After a number of anonymous sources wagging tongues, the clock is ticking for Square. Jack Dorsey’s payment start-up is burning through massive amounts of cash as it tries to scale its payments business.
Recently the Wall Street Journal – citing unnamed people in-the-know – reported that
Square lost $100 million in 2013 and is quickly eating up its $340 million supply of venture cash. Because of the cash bleed – Square is seeking a suitor desperately – writes Forbes Steven Bertoni.
I have heard the same things from sources across the business – that Square had met with Apple, Google and PayPal in a bid to sell itself before the cash ran out. There was even an unconfirmed story of a secret London meeting last year between Square and Visa (which invested in the start-up during the spring of 2011). Visa did not bite.
A spokesperson from Square denied any sale talks: “We are not, nor have we ever been in acquisition talks with Google, and while we appreciate that Square may be an attractive target for some companies, we have never seriously considered selling to anyone or been in any talks to do so.”
The sales rumours and cash burn are a drastic reversal from Square’s height of hype, that peaked back in September of 2013 with CBS’s 60 Minutes profiling Dorsey (the segment turned out to be a 13-minute Square infomercial).
“Jack Dorsey is one of the biggest and most ambitious innovators of our time,” said anchor Laura Logan. “Dorsey describes himself as extraordinarily reserved and shy, which is ironic because considering he’s the man who created twitter that changed the way people communicate around the world. Then he created a company called square which is helping to transform how we pay for things…”
But is Square really changing how we pay for things? For small merchants who once could only expect cash, it’s a solid yes. Square’s card-reader, which transforms any smartphone or tablet into a cash register, is smart and beautifully designed.
Innovative yes – profitable? Not really. Square’s bread-and-butter customers – vendors at farmer’s markets, art fairs and owners of cool coffee houses might be straight out of hipster heaven, but are low volume, low transaction businesses. They are not the type of customers you need in the thin margin payments world.
How thin are the margins? Square takes a 2.75% cut of purchases, but keeps very little of that (the Journal put Square’s take at about 1/5 of the total). Say you buy $100 worth of lattes with your Visa at the local coffee joint – Square collects $2.75 but must turn around and give Visa $2.20 of that fee.
That leaves Square with a mere $0.55 to fund its entire operation – marketing, growth, sales, customer service, human resources, salaries, rent…). Ironically, the more payments Square currently processes, the more money the company loses.
For a viable business, Square needs to scale its way to massive payment volumes. That’s why Square is trying to sell itself to a rich owner with enough cash to survive the cash bleed as it hunts for larger customers. It’s likely that Paypal couldn’t have created its $6.6 billion revenue business without having deep-pocketed Ebay by its side as it built the massive payment network.
For a while, Square tried to go it alone. According to sources, it fought hard to raise money at a $5 billion valuation before launching a campaign to sell itself. Unable to find an attractive offer, Square attempted to raise money with an IPO – it was losing cash, but its revenue was growing. But revenue slowed and in February Fox Business reported the IPO was on hold. Square instead took the debt route, borrowing more than $100 million from Goldman Sachs, Morgan Stanley, J.P. Morgan and Barclays.
Whether Square finds a buyer or discovers another way to keep afloat, in the end its survival hinges on winning massive retail players. It’s a tough task. The current payment systems – dominated by quiet giants like NCR, Micros and First Data – work very well.
Retailers (whether independent stores or mega-chains) are not looking to spend time and money replacing systems that are already efficient. Sure, Square is cool, but retailers don’t need cool payment processors. (Yes, Starbucks signed with Square, but only after receiving a sweetheart discount of 2% processing fees)
Dorsey has said that Square is not only a payments business, that it is out to revolutionize services like inventory, payroll and mobile payment. But Micros, NCR and First Data already have systems that take care of the backend.
As for the potentially massive market of mobile payments: Square has stiff competition in tech powerhouses like PayPal, Google, Apple and Amazon. Those companies have something Square still lacks – positive cash flow.
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