Contact: Scott Denne
By mismanaging valuation expectations, Square’s management risks turning what would otherwise be an immense success into a spectacle. Its IPO priced well below the valuations it garnered as a private company, which should lead to plenty of schadenfreude aimed at Square and fellow ‘unicorns’ that let valuations get ahead of reality.
That being said, it’s important to note that Square has accomplished something amazing. The company has shown that design and innovation can challenge even the most stodgy and mature markets – point-of-sale systems, in this case. In the span of five years it grew revenue from nothing to $1bn annually – uncommon growth by any measure. And from a financial and strategy standpoint, the company appears well positioned for continued – if slower – growth as it scales.
Unfortunately for Square, having gotten ahead of itself on valuation creates substantial problems. The company priced below its initial range of $9-11 per share and though it’s up above $13.50 in early trading, its market cap sits at $4.4bn compared with $6bn in a private funding a year ago. Recruiting and retaining executives will now become more difficult. And Square has introduced a narrative of hubris, failure and miscalculation into what had been an unadulterated success story.
Ideally, an IPO should be nothing more than a capital-raising event. In reality, it’s a major milestone that, for good reason, is often compared with a wedding – it should only be about the marriage, though in reality more money is spent on ensuring that the guests have the right perception of the marriage. Guests at Square’s wedding today just found out that the bride (management) and groom (public markets) have a fundamentally different view about where this marriage is heading.
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