Square Goes Public, and the Tech Bubble Deflates

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BRITAIN-US-FINANCE-BUSINESS-INTERNET
Jack Dorsey, CEO of Square, chairman of Twitter, and a founder of both.Photo: JUSTIN TALLIS

Today a big unicorn goes public: Square, the payments technology company founded and led by Twitter’s Jack Dorsey.

These unicorns are the start-ups that have been valued at more than $1 billion by private investors, among them Lyft, Airbnb, Kik, Snapchat, Zenefits, and Uber. It used to be rare for a company to be valued at more than a billion before it hit the public markets. Amazon was not worth that much at the time of its initial public offering, for instance. But given the money sloshing around the technology sector these days, the unicorn club has swelled to 127.

When those unicorns have gone public, though, they have tended to get gored: Square’s IPO was a disappointment, with the company raising far less than it had hoped to. Bad as that might be for Square, though, it should be comforting to the rest of us. It shows why this tech bubble is different, and less dangerous, than the last one.

Let’s say that we snapped our fingers and all of today’s unicorns went public, along with Square. How many would be worth a billion? How many would be worth less than the valuation last given to them by private investors? Back in the bubbly days of the late 1990s, the answers to those two questions would probably have been “all” and “none.” Companies took private money, built a business, and rushed to the public markets, with their shares often surging to irrational values as soon as they hit the exchanges, meaning big paydays for early funders.

This time around, not so much. Take Square itself. During its Series E fund-raise last year, it sold shares for $15.46, giving it a valuation of about $6 billion. Now it is selling 27 million shares on the public market for just $9 each. In other words, at the moment of its IPO, it is worth far, far less as a public company than it was as a private one.

Problems within Square itself are a big part of the reason, granted. This year, Dorsey took on the role of chief executive officer at Twitter, while remaining the chief executive officer at Square. He promises that his divided attention will not result in his attention being divided, or something: The board told him to devote his “full business efforts and time to the company, other than with respect to your work with Twitter Inc.,” in a hilarious regulatory filing. But many investors are unhappy about the situation, understandably. And on top of that, the company is facing slower growth, widening losses, and a heck of a lot of competition from deep-pocketed rivals in the banking and technology industries.

Even so, Square is one of many tech darlings that have seen big write-downs or knocks to their value this year: bleeding unicorns, if you will. Box was worth more on the private markets than it was on the public markets, both at the time of its IPO in January and right now. In August, Liberty Interactive bought Zulily for $18.75 a share, after the company IPOed at $22 a share back in 2013. And earlier this year, the mutual fund Fidelity — big institutional investors are the source of a ton of the liquidity getting soaked up by all these start-ups — wrote down the value of its investments in Snapchat and Zenefits, among other companies, estimating their paper value at about 25 percent and 48 percent smaller, respectively. Were those companies to go public, then, there is a very good chance they would be worth less than what some private investors thought they were worth, too.

Granted, private investors in many of these companies could still end up making gobs of money. Some of Square’s investors are protected by a clause that gives them more shares since the IPO price is so low, for instance. But many other investors might take a hit.

These bleeding unicorns might be giving us a much better picture of what it might look like when this tech bubble pops, or deflates, or what have you — a process that seems to be ongoing right now. It won’t be with colossal losses on the public markets, with mom-and-pop investors losing their shirts like they did back in the 1990s. There just haven’t been enough IPOs to make that a reality, and many of the IPOs we’ve seen have garnered lackluster enthusiasm from the public, leading to unimpressive longer-term results (see: Lending Club, Etsy, Alibaba, and Twitter). Big mutual funds will make write-downs. Some venture-capital and private-equity firms might report big losses. As the public gets a chance to inspect and value all those unicorns, the tech bubble might go out with a whimper, not a bang.