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More a line

15 October 2015 By Robert Cyran

Square’s initial public offering may not be in the best shape. The Silicon Valley payments firm is growing fast. It’s losing money, however, and governance is compromised with dual-class stock and a part-time chief executive in Jack Dorsey, who also now runs Twitter. And Square’s allies may have incentives to become rivals.

Payments are complex and costly for merchants. Square’s credit card readers for smartphones are easy to use, and the associated fees are transparent and relatively cheap for small businesses. Over 2 million sellers accepted five or more payments last year using the system. Square’s 51 percent year-on-year revenue growth in the first half of 2015 probably won’t slow soon, because existing customers should process more payments and new users will keep signing up.

Square is a “trust me” investment, however, with super-voting stock held by insiders. The company hasn’t decided on how many shares it will issue, so it’s unclear how much say the public will have. But with Dorsey and other pre-IPO owners having 10 votes per share, the answer is probably “not much.”

Even more worrisome is Dorsey’s workload. The founder, chief executive, and largest stakeholder also has what ought to be a full-time job running troubled Twitter. The double-timing CEO will have his hands full at Square, too. Its operating loss for the first six months of the year was $74 million, not much better than the $80 million shortfall in the first half of 2014.

Maintaining growth is hard enough, but Dorsey also needs to plan for profitability. That may prove elusive, as the increasing presence of upstart services like Square’s may well lead payments transaction fees to fall.

Especially if it starts to make money, Square’s continued growth could create new headwinds. The company runs its payments through networks owned by Visa, MasterCard and American Express. But it mostly uses banks and processors to access those networks. The largest of these agreements expire in the next three years. If Square is solidly in the black, its partners could demand bigger fees – or, worse, try to block access in favor of their own or competing services.

Enough investors may be lured in by Square’s growth-based IPO narrative. But that one-dimensional story is missing three critical sides: profit, governance and reliable allies.


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