Episode 43: The Square IPO

[0] I also don't think there's anything that we want to edit or cut.

[1] Oh, that was great.

[2] We're getting good at this.

[3] Welcome back to episode 43 of Acquired, the podcast about technology acquisitions and IPOs.

[4] I'm Ben Gilbert.

[5] I'm David Rosenthal.

[6] And we are your hosts.

[7] Today, we are covering the 2015 Square IPO to much, much demand from a lot of our listeners out there from, from David, from myself, living on our Google Doc for way too long, we now have enough distance from it that we feel comfortable retrospectively covering it as an acquired episode.

[8] Yeah, this one is going to be fun.

[9] I've been looking forward to this for a while.

[10] Yeah, we've never said that on a podcast intro before.

[11] Basically, this whole show is just like what Ben and I want to do and what we want to learn about.

[12] We did our survey and we had a tremendous amount of feedback that said it seems like you guys just kind of do whatever you want to do.

[13] And we hope that you guys like that because that is indeed how this works.

[14] Well, you know, that's the best product advice out there is solve your own problem, right?

[15] That's right.

[16] That's right.

[17] Speaking of our survey, we promised you guys that someone would win a pair of AirPods.

[18] And while they are still shipping because of Apple's excellent, excellent six -week delay, which congratulations to Apple for creating a product that has that much demand.

[19] They're still in the mail, but we've got a winner.

[20] So a shout out to Tom, who we will leave his last name anonymous.

[21] But Tom, we have reached out to you over email and congratulations.

[22] And thank you to everyone that took the survey.

[23] It means a bunch to us.

[24] Yeah, thank you.

[25] We got some great data and not just data, but feedback from you guys that hopefully you'll start to see incorporated in the show.

[26] Yeah, we heard you loud and clear.

[27] We do not need to do hot takes.

[28] I get a lot of feedback about the hot takes.

[29] We're not doing, unless we really need to.

[30] We're not doing the hot takes.

[31] Like today.

[32] Yeah.

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[40] Okay, listeners, now is a great time to thank one of our big partners here at Acquired, ServiceNow.

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[55] And when you get in touch, just tell them Ben and David's you.

[56] Thanks, service now.

[57] Yeah, do anything else before we dive in.

[58] No, let's do it.

[59] Should I start with the history and facts?

[60] As always.

[61] Well, today we start not where I think many listeners might think we would start when looking at Square and the Square IPO, which would be Jack Dorsey, of course, the man most associated with Square.

[62] But we actually start back in, not 1991 in St. Louis, Missouri, with another man named Jim McKelvey, Jr., who was a co -founder of Square.

[63] And Jim had been born in 1965.

[64] He was raised in St. Louis.

[65] And his dad was actually Dean of Engineering at Washington University in St. Louis.

[66] And Jim Jr., his dad was Jim Sr., Jim Jr., his dad was Jim Senior.

[67] Jim Jr. went there for undergrad.

[68] He majored in computer science.

[69] And he also got really into glass blowing while he was in college as a artist.

[70] He was a budding Dale Jehulli.

[71] Shout out to Northwest artists here.

[72] The other University of Washington area after college.

[73] So this is the late 80s now.

[74] Jim worked for IBM for a couple years.

[75] And then he got the startup bug and he went and he started his own company, which was called Mira Digital Publishing.

[76] Now, if you're wondering what all of this has to do with Square and Jack Dorsey, just bear with me for a minute here.

[77] So Mira, this is, again, late 80s, early 90s, initially they created a product that was a competitor to Acrobat, to Adobe Acrobat and PDFs.

[78] But unfortunately, Adobe existed and so that didn't work out too well.

[79] but they went out of it for a couple years and then and then Jim started to realize you know Adobe was going to win the market the whole landscape you know and technology was changing as the internet was was coming and so he decided to pivot the company and uh and this was mid 90s now this was 1995 um so he wanted to pivot the company into going into publishing actually into into conference publishing but nobody else in the company really was on board with uh with this idea with this pivot, except for for one person.

[80] And that was his 15 -year -old intern, summer intern, who was in high school.

[81] And that person's name was Jack Dorsey.

[82] Wow.

[83] Wow.

[84] Now that's a connection.

[85] That is, we are reaching way back here at acquired.

[86] And Jack, you know, had also grown up in St. Louis, Missouri, many years after Jim.

[87] And I'd gotten a summer job in high school working for Mira.

[88] But Jack, you know, was totally on board with the pivot.

[89] And so he was kind of the first person to get bought in.

[90] And, and that's how the relationship between the two official co -founders of Square started.

[91] All right.

[92] So how they knew each other for years then before the founding of Square, like, you know, all the way through Twitter, all the way through through even before that obvious.

[93] Take us through that.

[94] So, well, obviously, many, many years go by.

[95] And a lot happens.

[96] McHelby, you know, he pivots the company, they get into conference publishing.

[97] But he also kind of rekindles his love of glass blowing.

[98] And he starts another company called Third Degree Glass Factory.

[99] And he starts blowing glass again.

[100] And he gets really well known for making glass faucets.

[101] So like faucets on your sink.

[102] They're really beautiful.

[103] You can go, we'll link to it in the show notes.

[104] The company still exists today.

[105] And he makes glass faucets.

[106] So this was many years later.

[107] This was kind of late 2000s, around 2008, 2009.

[108] They're beautiful works of art. And so he was selling them.

[109] But he couldn't get set up with all the financial institutions, his bank and credit card companies to be able to accept credit cards.

[110] So he had to sell them by cash or check.

[111] And that was really kind of limiting the amount of $2 ,000 glass faucets that he could sell.

[112] Yeah, you got to imagine if just one of those sales falls through.

[113] I mean, that's a huge deal, you know, depending on your lifestyle.

[114] Like if you're a glassblower and you're kind of a starving artist and, you know, you just have one of those fall through, changes your whole life.

[115] It totally does, right?

[116] And not to mention, I mean, you have to do the work.

[117] You have to blow the glass.

[118] You're doing all this by hand, putting all this effort into it by yourself before you even try and sell it.

[119] And then if you can't sell it to a lot of your potential customer base, because you can't accept credit cards, that's, that's kind of a problem.

[120] You know, we live in a square world now, so we're used to seeing all the food trucks with square readers.

[121] But like, if you think about the type of business owner who was able to get approved for a merchant account these days, you had to have, you'd be tremendously established.

[122] I mean, it was really unfriendly to entrepreneurs and not tech entrepreneurs, but like, you know, people who are starting these little businesses.

