Mobile payment company Square slashed its share price on Wednesday night ahead of a sale that is casting a shadow over the new darlings of the tech sector.
The small-business-centric digital payments firm, which makes portable credit card scanners that work with smartphones, is run by Twitter co-founder and CEO Jack Dorsey. It is one of a number of so-called “unicorns” - start-up companies valued at billions of dollars that have yet to make a profit.
Dorsey and the rest of the Square team raised eyebrows earlier this month when they announced a projected price that cut the valuation of the company to a maximum of $4.2bn.
Square had been valued at $6bn in its final round of private funding in 2014. The $9 share price values the company’s 323m shares at less than half that amount, $2.91bn. Square had previously valued its shares at between $11 and $13.
Square is selling 27m shares in the initial public offering. The share price announcement, expected immediately after the closing bell, instead came after 7:30pm, much to the consternation of analysts and media.
Waiting for Square and Match Group to tell us the IPO price: https://t.co/juBg4sA5Os $SQ $MTCH #IPO
— Renaissance Capital (@IPOtweet) November 18, 2015
Even before the announcement Square’s valuation – and the market’s response to it when the stock goes on sale on Thursday morning – were being talked about as a wake-up call for unicorn startups, many of which have received late-stage funding from mutual funds and other large investors that may be inflating the value of the companies. Some of those late stage investors were guaranteed returns on their investments that have diluted returns for common shareholders.
It’s been a rough year for tech companies on Wall Street: Handcrafted goods e-tailer Etsy, for example, has seen its share price fall steadily since its IPO in May. Those conditions won’t get better if the Fed raises rates in December; the larger firms comfortable taking risks on small companies that might not be in the black for years will likely transition to more conservative investments. Lead managers on Square include Goldman Sachs and Morgan Stanley.
There are 82 $1bn pre-IPO startups in the US and a total of 125 worldwide, according to an analysis by the Wall Street Journal. The combined valuation of all US unicorns, including Airbnb, Snapchat, Uber and WeWork is currently $486bn. But realising those paper fortunes may prove difficult if public market investors turn against unicorns.
Match, the online dating company that also owns the Tinder app, priced its IPO shares on Wednesday too. Match’s $12 a share price was at the low end of forecasts.
There are already signs that investors are less enthralled by unicorns. Fidelity, one of the largest mutual funds group in the world, recently wrote down the value of its stake in Snapchat by 25%.
US regulators are also casting a critical eye on the massive amounts of money that have been invested in these private companies by mutual funds, which primarily invest cash for pensioners and savers. The securities and exchange commission (SEC) is questioning whether investors have a firm enough grasp of what they are buying and how it is valued, the Wall Street Journal reported this week.
Black marks on Square’s record thus far include a failed deal with Starbucks (which is nearly at an end) and its inability thus far to turn a profit. The company is trying to diversify, recently acquiring a company called Caviar that provides food-delivery infrastructure to restaurants that don’t yet let customers order in. “Investors may be skeptical of Dorsey’s dual role as CEO of Twitter and Square,” noted Renaissance Capital analysts earlier this week.
“It’s an all-or-nothing market, and investors right now are looking at putting more of their dollars to work in scale companies,” Tony Ursillo, portfolio manager for technology at Loomis, Sayles & Co., told the Wall Street Journal.
Early stage investors like Maarten Hooft of Quest Venture Partners say that cost management is important at every stage of the startup game, particularly early on, and that it will likely become moreso.
The price cut, said Hooft, “should let more founders know that rating at these high valuations comes at a cost.”
