So to the stock-optioned employee what does this mean? Somebody who started early with the company vs somebody who starts after this round? Keeping track of the value of options after several rounds seems to be quite complicated.
- What is the expected market value of the company?
If a company is valued at $1billion dollars and has 10 million shares, then each share is expected to be worth $100. This is a rough estimate, and assumes that the valuation accounts for future revenue, violatility, etc.
If you have options that gives you the right to put (sell) the shares at $150, then you are making $50 on each option, since you can buy your $100 share in the company and sell at $150, guaranteed. 1,000 options would be $50,000 profit at that share market price and stock option strike price.
This means you can expect the option to be worth $50, except that options typically have a date at which the options expire. The price of the option changes relative to this date, and is worthless after the date.
This is also dependent on you being able to exercise your stock options, which is unlikely unless the company is being publicly traded. A series D funding means the company is still privately traded, and the market price isn't set yet.
- Facebook raised $200MM in its Series-D round with DST in 2009, at a valuation of $10B.
- Twitter in 2010, with plateauing growth, raised $200MM (series F), with a valuation of 3.7 B.
Square has strong growth and a proven revenue model and still just got a multiple of 16x. Clearly the market has adjusted its expectations quite a bit. In other words, it is going to be quite hard for a Pinterest to raise money at 1.5B valuation today.
I'm going to have to conclude that reports of another tech bubble burst were quite exaggerated.
Proven revenue can be counter intuitive when raising money. On the one hand, it makes it much easier to raise. On the other, it's such a solid metric that you can't build a story for investors that gives you insane valuations.
It would not surprise me to see a hot startup with really good traction/growth and a fuzzy but credible "here's how we make money" raise at another crazy valuation soon. If you can paint a picture of a huge market, show impressive ownership of that market, you can let investors use their imaginations from there.
Agree with you that proven revenue model doesn't help create growth multiples.
But in Square's case, the story for investors would likely have been: here's ways x, y, z, in which we can make money, and even in case none of these works, here's our proven revenue model.
IMHO, a comparison with other B2B/sales-driven startups would reflect the reality better - e.g. Yammer. Pinterest is more on the Twitter league (B2C, growth-driven), where it seems that the average valuation is much higher...
Wonder how much of that 8 billion in payments/year they see. 2.75% (their fee) of 8 billion is 220 million. How much of that do they have to pay out to the payment networks?
A lot of that depends on their average transaction size. Square charges a flat rate despite there being per transaction fees, so 10 $1 charges are a lot less profitable for Square than 1 $10 charge.
They almost certainly actually lose money on the $1 transactions (their fee is under 3 cents but you'd typically have north of 20 cents of interchange fees).
I'm curious what the plan is for that $200 million. Obviously Square is printing money at this point, but what other direction do they see to move out from mobile payments?
My guess is maybe they are going to go after other parts of the small biz segment like making e-commerce easier and so on. Ultimately, if Square can get 3% off the top of every transaction a business makes for the vast majority of businesses, there is a lot of money to be made for sure.
> Obviously Square is printing money at this point
Not so sure that's obvious. They're processing a lot of payments for sure, but not all of them are profitable. They spend a lot of money on hardware and customer service. Fraud surely costs a bundle too. It's a business that only makes sense at a very large scale.
Agreed. 3% is an overly optimistic estimate for how much they are making off each transaction since they are charging 2.75% and no per transaction fee and interchange isn't too much lower than that (maybe around a 2 or 2.2% blended rate?) Then you have to account for per-transaction fees, chargebacks, etc.
Given the pricing, I am guessing that they are making anywhere from break-even to 1% on each transaction. At my most generous estimate, that's $80M of annual revenue before any costs, but I'd wager they are pretty damn close to break-even and not making too much, yet...
So I agree with you, they are growing very quickly and have pretty tremendous potential, but I'm not sure I'd say they are "printing money".
Moving internationally costs beaucoup de monies, and scaling way up (another Starbucks) requires them to probably streamline service for that level of client.
$200 million goes fast when take just those two things into consideration. I could see just the UK costing some millions, and the rest of the EU a few tens of millions.