[123] And in fact, but to getting ready for this episode, I talked to someone that had a business that had, you know, around 100K of cash in the bank that was doing like a quarter million dollars in sales a year, but was new, it was sort of a few years old and couldn't get a merchant account with a bank.

[124] I mean, how insane is that?

[125] It's totally insane.

[126] I mean, thinking back on it now and how much square and other financial startups like Stripe and the online world have changed the way this all works.

[127] But even just a few years ago, you know, you needed to be super established doing tons of revenue before, you know, the financial system would kind of let you in.

[128] So Jim's got this problem.

[129] He thinks maybe technology can solve it.

[130] So he calls up, you know, a good buddy who just actually coincidentally got forced out of his current startup.

[131] And that was Jack, who had been CEO of Twitter famously from 2006 to 2008 and then was forced out of the company.

[132] And so he's looking for a job.

[133] It's late 2008.

[134] And his old first boss, Jim, calls him up.

[135] It says, I've got this problem.

[136] Yeah, I'm thinking back to like my first boss now and imagining ever getting that phone call.

[137] Like, well, I was an umpire.

[138] So it'd be the guy that ran the summer umpires group.

[139] But yeah, I can't really imagine.

[140] Well, you could have started Bamtech.

[141] That's right.

[142] More on that later.

[143] So I just told this whole story about the origins of Square.

[144] And it's a great story.

[145] And it's the official story.

[146] now is it the true story that's a little more complicated yeah David why why have I heard that there was like seven founders of square yeah so there was there was a little more going on behind the scenes than that and impossible to know exactly what but it is true that Jim was Jack's first boss and that he called him up in late 2008 right after Jack was forced out of with an idea to start a new company.

[147] It turns out that probably most likely in Jacks actually talked about that.

[148] That idea wasn't square.

[149] It was to start an electric car company and compete with Tesla.

[150] Well, that's very different.

[151] You know, it's almost like accepting payments, you know, via a plugging into your audio jack on your phone, almost.

[152] Yeah.

[153] But at some point along the way, a third person gets involved.

[154] And that person's name is Robert Morley, Robert or Professor Morley was a professor at Washington University in St. Louis.

[155] And I believe it was that Jim and Jack initially approached him about potentially helping with this electric car idea.

[156] And Morley says, no, that's terrible idea.

[157] But I've got this thing in my research that I'm really focused on and I've been working on for years, decades, and that's around card reading technology, payment card reading technology, and I've got this device that you can plug into a mobile phone and it'll read credit cards.

[158] That, according to Morley's side of the story, got Jim and Jack really interested in this idea.

[159] And it was also true that Jim, you know, was a glassblower and couldn't sell his faucets via credit card.

[160] So they got really excited, turned them on to the potential of using mobile phones to accept credit cards rather than the super expensive.

[161] and really clunky and big point of sale systems that, you know, NCR would sell, National Cash Register or other, you know, sort of big fintech companies.

[162] And so one way or another, they start working on it.

[163] Morley was never kind of officially part of the company.

[164] He did in 2014, before they went public, he did sue the company for both patent infringement on the card readers and for forcing him out at the founding stage.

[165] and Square in the company, and he settled in 2016 for $50 million.

[166] So more than $50 million, you know, everybody's happy and Square is a great company today.

[167] Man, so you have to imagine, like, how does that all go down if you're morally?

[168] Like, it's based on a lot of his research.

[169] He had all these conversations.

[170] It seemed like he was in.

[171] Presumably they would sign some documents when he parted ways.

[172] But, you know, are you just sitting there thinking, like, Well, you know, at some point I'll get a payday out of this.

[173] So I'll just wait until the exact right time to sue.

[174] Yeah.

[175] I mean, it's, I don't know.

[176] We didn't talk to Morley or Jim or Jack for this episode.

[177] So, and I doubt they would tell us anyway.

[178] Yeah, yeah.

[179] But note, I'll pull forward a tech theme here that this is not the first time we've heard this.

[180] I mean, there's so many scenarios where, you know, right around acquisition, right around an IPO, this lawsuit comes in.

[181] and it's around the founding of the company and it's it's really messy and you could take away a lesson that's like hey have your your documents all buttoned up from from your founding era but I think the real takeaway is like hey like you know be have everyone be fair and equitable yeah yep and you know I mean at the end of the day everybody's probably pretty happy here but I think this also highlights this whole thing both the official story and the unofficial story highlights what I think Jack in particular is really, really great at, like, what his superpower is.

[182] And we'll talk about this more in the episode, but he gets the power of stories.

[183] And the official, you know, square origin story is super powerful, right?

[184] Like, you know, I'm trying to sell, I'm an artist.

[185] I'm making glass faucets and I can't sell them, but I have to make them up front.

[186] And I'm locked out of access to the modern financial industry.

[187] Yeah.

[188] It just resonates with so, so many people.

[189] And I think I'll pull forward another tech theme because we have so many good tech themes that I think it's worth doing these sort of like popcorn ones early.

[190] Reinvented founder stories, I think are probably more common than actual organic, you know, live as it happened, founder stories.

[191] Like when you hear the picture perfect too good to be true, you know, entrepreneur post IPO describing this simple insight that they had when they were, you know, Who knows if this one's actually true or not, but I'll pick on it and say, I don't have any information, but with Zillow, right?

[192] You hear, you hear Rich Barton talk about, how he and Lloyd were both looking for houses after leaving Expedia and they couldn't believe that it wasn't online.

[193] Like, you got to think that it's much more like, hey, we should start a business together.

[194] Here's a few sectors I'm interested in.

[195] Let's assess the viability of this.

[196] I think it looks a lot more like what Travis Kalanick would describe as a jam session between very entrepreneurial entrepreneurial -minded people, then it does this, like, you know, idea pops me on the head one day.

[197] Indeed.

[198] It's a good story, though.

[199] It's a great story.

[200] And I think, like, you know, like I was saying, you need a story to communicate.

[201] Like, it's not necessarily bad or wrong to create these founding mythologies because that's part of how you communicate, you know, to your potential customer base, what the company does, to the employee base?

[202] Like, you embody the culture and the values of a company in these stories.

[203] Yep.

[204] Yep.

[205] And there's so many great things that fall out of it.

[206] Like, you're engineering, you know, let's say you're doing agile, like your user stories.

[207] Like, you have your first user story, right?

[208] Like, you have your very first, uh, when you're describing your market.

[209] Like, it's, it's very easy for, you know, an investor or a partner or a customer to conjure up the, you know, Jim the glassblower in their head.

