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Things are about to get complicated for Jack Dorsey. News broke this week that electronic payments company Square Inc., which Dorsey founded in 2009, has filed paperwork for an initial public offering.
Ordinarily an IPO is cause for celebration for a CEO, especially one who is a founder and holds a major equity stake. However, in this case there are many factors hanging in the balance.
The Square IPO is particularly important for the markets, for the digital payments industry and for Jack Dorsey himself. Plus, the success of the Square IPO may depend on the continued success of digital payments competitor PayPal (NASDAQ: PYPL), which successfully completed its own IPO on July 20.
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Dorsey, a Twitter (NYSE: TWTR) co-founder who later became its CEO, was eventually ousted from his chief executive role in 2008. Soon after, Dorsey began focusing his energy on Square.
News broke in early June that Twitter CEO Dick Costolo, who had taken over for Dorsey’s successor and served as CEO since 2009, would step down and that Dorsey would be returning to Twitter as its interim CEO. Meanwhile, he would also maintain his role as the CEO of Square.
To those who follow Twitter, the move seemed a lot like a tech industry coup d’état, as it had long been known that Dorsey did not leave Twitter by choice and had a strong desire to return to the company as its CEO.
It seemed to me at the time that the “interim” tag on his CEO title was a mere formality and that it was only a matter of time before we learned that Dorsey would be returning as Twitter’s permanent CEO – perhaps even that he had led a conspiracy to oust Costolo.
Even after Twitter’s board announced that it was only interested in candidates who could commit “full-time” to being the CEO of Twitter, the only question – it seemed to me – was what would happen to Dorsey’s involvement with Square.
News of the upcoming Square IPO changes everything.
First, it seems extremely unlikely that Dorsey will leave Square at this time to return to his beloved Twitter as its CEO.
Dorsey, who was recently reported to own 26.2% of Square, would surely sabotage the Square IPO if he were to jump ship now in order to become Twitter CEO.
Meanwhile, Dorsey’s performance as interim CEO at the beleaguered Twitter may very well be used to judge the merits of Square’s IPO, regardless of whether such a comparison is fair.
Twitter declared earnings on Tuesday afternoon. Though the revenue news was better than expected, the stock opened for trading Wednesday down by double digits as investors were again disappointed by slowing user acquisition rates.
The PayPal Effect
Another complicating factor is the July 20 IPO of PayPal, one of Square’s biggest competitors.
PayPal, which was spun off from parent company eBay (NASDAQ: EBAY) and was already more valuable than its parent at the time of its IPO, has offered us a glimpse into how the market will respond to digital payments stocks.
Indeed, not only does the success of Square’s IPO depend on the market perceiving Dorsey’s performance as Twitter’s interim CEO to be acceptable, it also depends on the news, growth and market reaction to everything that happens at PayPal. The stock is essentially flat since it started trading independently of eBay.
If transparency is the key to a successful Square IPO, investors shouldn’t get their hopes up.
Confidential IPO
Square filed for a confidential IPO, according to reports by The Wall Street Journal and Bloomberg that both cite anonymous sources familiar with the matter. This confidential treatment is enabled under the Jumpstart Our Business Startups Act, or JOBS Act, which allows companies with annual revenue under $1 billion to file their IPO paperwork confidentially.
Perhaps the most interesting fact about the Square IPO is that, as Dow Jones VentureSource notes, it would be 2015’s first IPO of a U.S. company valued by venture capitalists at more than $1 billion. Square’s most recently reported valuation was $6 billion.
It is clear to me that Dorsey is no longer being considered in Twitter’s CEO search, and that the success of the Square IPO will depend on more than just Square’s financial performance.
Indeed, Dorsey’s success as interim CEO of Twitter will be used to judge Square’s prospects, as will the performance of PayPal stock between now and the Square IPO.
Perhaps most importantly of all, the Square IPO should give us our first glimpse into whether or not the public markets believe in the rapidly expanding and sky-high valuations private investors have assigned to roughly a dozen multi-billion dollar technology startups like Uber, Snapchat and Airbnb.
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