square had a valuation of $6bn last time it raised money. The late stage investors which backed that round have a deal term, called a ratchet, which allows them to be issued more shares if the flotation is below a certain price. This in turn causes a motivational and human resources problem for how to manage executives – especially later joiners – that get diluted. 

There is clearly a narrative building that not everything is happy in unicorn land – the place where more than 150 venture funded companies are valued at more than a billion dollars. It is also a place where many, even those who work there, can’t quite believe it is real. This is an entirely reasonable belief, for many of the companies. However, some of the companies will likely be worth more than 10 times what they are now. 

 Asset manager Fidelity added to the drama leading up to the Square narrative last week with downgrades of its unicorn portfolio including of US-based social media platform Snapchat and file sharing company Dropbox.

This followed allegations of fraud by newspaper the Wall Street Journal against consumer healthcare company Theranos, that sparked an opinion piece from venture capital firm Sequoia Capital’s Sir Michael Moritz on “the sub-prime unicorns that do not look a billion dollars”. 

“Mr Market” as he is sometimes known, is said to have moods. The euphoria of recent years is clearly moving towards glass half-empty logic. 

Yet it is a real head-scratcher where a $3bn valuation IPO is regarded as a “disappointment” as many have framed it. It is easy to live with this Silicon Valley problem. As venture capitalist Fred Wilson wrote today “You do the deal, and live to fight another day”. 

Expectations become crazy in the kind of hyped technology environment, we are still living through. Yet my instinct is we will have forgotten the negative sentiment surrounding the Square IPO five years from now. One sign of such mixed sentiment is in the public market themselves, with Square trading at $12.85 per share at the end of last week, up 40% on its offering price.