[210] Yeah.

[211] Yeah.

[212] Well, speaking, of stories.

[213] We've got a couple more before we're done with history and facts here.

[214] And they're pretty good.

[215] So 2009, one way or another, the company's often running.

[216] Jack is the CEO.

[217] He's still the chairman, either chairman or executive chairman at Twitter, but he's basically like barred from the company.

[218] There's a whole book hatching Twitter all about this, which I actually haven't read.

[219] I need to.

[220] But I think there's, you know, at one point they shut off his email account.

[221] So he's all in on Square at this point.

[222] And Jim is the co -founder and he's the head of hardware.

[223] And so they get to work.

[224] They have a name.

[225] They have a really great name.

[226] They have an iconic design for the card reader that's going to plug into phones, iPhones and Android's.

[227] What's that name that they have?

[228] The name starts with an S and then a Q and then a U. It's squirrel.

[229] And the card reader design also totally iconic and matches the name perfectly.

[230] It's an acorn.

[231] So, yeah, they go down this path.

[232] But fortunately, for the world and for Square, before they launch, they go to Apple.

[233] They go to Cupertino and they meet with Scott Forrestle, who at the time is, you know, like the most important person besides Steve Jobs when it comes to the iPhone.

[234] We've talked a lot about Scott on this show.

[235] And of course, Jack is, he's been forced out of Twitter, but he's a celebrity.

[236] So it's, you know, this isn't just some, you know, rinky dink startup from St. Louis.

[237] No offense to St. Louis, but easy to get a meeting with Scott.

[238] And Scott points out to them that, hey, you know, they're having lunch at Apple at the cafe there.

[239] And Apple actually uses another company called Squirrel System.

[240] that does their point -of -sale system at the cafe.

[241] And so Jack's like, well, that's not a good idea.

[242] So they changed the name to Square.

[243] And then fortunately, they also changed the design of the card reader to be a square.

[244] And it is worth noting at this point that Square was not a point -of -sale company.

[245] So it wasn't this obvious like you would have searched other point -of -sale systems to realize, oh, there's a squirrel systems.

[246] If you remember at the beginning of Square, I mean, it was more about, accepting credit cards on the go and just this single dongle that plugged into your iPhone, there wasn't even an iPad app, let alone this ubiquitous, you know, every coffee shop on the planet uses square register as their point of sale system.

[247] And so you could imagine like you think you're competing in this category of we're just working with kind of the un, not the underbanked, but like the under merchant accounted right now.

[248] We're providing this new, you know, mobile payment system mobile is new.

[249] It's only two years since the iPhone.

[250] You really don't think you're going to be competing, really, in that point of sale market of people that stand behind a counter.

[251] Yeah.

[252] I mean, I remember when Square first came out, being really excited in getting a reader myself.

[253] I mean, I wasn't a business.

[254] I didn't sell anything.

[255] I thought it was like, oh, this is great.

[256] When I sell stuff on Craigslist, I can take payment on credit card.

[257] That's what I thought I would use it for.

[258] In fact, I even used it like what people use Venmo for today because I was so excited.

[259] My, uh, my buddy Andy and I were taking a backpacking trip and we both bought the same backpack and I put them both on my credit card.

[260] And I was like, hey, pay me with square.

[261] And I like pulled out on the way home.

[262] I like pulled out my card reader and accepted his credit card.

[263] Oh, man. Knowing that I was going to take.

[264] Yeah.

[265] Yeah.

[266] Yeah.

[267] Like I got less money.

[268] I took the fees as the, I took the fees as the merchant.

[269] But it was like too cool not to do it.

[270] You wanted to take, you know, payment on a credit card on your phone?

[271] I'd never, you know, as a person, I'd never been able to do that.

[272] I know.

[273] It's pretty cool.

[274] That's the end of the fun stories of the history and facts for Square.

[275] But I think this is really the key innovation.

[276] I mean, part of it is the hardware thing.

[277] And we talked about the lawsuit and Morley.

[278] But part of the innovation was being the technology to accept payments on your phone, but the bigger part of it was enabling anyone to accept payments.

[279] You know, like we were talking about, there was this huge barrier to doing so and entering the industry.

[280] And what Square was able to do, and it also, I think, was technology innovation, but it was on the back end.

[281] They were able to let so many people, like you and me, you know, Ben, consumers, into this world of accepting payments because they got really, really good at fraud, prevention.

[282] And this was the, you know, part of the reason why the industry didn't let anyone in before was, you know, protectionism, probably.

[283] But, but the stated reason was fraud.

[284] That if you let anybody accept payments, you're just opening the door to tons and tons of fraud happening.

[285] Yeah, I think you nailed it.

[286] And there's a couple of amazing data points here.

[287] So I think you're right that the thing that Square did that is entirely differentiating is, is unlocked a completely new set of people.

[288] people who could accept transactions, right?

[289] They did it in an incredibly design -focused way.

[290] So every POS system ever has sucked, right?

[291] It's just been awful.

[292] And they invented this category of sort of cloud point of sale, which is really the big market than they're in now.

[293] It's not as much mobile, you know, mobile card reader as much as it is a cloud point of sale system.

[294] And, you know, they're competing with like the micros of the world there that are sort of the, you know, tethered to a phone line point of sale system and really hard to integrate with.

[295] And so when you look at, you know, the market they were entering, so they did three things really well.

[296] They did the incredible, amazing user experience as a merchant.

[297] They unlocked new merchants that could never be merchants before.

[298] And they did the best job of reducing fraud with this new merchant class.

[299] And so when you look at, you know, this square device was revolutionary, but it wasn't the first.

[300] I mean, Intuit had something called Go Payment that was totally already catching on.

[301] It wasn't even like, oh, well, you can find prior art or something like that.

[302] Like, it was totally happening, but Square had a phenomenally better experience.

[303] And I think that...

[304] And PayPal had a reader too.

[305] That's right.

[306] Afterwards, but it launched pretty quickly afterward.

[307] And the Square folks called that the triangle because it was shaped like a triangle and was copying Square in a lot of ways.

[308] Oh, man, that thing was so ugly.

[309] The interesting data point around this is both PayPal and I think Verifone was the other one that that basically weren't doing the underwriting the way that Square does and they were taking huge losses.

[310] So they were actually subsidizing payments when they realized, oh crap, there's this entire new class of merchants emerging.

[311] They didn't have the underwriting system and basically the machine learning system.

