Jack Dorsey took Square public with an overvalued IPO and rang the bell at the NYSE on Nov. 19, 2015. Photo ©Dave Cynkin | FlickrCC.
A few weeks ago, mobile payments processing company Square made its IPO, and both the road there and the road that followed were bumpy and surprising. Square initially expected its shares to be valued somewhere between $11 and $13, but they were made public for much less: $9. Despite the devaluation, Square’s investors still made considerable amounts of money, and Square itself is now valued at around $4 billion. So what can we learn from Square’s unusual IPO, and what does the continued health of the business say about the market?
Even veteran investor Henry Kravis acknowledges that he can’t tell who will be winners and who won’t be among IPOs, and even he probably couldn’t have predicted how Square’s IPO would turn out. But despite early reports that Square’s offering had fallen flat—“call it a moral victory for the unicorns,” wrote CNN Money—its investors made a killing on the trading floor. After the initial devaluation, the stock jumped and raked in the money.
Those early investors, which include Khosla Ventures and Jack Dorsey himself, are doing quite well. Khosla invested on the Series A round at 22 cents a share and Series B at 27 cents a share. As one can imagine, their coffers are pretty full now.
We know also that Square’s down-and-up IPO may not deter other tech companies from going public. “We are likely to see more IPOs but at lower valuations,” says Sean Madnani, technology investment banker and senior managing director at Guggenheim Securities. Even better news for investors is that there is still money to be made in a Square investment: money remains on the table, so investors can get good gains on the shares they purchased in the deal. Buyers can still get in and make a lot of money.
What else is interesting is that despite its high value, Square isn’t actually profitable—and it never has been. The company has been generating losses since 2012, losing $154 million last year and $103 million in 2013. Square included these facts in the risk factors before it made its IPO. However, that did not deter people from investing in the company, which could suggest a promising market trend—if the valuations of tech IPOs go down and the companies stay on track, if not necessarily profitable, investing in IPOs could become a less risky practice.
Even if Square isn’t profitable now, that doesn’t mean it never will be. Its IPO is complete, and if it stays afloat and runs a strong business, there’s no reason its valuation—or the valuation of other tech companies—won’t rise
