Hyped payments startup Square on Friday announced pricing terms for its upcoming initial public offering that would value the company at up to $4 billion. There's only one problem -- Square raised venture capital last year at a valuation of $6 billion.
The massive cutback signals that many more private startups may face problems when they eventually try to go public. Under CEO and founder Jack Dorsey, who also heads Twitter (TWTR), Square has followed the same path as most other highly-valued startups, growing revenue quickly while piling up huge losses.
Square, which processes credit card payments for millions of small businesses, increased its revenue almost 50% in the first nine months of this year to $893 million and posted a net loss of $132 million. In the prior three years, Square lost a total of $344 million even as its revenue nearly quadrupled. Some of the losses were due to a money-losing deal Square signed with Starbucks (SBUX) that recently ended.
Square declined to comment.
In its new filing, Square said it expected to price 27 million shares at $11 to $13 each. Underwriters have an option to sell another 4 million shares. That would raise about $400 million and value the company at $4.2 billion at the high end of the range, which is far below the $6 billion valuation Square received in a final round of private capital raised last year. It is still possible that Square's underwriters could find unexpectedly strong demand for the shares over the next week or two and raise the initial offering price.
Some 143 private startups carry valuations of at least $1 billion, according to CB Insights. Venture capitalist Aileen Lee dubbed such companies "unicorns" two years ago, when fewer than 40 startups reached the lofty level of valuation. The rapid growth of the unicorn club has sparked a debate over whether the companies will be able to sustain their success and reward their investors. Some investors, including famed venture capitalist Michael Moritz, are starting to sound alarm bells about a bubble inflating for startups.
But the potentially bubble-level valuations haven't crossed over to the public stock market. Square may be the most well-known unicorn to drop in value upon going public, but it's hardly the first. Box (BOX), Zynga (ZNGA) and Pure Storage (PSTG) are among a number of newly public companies trading below the value of their last private fundraising valuations.
Although the decline in value from private to public markets mainly hurts just the venture capital funds that have backed unicorn startups, an increasing number of mutual funds have also invested in unicorns. Fidelity's $111 billion Contrafund (FCNTX), for example, reported owning small positions in startups like AirBnb, WeWork and Uber Technologies.
Square started out in 2009 by offering a small, plastic credit card reader that could run off of a smartphone, allowing small merchants like coffee shops to accept credit cards. Since then, Square has grown by attracting much larger retailers, like Godiva and Whole Foods Markets (WFM), and branching out to offer other services like short-term lending and payroll processing.
(Correction: Square's deal with Starbucks ended last month. It will not run until next year.)