[312] And that wasn't all the rage yet, but effectively machine learning system to constantly be learning and constantly be basically re -underwriting that merchant after every transaction.

[313] And predicting whether, you know, whether new merchants and existing merchants were going to be fraudulent or not.

[314] Exactly, exactly.

[315] And so Verifone, this is crazy, Verifone actually shut down their competing product because of fraud losses, because they were taking kind of a 1 % loss on every transaction from every customer.

[316] And when they shut down, they very publicly accused square of subsidizing the small businesses.

[317] And it's funny that squares, like, actually a core competency of our business is we're really, really good at this.

[318] And the trick that they were using is a really interesting one.

[319] And obviously, they have this incredibly sophisticated, you know, team that does this.

[320] But they basically would only take on a little risk at first.

[321] So you couldn't do these sort of, you know, a bunch of transactions and massive transactions at first.

[322] They would just say, hey, we're not going to put you through a bunch of hoops.

[323] We're just going to give you a little bit, you know, basically a little bit of credit.

[324] We're going to let you, you know, start racking up your transactions until we trust you.

[325] And with every time that you completed a transaction and it wasn't a charge back and it wasn't fraud and it wasn't all these things, they basically gave you a little bit more rope.

[326] And so that way they could actually get you started quickly and trust you more over time, which was just nothing, it was completely innovative in this industry.

[327] Yep.

[328] And just to put a data point around that, you know, when Square started, there were 30 million businesses in the U .S. that had under $100 ,000 in revenue.

[329] And that's just businesses, people that had already incorporated a business.

[330] But only 6 million of those could accept credit cards.

[331] So 24 of the 36 million, you know, small businesses in the U .S. under $100 ,000 in revenue could not accept credit cards.

[332] Like, that's just unfathomable today.

[333] Man, if you are like Visa, MasterCard, American Express, you have to be just besides yourself at the market this unlocks for you.

[334] Yeah, totally.

[335] So 2010, they launch, you know, as Square, not as Squirrel, and with the Square Reader, not the Acorn Reader.

[336] And they make the card reader free.

[337] So if you want to join Square, you sign up online, you enter some information.

[338] It's pretty easy.

[339] You give them your address.

[340] And then they send you a card reader in the mail for free versus like, you know, buying a $2 ,000, $5 ,000 point of sale system from, you Verphone or NCR or whomever, it's a game changer.

[341] Yeah, like on top of technology innovation, just massive business model innovation.

[342] Totally.

[343] And then once you start accepting payments, it's a straight two and three quarter percent charge on every credit card transaction, which is different from how it worked with large providers at the time.

[344] That would be a sliding scale.

[345] It would depend on what type of card people were using if you were using that yeah David have you replied for a merchant account before no so I when I was working on a startup um in college I actually applied for a merchant account and um you get this thing that's like maybe 12 to 15 pages thick and it has I don't know 50 to 100 lines on each page and each one is a different scenario where you have a different fee structure for each card.

[346] So there's zero way that you could ever, like, put that in a spreadsheet and calculate it yourself and make sure they're charging you right, or perhaps model out what your average fee is going to be, um, you know, for your business because it's literally like, oh, if someone types in their card number versus swiping it, it's different.

[347] If it's this card that is, uh, you know, a visa signature instead of a visa or is underwritten by this bank or whatever, every single one is different.

[348] Yeah.

[349] I mean, and if you're like, you know, you're a retailer or, uh, you're, uh, you're a you know, cafe or a food, like, your margin is already super small to begin with.

[350] So now you're just like, now you can't even calculate, you know, whether you're profitable on things.

[351] It's just terrible.

[352] Can we just, can we just pause for a minute and say, the credit industry is like the biggest fast one pulled of all time?

[353] Like, can you imagine, so like, let's say we live in a world where, like, the credit card system was never established.

[354] And suddenly this guy's like, oh, I'm going to start a credit card.

[355] And he comes to you as a retailer and he says, hey, people can pay with this thing instead of cash, and they're going to want to, because it's going to be really easy.

[356] And I'm actually going to take like 3 % of your entire business.

[357] So, but I'm not even going to tell you how much I'm going to take.

[358] Like, I'm just going to run some voodoo and then you got to trust me. Right.

[359] Unbelievable.

[360] I mean, this is a little bit of like, um, the better consumer experience always wins out.

[361] Like if, if somebody gets in the, it provides the way that people are going to pay for services at your business, um, that is the easy.

[362] thing and there's sort of a network effect going on.

[363] Like, it's going to happen.

[364] So there's another tech theme pulled forward.

[365] Then it's going to happen.

[366] But like, just can you imagine how resistant retailers must have been when this first started of like suddenly you lose three percent of your revenue?

[367] Well, it took decades.

[368] And, you know, the other thing that this, you know, hypothetical sheister named credit card would pull on these businesses is not only am I going to take a, you know, undefined and uncalculable percentage of your sales rather than, you know, when you take cash, then you have the cash.

[369] Like, it's there.

[370] It's in your cash register.

[371] By the way, I may take this away from you.

[372] Yeah.

[373] I may take it away from you, one, via chargeback.

[374] But two, even if I don't take it away from you, I'm not going to give it to you for like 30 to 45 days.

[375] Unreal.

[376] You know, so when you took credit cards before, that money wouldn't show up in your bank account for at least 30 days.

[377] And if you're a small business trying to meet payroll, trying to, you know, pay off your suppliers, like that's a problem.

[378] So the other big product feature that Square had was they deposit the funds into your bank account within one to two business days, which again was huge compared to the industry at the time.

[379] Yeah, that's pretty incredible.

[380] Yeah.

[381] You know, how they did all this, and they launched pretty quickly after they were founded.

[382] I don't know.

[383] I mean, that would be a great story of building all this.

[384] Like, this is not easy stuff.

[385] Okay, so at Pioneer Square Labs, we work on all these startups.

[386] And we've started like 60, and we've sort of killed a lot of them along the way, and we've spun out six.

[387] And, you know, the every single one, whether it's a successful thing that actually launches or an early project you're working on, like, it is so hacked together.

[388] And the consumer experience is so, like, almost there at the start.

[389] You're just trying to prove that, like, your one insight is true.

[390] And I remember when I found out about, square like the first press release you go to the website and it's like one of the best designed websites i'd ever seen because it's like a huge tenant for um for the company and a principle that jack believes in and in fact like i was doing like web design at that time and and web development and people would just keep pointing back to square like oh make it look like that and every iteration for years was like the gold standard of beautiful designed website and when my square reader arrived it was beautiful the packaging was Apple caliber, like the messaging was all perfect.

