Episode 43: The Square IPO

Episode Summary

Executive Summary: The episode traces Square’s origin from Jim McKelvey’s glassblowing business and Jack Dorsey’s early partnership, then explains how Square turned an exclusionary, fraud-prone merchant payments market into a design-led, cloud-based platform for small businesses. The hosts argue the company’s fundamentals were strong, but the 2015 IPO was badly timed and poorly executed, especially due to the Goldman Sachs ratchet and the overhang from the Starbucks deal.

Main Topics: Square’s origin story and founding mythology (Priority: 5/5): The hosts recount how Jim McKelvey and Jack Dorsey connected in St. Louis, how an initial idea to solve merchant payment acceptance emerged, and how the company’s story became a powerful narrative for customers and employees. Product innovation in payments and merchant onboarding (Priority: 5/5): Square’s breakthrough was not just the card reader, but making payment acceptance accessible to tiny businesses through elegant design, free hardware, fast deposits, and fraud underwriting that allowed new merchant classes to enter the system. The Starbucks deal and Square’s expansion into enterprise POS (Priority: 4/5): A major strategic deal with Starbucks forced Square to become enterprise-grade and broaden from mobile payments into a fuller point-of-sale and merchant operating system, though it also created financial strain. IPO timing, valuation, and the Goldman ratchet (Priority: 5/5): Square’s IPO came after a large private round with a liquidation preference/ratchet structure, leading to a down IPO versus the prior valuation and raising concerns about conflicts and employee dilution. Narrative versus fundamentals in tech investing (Priority: 4/5): The hosts contrast the market’s negative story about Square as an overvalued payments company with the company’s actual business reality: strong growth, improving unit economics, and a large expanding market. Broader lessons on experience and business model design (Priority: 3/5): The episode closes with themes about timing, the value of experience in startup decisions, and how Square’s model monetizes through transaction volume while bundling tools that help businesses grow.

Key Arguments: Square’s core innovation was enabling almost any business to accept cards, not merely selling a reader; the deeper moat was backend fraud prevention and underwriting. The company’s design quality, onboarding simplicity, and free hardware were major business-model innovations that lowered barriers to adoption. Square effectively created and then dominated a cloud POS category, moving beyond the original mobile payment wedge. The Starbucks deal was strategically valuable because it forced enterprise-class capabilities, but financially it was a burden and eventually unraveled. The IPO was probably necessary given employee-option pressure and capital needs, but it was executed too late and in a weak market. The Goldman Sachs ratchet created perverse incentives and helped produce a disappointing IPO price relative to the prior private valuation. Square’s long-term value comes from helping merchants acquire customers, retain customers, access capital, and run operations, not from payments alone.

Data Points: Episode number: 43 - This is episode 43 of Acquired, covering Square’s IPO Square IPO date: November 19, 2015 - Square went public at $9 per share IPO price: $9/share - Square priced below its target range IPO valuation: $2.9 billion - Implied market cap at IPO Prior private valuation: $6 billion - 2014 Series E valuation before IPO Target IPO range: $11–$13/share - Square priced under range Additional stock from ratchet: $93 million - Issued to prior investors because IPO priced below the ratchet terms Goldman IPO fees: about $10 million - Underwriting fees from the IPO Starbucks-related revenue breakout: $0 now - The investor materials still referenced Starbucks transaction revenue after the deal ended Series E round size: $150 million - Raised in 2014 from the Singapore sovereign wealth fund and Goldman Sachs Series C round: $200 million - Raised in 2012 from Chris Sacca and Rizvi Traverse Series B round: raised in 2011 - Led by Sequoia, with Roelof Botha involved Businesses under $100k revenue: 30 million - Approximate number of U.S. businesses in this category when Square started Businesses unable to accept cards: 24 million - Of those 30 million businesses, 24 million could not accept credit cards Square transaction fee: 2.75% - Square charged a flat rate on credit card transactions Deposit timing: 1–2 business days - Square deposited funds much faster than legacy processors Merchant account paperwork: 12–15 pages / 50–100 lines per page - Illustrating the complexity of traditional merchant underwriting Morley settlement: $50 million - Robert Morley settled patent/founding claims in 2016 Square stock price mentioned later: $25.59 - Hosts note the stock later rose significantly from IPO Market cap later mentioned: almost $10 billion - Used to illustrate appreciation after IPO Starbucks deal valuation: $3.25 billion - Approximate value in the 2012 financing context Square revenue cited: $482 million transaction-based; $59 million subscription/services; $10 million hardware with $14 million loss - Hosts use these figures to explain revenue mix

Pivotal Quotes: "Square is not a payments company. We’re about helping merchants increase their business." — Ben/David paraphrasing Square’s S-1 narrative: Used to emphasize Square’s broader identity beyond payments "This is the biggest fast one pulled of all time." — Ben Gilbert: Commenting on how credit card fees and settlement timing burden merchants "The only thing you can have is experience and great people around you." — David Rosenthal: In the discussion about why startup and IPO decisions are so hard to get right

Implications: Square’s story shows that the strongest fintech companies win by combining product design, risk management, and merchant software—not just payments. For startups, timing, fundraising structure, and narrative discipline can materially affect outcomes.