Square IPO pricing reveals waning appetite for ‘unicorns’

SAN FRANCISCO — The long-running gold rush into hot technology startups is showing signs of faltering, after mobile payments processor Square had to sell its stock at a deep discount to complete its much-anticipated initial public offering, a concession signalling that investors are becoming wary of once-hot start-ups that haven’t proven they can make money.

Square — valued in a private financing last year at US$6 billion (S$8.5 billion) — priced its initial public offering at a level that gave the payments company a valuation of US$2.9 billion (S$4.11 billion).

The difference between the two may be seen as a sign that the market for venture-backed companies has reached too high.

The shares were priced at US$9 after Square was unable to get demand from investors within the US$11 to US$13 range it was seeking, raising US$243 million.

The IPO price is 42 per cent below the US$15.46-per-share price that Square fetched a year ago when it raised US$180 million while it was still a privately held company.

“It seems more like another payment processor that uses a little technology than a technology company,” said Mr Erik Gordon, a professor at the University of Michigan’s Ross School of Business. “There is no way to put a smiley face on a price that is 40 per cent below its previous valuation and nearly 20 per cent below the low end of its projected offering range.”

The weak IPO pricing raises the pressure on Mr Jack Dorsey, Square’s chief executive. Last month, Mr Dorsey was appointed chief executive of Twitter, the social media company he co-founded, with some critics questioning whether he would be able to manage two public companies.

Square is not the first IPO of the so-called unicorns — private companies valued at US$1 billion or more — to go public below its latest private valuation. But it is the largest in recent years. Of 140-plus unicorns, Square ranked among the top 15 per cent.

“The unicorn thing has gotten way out over its skis,” said Mr Max Wolff, chief economist at Manhattan Venture Partners. “Square’s IPO says people are a little bit less caught up in the prospects of what you can become and are more grounded in what you are.”

Many investors have shifted their focus toward measures such as earnings, which Square does not currently have, and away from revenue growth.

That shift in perspective can be seen with mutual funds, which have poured billions of dollars into private companies in recent years.

Lately, a number of funds have been discounting their positions in prized start-ups. While Square was on the road speaking with investors, it emerged that Fidelity had marked down the value of Snapchat by 25 per cent. Dropbox was devalued by BlackRock earlier this year.

From the beginning, Square has had challenges that caused it to face a trying process to go public.

Its detractors have long been sceptical of the company’s business model, taking a small percentage of every credit card transaction it processes and splitting it with financial intermediaries, credit card networks and others, making it harder to achieve large-scale profitability. It also faces a lot of competition from such traditional operators as First Data and PayPal and smaller upstarts such as Stripe.

Square is also entering a difficult market for IPOs in general.

Match Group, the owner of a number of dating sites, including Tinder, also priced shares in its offering Wednesday. The company sold 33.3 million shares for US$12 apiece, the bottom end of the range it was marketing to investors. At the IPO price, Match has a market valuation of US$2.9 billion.

Like Square, Match faces substantial competition, but it was able to show investors positive net income.

“The way that Square was valued as a private company is they were just going to disrupt everything and change payments,” said Mr Andrew Chanin, CEO of PureFunds, an exchange-traded fund that includes mobile payments companies. “And the reality is not that.” Agencies