[391] Like there was nothing about this company, at least as a customer, that felt like scrappy or new or at experiment or it's like it was like birthed as a perfectly formed product.

[392] Yeah, it would be great.

[393] It would be super fun to have somebody if you're out there who was there in the early days of Square to come on and do a follow up with us about like, how did you build all this stuff in like 12 months or less?

[394] Yeah.

[395] Yeah.

[396] Cool.

[397] In 2009 and 10, you know, no less when it was definitely not as easy as now to build all this stuff.

[398] Right.

[399] And it really speaks to Jack as a product visionary too.

[400] I mean, when people refer to them as jobs like, I mean, I think in the way that Steve Jobs and Johnny I've and those folks could conceive of something and then release it perfectly into market the first time, you know, Square has iterated quite a bit in a very Apple way of, of, um, um, you know, small interactions over time and small iterations over time.

[401] But, um, amazing how, how good it was at first.

[402] Yeah.

[403] So they launch in 2010.

[404] Um, before they launch, uh, they had raised a series A from coastal adventures in 2009, but they launched.

[405] And then basically they just grow like wildfire.

[406] I mean, we, we've talked about all the reasons why this was a complete game changer for, um, you know, small merchants and, and people that, that didn't even accept payments at all before.

[407] Launch in 2010, there is a series B from Sequoia from Roloff, both who was his partner at Sequoia and had been the CFO of PayPal in 2011.

[408] Then a couple months later in 2011, they raise $100 million Series C from Kleiner.

[409] 2012, they raise another $200 million from Chris Saka, who and Risby Traverse, Chris had used that vehicle to buy up a lot of secondary shares in Twitter famously and then he used the same same vehicle to invest in Square and and then simultaneously well right after that then they do this enormous deal with Starbucks in late 2012 and this was going to be this was such a huge announcement at the time so so Starbucks invested as part of this round into Square and committed to transferring to to moving all of their payments at all Starbucks -owned stores in the U .S. onto Square technology.

[410] And up into this time, you know, Square was for the customer we've been talking about, the sort of small merchants.

[411] But the idea that a, you know, Fortune 500 retailer would move everything onto Square was just pretty shocking at the time.

[412] Yeah.

[413] And, you know, I actually didn't dig that much into this deal.

[414] But to me, it's shocking that Square was anywhere are close enough to feature complete to make this deal make sense.

[415] I mean, I think there's a lot of discussion we'll do about this deal of the financials of it.

[416] But from a product perspective, I remember being shocked that like was Starbucks going to like contribute to, I guess Square probably had to do a ton of sort of custom development effort.

[417] And it probably forced them to enable a lot of the functionality in the square register that they have today.

[418] Yeah.

[419] Well, and we talked about this a little bit in the Starbucks episode with Dan.

[420] But I think a couple things.

[421] You know, one, Square wasn't ready.

[422] This was a really bad deal.

[423] And, you know, I joked earlier that the end of the fun stories in this episode for Square, at least until the very end of this episode, but this was the beginning of the end of the fun.

[424] But, you know, I read a lot of things written by Jack and interviews with him, you know, looking back on this and preparing for the episode.

[425] And, you know, he does.

[426] say and and he's probably right that what it forced what this deal forced square to do was become enterprise class in terms of you know payments and fintech and security um really quickly uh i mean they basically had no choice yeah yeah that's interesting and it also i mean it really also i guess gave them um gave them those product features to move a lot more of their business to to this point of sale market instead of the mobile card payments.

[427] And I think the difference is subtle, and I mean, it's best simplified as going from iPhone to going to iPad, but they forked the code base.

[428] It became square and then a different app called Register.

[429] If you look at the vast majority of their revenue today, they have, on a per quarter basis, $482 million in transaction -based revenue and everything else pales in comparison.

[430] It's like $59 million in subscription and services.

[431] based.

[432] Hardware revenue, they actually, they do 10 million, but 14 million of that is a loss.

[433] And the vast majority of that 482 million is really in that, really in the point of sale category that is not quite where they started.

[434] I mean, they've used that that as a wedge to get into the merchants that otherwise wouldn't have been able to get an account.

[435] But now they're in this, they're in this rising tide of cloud point of sale.

[436] And, you know, I was thinking that, I was about this before the episode, a lot of, a lot of the growth ahead of them is really just this industry of cloud POS growing, much more so than, you know, Square being able to, to continue to bring on more people that wouldn't have been able to be merchants before, or perhaps stealing share from other cloud POS providers like Clover or there's all these other new ones launching, that it's really like, they kind of pioneered this category.

[437] and then really solidified their position in the category by forcing themselves to do all this work, much of it probably from the Starbucks deal.

[438] And now it's just like they get to sit on top while that industry accelerates.

[439] Yeah.

[440] Well, I would agree, but I would argue for a slightly different framing of it, which is it's not just cloud POS.

[441] And I actually think the software and data products, you know, line item of other revenue they have is hugely important.

[442] What this really did is it took square from being just a payments rails system for anybody to, you know, accept credit card payments to a whole suite of a solution for a merchant of any size, really, but a world -class suite of tools for a merchant to run their business, of which payments is probably the most important part that's accessible to anybody from, you know, the coffee shop down the street to Starbucks.

[443] And that's what I think this deal did.

[444] And so if you look at what, you know, the point of sales system itself and the Square Register, it's no longer just about taking payments.

[445] It's about managing your inventory, managing your skews, managing your employees, time punching in and out.

[446] And then since then, Square has added so many different features, you know, payroll for employees, Square Capital to do lending against your revenue.

[447] you know, appointment booking, basically everything you would need if you're a business to manage and run your business.

[448] And I think that all really happened or started because of this Starbucks deal.

[449] Yeah, I could see that.

[450] I like that framing.

[451] It is worth noting.

[452] And I think it's another business model innovation that they're bundling all this stuff in largely for free or for a very reasonable cost.

[453] And the way that they monetize it all is through the transaction.

[454] So for square it's not like what else can we sell through this channel it's more like what can we add to this channel what can we add to make the lives of small business owners easier so that number one they stick around longer and continue to use this product number two their business does better so that we both do better yeah well it's it's a flywheel you know um yeah it's an acquired flywheel and they do charge and you know it's like a ws right like they charge um some amounts of fees for some of their services.

[455] And some of the services are free.

[456] Like they bought caviar.

[457] And so for restaurants, you know, caviar and food delivery is an option that they offer.

