Square made its debut on the public markets yesterday. After settling on its much-commented-on offering price of $9 per share, which some took as a shot across the bow for unicorn startups, the Jack Dorsey-helmed payments firm surged more than 45 percent in its first day of trading, with its stock closing above $13.
Observers saw that strong initial start as buoying an uncertain tech market. At an investors’ panel at last month’s Street Fight Summit, Redpoint Ventures partner Satish Dharmaraj and First Round Capital partner Howard Morgan both indicated that there was a tightening in the venture capital market — particularly for growth-stage companies. “People are being more careful about valuations,” Morgan noted. It’s certainly possible to see the uproar about Square’s IPO pricing, which valued the company at $2.9 billion, less than half of the $6 billion valuation the company received in its last funding round, as an extension of that caution.
Then again, it’s a long game. Lots of companies, especially those that have been the subject of so much media attention, scrutiny, and curiosity, surge in their first day of trading, only to settle down over the following days and weeks. As the Los Angles Times observed, “a big first day pop doesn’t mean much. Some of those companies tank, while others soar.” For example, crafts marketplace Etsy, nominally a tech unicorn, went public in April at $16 per share. It has since lost more than 70 percent of its market value — not the path Square would like to follow.
The tech media’s emphasis on — some might say obsession with — unicorn-grade overvaluation of tech companies notwithstanding, Bloomberg analysis shows that on a sectorial basis, the tech market is middle-of-the-road on most counts when it comes to IPOs, including performance. The trend Bloomberg observed is that “tech companies are staying private longer,” a strategy that worked well for Google and Facebook, among others, but then, timing is everything. One day Square was the goat, the next day, the hero.
Even if Square passed its first test as a public company, many more hurdles lie ahead. It still needs to prove it can turn a profit from being “an operating system” for the burgeoning small business economy — a prospect that makes a lot of sense and theoretically addresses many unmet needs but one that can be hard to sell. CEO Dorsey will have to do all that under the scrutiny of the public markets, while also serving as the CEO of Twitter, a dimming tech star, at least on the basis of its falling stock price.
The pressure may be off Square momentarily, but it won’t stay that way for long.
Noah Elkin is Street Fight’s managing editor.