Square, the company other than Twitter, where Jack Dorsey is CEO priced out its IPO on Wednesday night. The final number of $9 didn't even make the $11 to $13 the company had expected to get. "Skeptical investors" was the reason the Wall Street Journal gave.
Common sense is another way of putting it, and the news is very good for entrepreneurs.
There are good reasons common sense should have pushed investors to turn down the higher prices:
- The company is still losing money, and even though revenue for the first six months of 2015 were 50 percent up from the same period in 2014, Square is on track for losing as much money.
- The whole deal with Starbucks was a major loss, which makes you wonder why management agreed to the conditions in the first place.
- Square's transaction costs are really high compared to competitors like PayPal. Square kept only 36.5 percent of transaction revenue after costs, compared to the 64 percent PayPal kept in the second quarter of 2015, which was its first reporting quarter after the split from eBay.
- Square wants to be in the software and services business instead of payments, which is too bad as payment revenue is 95 percent of the company's total revenue.
- A two-class stock structure means that the insiders, who haven't been able to make a payment business profitable, keep total voting control.
Mind you, Square is far ahead in terms of revenue than many of the other magical unicorn young companies with valuations that top $1 billion. Maybe investors are finally saying that a company worth backing should show a good chance of traditional financial success. Perhaps they're saying hyper growth and the hope that some poor fool down the line might pay more for a share of stock than you did aren't the best reasons to invest.
A dose of reality would be good for everyone, but particularly entrepreneurs. Many entrepreneurs dream of the big score and becoming one of those unicorns. But there are bad side effects of overheated markets:
- First, many investors become interested only in a ride to the stratosphere. Solid business concepts and executions that don't seem as exciting get short shrift, even if they are better bets. Therefore, for most entrepreneurs, getting the investment they might need to get their companies to the next level becomes much harder.
- Second, when valuations get ridiculously high, so do investor expectations. They want a bigger win, so they may want a bigger portion of the company. Plus, now they think you should walk on water, so satisfying people gets much harder.
- Third, if you're competing for resources (and you don't have to be in the same industry for that to happen), then a few companies with a lot of cash can drive up prices and make it tougher for you.
So, here's to IPOs pricing down to more realistic levels, sense returning to the markets, and an end to additional unreasonable pressures on business owners. They have enough to worry about without the extra burden.