[458] You know, and then there's Square Capital, which is loans.

[459] And they make money off of those businesses.

[460] But really, the beauty is in helping the merchant grow their business, which grows transaction volume.

[461] So Square makes more money.

[462] And then they use more square services.

[463] So they make more money from the ones that they charge for.

[464] and the whole thing drives itself.

[465] Yep.

[466] Great point.

[467] And so this Starbucks thing, I mean, it leaves them with a massive hangover, right?

[468] Like this is something where here, this is actually, this underscores the point.

[469] So I was looking at the investor site earlier and checking out the way they break out revenue.

[470] And I mentioned subscription and services based revenue and hardware revenue.

[471] There's actually a fourth breakout, which is Starbucks transaction based revenue.

[472] And it's obviously that now that the deal is over, it's zero.

[473] but it's still on all their year -over -year comparisons because it was broken out separately.

[474] It was something that was just extremely, you know, that there was, they generated good revenue for it, but extremely costly to the business.

[475] Well, let's, uh, let's jump forward and accelerate through the end of history and facts here, uh, where we'll cover all this.

[476] So last we left them, 2012, they'd raised this huge round, done the Starbucks deal.

[477] They were valued, I think, at three and a quarter billion dollars in that round.

[478] Remember, this is 2012.

[479] The company was founded in 2009.

[480] Then in 2014, kind of rather than go public, they're toying with going public.

[481] They decide instead to raise a $150 million series E from the Singapore sovereign wealth fund and Goldman Sachs.

[482] We're going to come back to Goldman in a minute.

[483] And that's at a $6 billion valuation.

[484] And that round becomes pretty important in a minute.

[485] So, you know, in the meantime, growth is great.

[486] Like they're growing.

[487] payment volumes hugely.

[488] They're growing revenue hugely.

[489] And they're making money off of, you know, off of the transactions.

[490] They're making real margin dollars off of it.

[491] They're still paying down their fixed costs.

[492] But the business is working.

[493] And I think they were coming out of that Starbucks thing and looking toward the IPO.

[494] They were close to break even.

[495] If you look at them today, you know, they just took a $16 million net loss on last quarter.

[496] But if If you look at the way that that's really come down, I mean, you're right, David, on a, on a sort of pro -transaction bait.

[497] Yep.

[498] Yep.

[499] Yep.

[500] And so they are, they've completely paid down their fixed costs.

[501] And, you know, they have a bright future ahead now.

[502] So all this is going on.

[503] This is throughout 2014.

[504] 2015, 15, 15, Steve Jobs moment, comes back.

[505] Well, so the first thing that happens, June 2015, Dick Costello resigns as the CEO of Twitter.

[506] And Jack, Steve Jobs moment, comes back as interim CEO of Twitter, which is also a public company at this point.

[507] Square's not public yet, but they're preparing to go public on the back of all this momentum.

[508] But during the year, they realize this, this Starbucks deal is a terrible deal.

[509] And they are financially.

[510] Now, strategically, it was great for the company for all the reasons we said.

[511] Because of the pricing that they're giving Starbucks, they're just losing money on every transaction that is that they're handling for Starbucks.

[512] They did renegotiate that at one point, right?

[513] They did renegotiate, but the outcome of the renegotiation is basically that they're just going to, Starbucks is going to pull out.

[514] Because part of the renegotiation was that Square no longer had to be the exclusive provider for Starbucks for payments.

[515] And Starbucks could get better pricing elsewhere.

[516] So they, over time, basically just start pulling out of the deal.

[517] So that's throughout 2015.

[518] Then October of 2015, Square is all working to go public throughout the year, is dealing with all these things.

[519] And they eventually do go public in November.

[520] October 5th, 2015, Twitter announces that Jack is an interim CEO.

[521] He's permanent CEO of Twitter.

[522] And also permanent CEO of Square.

[523] So he's truly like Steve Jobs with, you know, Apple and.

[524] Pixar at this point.

[525] Was he CEO of Pixar while being CEO of Apple?

[526] I think he was, yeah.

[527] Wow.

[528] Wow.

[529] Parallels in more ways than one.

[530] But this, yeah, I totally remember this moment of like, okay, so can you, can you do that?

[531] Like, is that what?

[532] Is that possible?

[533] And everybody knew Square was, it hadn't been publicly announced yet, but everybody knew they had privately filed to go public.

[534] And we're going to do our narrative section that we now do on IPOs in a minute, but let's just say the narrative was not good in the press.

[535] So November rolls around, Square had announced their public filing.

[536] They've done their roadshow all while Jack is also now the new CEO of Twitter.

[537] And they go public at, on November 19th, 2015, at $9 a share, which equates to a $2 .9 billion valuation.

[538] Now remember the last round they did was at a $6 billion valuation.

[539] So it is, as then got widely reported in the press, it is ratchet time.

[540] And that $9 per share was below the published range of what they were shooting for, $11 to $13 per share.

[541] So they priced under the range.

[542] They said they were aiming to do the IPO at $11 to $13 to share.

[543] They ended up pricing even under that.

[544] Basically, the whole tech world thought, you know, this is like the first unicorn to die.

[545] Oh, yeah.

[546] So, so this, I mean, this was a moment where everyone thought the music had stopped.

[547] Like this, the, the, the, the doors were closed on the tech IPO market.

[548] People were worried about a, you know, global financial crisis or at least a recession.

[549] And, and Square was trying to tell this other story of like, no, it's great.

[550] Like, we're doing better than ever.

[551] And, um, and we've got sound fundamentals, which is totally true.

[552] But like, this, the, the story that they were telling the, world.

[553] I mean, everyone's thinking, like, are you crazy?

[554] Like, nobody's IPOing right now.

[555] But they did.

[556] And so as a result of it, and this got so much press, this ratchet.

[557] So at the last round that they'd done, which remember, Goldman Sachs was a big part of investing into this last round.

[558] And then Goldman Sachs led the IPO.

[559] It was 150 million.

[560] And I think, I think Goldman invested 50 million.

[561] I could be wrong on that.

[562] Yep.

[563] They did.

[564] So the terms of that round, though, were that the company essentially promised those investors in that round a 20 % return on their money at IPO.

[565] So not just would they get their money back at the same valuation, but they would also get a 20 % return.

[566] And the mechanism by which that played out, remember, the IPO happened at essentially half of the valuation of that round.

[567] So not only did they not get a return, they lost money.

[568] the way it played out is the company had to issue additional stock to those investors when the IPO happened, and $93 million of additional stock.

