R4_Square_Falling

Why the Square IPO will Happen (Just Not Now)

May 7, 2014         By: Michael Foster

When 2014 began, a new wave of tech IPOs was planning to hit the market.

After the success of Twitter, companies were eying the public market. The list was endless and diverse: Airbnb, Appnexus, Box, Dropbox, Evernote, Gilt, GoPro, Pinterest, Snapchat, Uber, and Vice are just part of the list of rumored IPOs for the next two years.

Mobile payment innovator Square also made the list, and rumors of a Square IPO filing reached a fever pitch until February, when several sources reported that the IPO had been indefinitely postponed.

Is the company getting cold feet on fears that Twitter’s stock is set to crash, or is there something deeper behind this move?

A Commoditized Product?

Square can be defined as a commodity service and, as a commodity, will have difficulties finding sustainable monetization when copycats can dilute the market with competing products.

The mobile payment space is a noisy one, and Square has had plenty of competitors. PayPal released a mobile payment solution years ago, and several other companies are adopting different standards to get a piece of this pie.

But PayPal has thrived as a commodity product, and thanks to handling eBay’s payments, PayPal has dominated the web payment space for years, which is why it’s eBay’s most valuable asset.

Plenty of startups have offered lower cost alternatives, but only a handful have proven a threat to PayPal’s de facto monopoly.

In the mobile payments space, Square is one of these companies.

Square has demonstrated a consistently growing transaction volume, deals with major merchants including Starbuck and Whole Foods, and a level of branding and stickiness with consumers and retailers.

So why no IPO?

Ripe for Consolidation

This delay is actually a big problem for Square, who needs an IPO urgently. Why? The answer boils down to cash and scale.

There are plenty of big players getting into the mobile payment world, and many new technologies (NFC, BLE, cryptocurrencies) are fighting for dominance. A fractured market is bad for mobile payments—one mainstream standard is necessary to make mobile payments a viable solution for merchants and customers alike.

Square is well positioned to dominate. Card issuers want a solution that is plastic-dependent to win out, and Square is both free and easy to setup for small businesses.

But they won’t be able to really expand themselves without a lot of cash, and that’s only possible if they go public.

Timing is Everything

The stock market is not being nice to the tech world. Twitter is down 50% for the year. FireEye is down 32%. Smaller recent IPOs like Rubicon (down 34%) and RocketFuel (down 50%) hit new lows almost daily. Even more established tech companies are struggling; Google is down 8%, LinkedIn is down 35%, Netflix is down 11%, and Pandora is down 15%.

Who would want to go public in such a market?