[569] Now, that's not terrible relative.

[570] You know, the company had a $2 .9 billion market cap, but it's a lot.

[571] And also, this got issued as stock.

[572] So if those investors held that stock, since then, the companies basically just killed it because they had sound business fundamentals and lots of growth, potential.

[573] ahead of them and a huge tam.

[574] So now they're trading at $25 .59 as of today, up hugely, almost a $10 billion market cap.

[575] And so if those investors had held onto that stock, the stock that they bought in the private round initially, and then what they got in the ratchet, you know, they would just be making huge returns right now.

[576] Okay.

[577] So let me talk about the conflict here.

[578] This, because this, this blows my mind when we were digging into this and really figured this out.

[579] Like, so the way IPOs work is the bankers get basically banker fees for, for taking the company public.

[580] And so Goldman Sachs gets about $10 million in banker fees from this IPO, which, you know, makes a lot of sense, given where it price, you know, given, given all those things.

[581] They also get 90, whatever, 90 something million dollars in, in that ratchet because they, they, they, they, participated in a huge way in that previous round.

[582] When you look at this, the incentive for Goldman as the lead underwriter on this IPO is to actually price it lower because their banker fees that they get as a percentage of the valuation of the company is actually significantly less than the amount of money that they would get from it being priced lower.

[583] And so obviously, it's different people at Goldman doing this, but it's kind of shocking that that's possible that you would pick Goldman, given their conflict there.

[584] It's totally crazy.

[585] I mean, banks have long argued that, you know, you should let, it's been kind of like common wisdom in startup world that if you're thinking about going public, you know, and a bank wants to, one of the main investment banks wants to participate in sort of a mezzanian round before you go public, you should do that because then you're going to align incentives with them if they ultimately do take you public where, you know, the higher they price the stock, the more money they're going to make because they're already a shareholder in your company.

[586] But if you have a ratchet like this, then just as you said, Ben, you've set up the incentive for them to price the stock lower because it's perverse.

[587] It's totally perverse.

[588] And, you know, who knows, what did Goldman intentionally, you know, guide the company to, you know, price.

[589] the IPO too low, who knows.

[590] But here we are.

[591] And the facts of the matter are, just like you said, Ben, the company's killed it over the last, you know, year and a half.

[592] And the stock is now up, you know, almost three times since the IPO.

[593] And let's talk about why they've killed it.

[594] So Square, you know, as we both argued in different ways, I think me that they were sort of the creator of this new new category of cloud POS and they're the most well recognized name in it and they're they're doing extremely well um in this you know massive rising tide so so they'll continue to to kind of grow with that industry um and and your point of view was that that yeah and indeed they also are bundling all these other amazing services to make these businesses perform better um and and make all a cart fees on those but also increase the the number of transactions that they take a piece of so great the company's doing well the other magic to this whole thing is is this is the sort of business that also has zero churn.

[595] Because for Square, on a per cohort basis, so for folks that aren't familiar, a cohort is like a whole bunch of people who are becoming new customers in the same time frame.

[596] So they would all come in and their net churn was zero.

[597] So basically what that meant is the way that this business works is they would lose customers.

[598] They would churn out at a certain rate.

[599] But the amount of money that the customers from that cohort who stayed there would generate from growing their business was approximately equal to the business that Square was losing from these customers that churned out of the cohort.

[600] So it actually, if you look at every new cohort they add, they flatten out over time and make a consistent amount of revenue for the company basically indefinitely.

[601] And so it makes a lot of sense for once Square has this, this CAC to LTV ratio where they can figure out, you know, boy, when we deploy X in market.

[602] spending, we make it back, you know, plus 30 % or so in less than two years.

[603] And we're able to just keep pouring money on to do our marketing efforts.

[604] And we just keep getting basically zero net churn cohorts that all stack on top of each other forever.

[605] So very predictable business in an industry that's absolutely a rising tide.

[606] It's something where if you look at it, you know, on its fundamentals, rather than as like a speculative, who knows if this will actually pan out thing.

[607] Like, it seems like it's a great growth company.

[608] I mean, we've basically talked about the content of the narrative section here, but it's really, it's like a tale of two stories, a tale of two companies here.

[609] You know, it was the best of times.

[610] It was the worst of times.

[611] If you listened to the press around the time of the square IPO, and I think, you know, I remember, you know, lots of investors sort of, you know, talking to and chattering, you know, This is the worst of times.

[612] Like, this is the death knell for all these unicorn companies.

[613] And, you know, Square is, like, prime example of super overvalued.

[614] And it turns out that their actual business, which is payments is a super crappy business, really low margin, if any margin.

[615] And, you know, example number one of that is look at this Starbucks deal.

[616] Like, it sucks.

[617] Square is losing so much money on it.

[618] And that means, you know, they'll never be able to serve large merchants.

[619] And so this company is doomed, right?

[620] Like, that was the narrative that was so dominating the press cycle and the investor cycle.

[621] But, you know, I think the lesson here is, like, in any kind of situation like that, you really got to dig into the company's fundamentals, whether the narrative is, like, this company can do no wrong or whether this company is doomed.

[622] You know, in Square's narrative through the whole thing, you read their IPO, you read the, or you read the S -1, you know, they say, they actually say in the S -1, you know, like, we serve small business merchants.

[623] Like, we make commerce easy.

[624] We make it accessible to everyone.

[625] Like, we're not a payments company.

[626] We're about, you know, helping merchants increase their business.

[627] And because of these flywheel effects, that, you know, is good for us too.

[628] Yep.

[629] And boy, it's really, it's funny.

[630] I mean, it's the, not to talk about Rich Barton in every episode now, but when you hear him talking, he talks about the name Expedia and the name Zillow, like picking an empty vessel and then you get to fill it with with your marketing and you get to fill it with your product and your brand that you know the value prop to customers like square was not a payment word right like it's something that they can choose to to fill with whatever they want to be and the in the way that snap is a camera company and we all said oh snap is a camera company like square isn't a payments company you know square is a small business company and i think that that's that's got a lot of power to it yeah i mean there's a there's a great interview with Jack or he talks about, and he's asked sort of like, what is square?

[631] And he's like, well, look, there are three things that every business needs, whether you're, you know, and he says, whether you're, whether you're a coffee shop, you need access to capital.

[632] And capital can be, you know, raising money, but it can also be, you know, sales from your customers.

[633] Like we were talking about earlier, if you can't access the money from your, the capital from the sales you're making to customers, because you're not getting it for 30 to 45 days, um, that's, a huge problem.

[634] So you need access to capital to build and grow your business.

[635] You need to acquire customers.

[636] And then you need to retain customers and build loyalty.

[637] And like what Square's done, I think, is, or at least what Jack would say Square is trying to do is to help small businesses, well, businesses of all types, physical businesses, do all three of those things better.

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[656] So drifting toward what would have happened otherwise, let's talk about access to capital a little bit.

[657] And this will help us guide a little bit of, you know, our criteria for grading this toward the end of the episode will be kind of twofold.

[658] One is always is, you know, did this IPO allow them to do something that they previously couldn't do before?

[659] Like, was it a good business decision to IPO?

[660] And the two components of that are the idea of it and the execution of it.

[661] And so kind of working backwards from that and thinking about access to capital, after this Starbucks thing, they're left in this place where they're near cash flow positive.

[662] Like, that is right on the horizon.

[663] They know that when they spend marketing dollars.

[664] This very predictable thing happens where they are able to get a return on that marketing spend.

[665] So it's really about, hey, let's go get some more capital so we can keep taking advantage of scale, getting closer to cash flow positive, and pour some dollars on this business.

[666] So, you know, then you have this decision of, we'll do that from the private markets like we did with our series D and we did with our series E, or do we go to the public markets?

[667] This isn't really talked about enough.

[668] But if you look at...

[669] sort of the liquidation preference in all these venture rounds and all of that stacking on top of each other.

[670] The valuations are a little silly because think about it this way.

[671] If you're a public company and somebody says, I will give you a valuation of $1 billion and I will own, you know, X shares that are worth 20 % of the company, then they actually own X shares that are worth 20 % of that company.

[672] But if a private investor...

[673] And if the price goes down or the company gets sold for, you know, $200 million, like, tough luck that they yeah exactly you you still own exactly 20 % of that company whereas in the private markets the reason or one of the reasons that we have all these inflated valuations is because the risk that the investor takes by putting money in is dramatically induced by the preference so the way that that sort of works is you can say hey I'm going to take 20 % of this company and give you 200 million dollars and value you at a billion dollars but you know if if you're if you sell for less than a billion like if you're sell for $500 million, I'm still going to take my $200 million back.

[674] Right, right.

[675] And if you guarantee your return, like the ratchet, it's like, no, I'm going to take my $200 million and I'm going to take a 20 % return.

[676] And so you, you know, founders, employees, the rest of the shareholders in the company, you thought you just sold for $500 million, but you actually sold for, you know, whatever, call it $200 million at that point.

[677] You know, in this scenario, you take huge private round on huge private round, on huge private round, and you build up all this liquidation preference, all this money that's going to go to these investors that are happy to say, sure, we'll give you a higher valuation because it's lower risk for us.

[678] If you want that higher valuation, sure.

[679] But if things go south, then we're going to get the money off the top before any of the common shareholders do.

[680] And so you get yourself into this situation where suddenly you have a $6 billion evaluation.

[681] You start to realize that the public markets aren't going to give you that $6 billion.

[682] our valuation because it's a very different climate out there.

[683] You have a lot, a lot of people on that road show that you're talking to that are all talking with each other.

[684] It's not a small conversation between a CEO and a few partners at a firm.

[685] It's much more like, you know, it gets pushed down if there's a narrative out there that wants to push it down.

[686] And so I think depending on the story that's told when you're IPOing, you can really get burned by that.

[687] And that's what sort of Square was realizing was, uh -oh, we are not going to be able to IPO at $6 billion, or it's looking like we're not going to be able to.

[688] And there was like a nine -month period for Square where they're issuing all these stock options as part of the compensation.

[689] So employees are hired in.

[690] They're given, you know, 25 % of their compensation in the form of stock options.

[691] But, you know, it turns out those stock options have a strike price where the valuation of the company is $6 billion.

[692] Right.

[693] And today the valuation is only 10.

[694] I mean, it's not, it's $4 billion higher, but on a percentage basis, if you got stock options, then, you know, it's relative to the performance of the company and the growth of the company since then, you know, you're not really being rewarded for that.

[695] Right.

[696] And people started to sort of realize this, where they're hired in and they're like, wait a minute, you know, I'm never going to be able to, or in any short amount of time, like, these stock options that I was given aren't going to be worth anything.

[697] and so I'm being undercompensated for my work.

[698] And so they start losing employees and they're going to, you know, if they go do another private round, it's going to have to be either a down round or a flat round or if they go up, then there's even more liquidation preference that goes on top.

[699] And so they sort of have to go public in a lot of ways to get all that liquidity and make it so that when you issue the restricted stock units to your employees, like that that's an option for you.

[700] And I think they actually started issuing RSUs before they went public, but it was a little bit of like a too little too late situation where you have all these employees over, you know, nine months to a year whose stock options are worth nothing and realizing it.

[701] Yeah.

[702] Well, you know, I mean, I think for me, this just highlights like when you are talking about valuations of companies and investing in companies, and that's actually only part of what we do as, you know, startup investors as who I was talking about in the Opsware, you know, on the Opsware episode, the most important thing is helping build companies.

[703] But when you have your investor head on, that's why you really need to value companies based on fundamentals, you know, and companies of course so hard to do in the early stages, right?

[704] But by the time Square was raising these rounds, like it was possible.

[705] And if you're a founder and a company, too, you also want your company to be valued on fundamentals, right?

[706] Like, taking a $6 billion valuation because you can get it and it feels good is like all nice and well, but you just screwed your employees, you know, um, and if you take it with all this structure.

[707] And it's, it's, and you know, we're not accusing anybody of doing that because it's one of these things where like the, the whole world is telling you yes.

[708] And it, it seems like it's the, the, the train's going to keep going and then you're going to IPO and you're going to do another upround and it's all just going to happen.

[709] Um, but when you when you start reasoning from from fundamentals it does get a little a little scary i completely agree with you ben like i i i don't know you know the square management team personally but i seriously doubt they were actively trying to screw their employees no they seem like you know incredible incredible leaders and operators yeah um so it is okay so we're in what would have happened otherwise um and in thinking about that you know one option and and this is i i I think really hard to expect this of someone.

[710] But one option is back when they had that, I think their series D, that was Starbucks and City and Saka was in the neighborhood of $3 .5 billion, instead of that private round, they could have just tried to go public.

[711] And doing that earlier might have been able to do a flat or up.

[712] up IPO, at a higher valuation, or maybe at that $3 .5 billion valuation, at least up from their series C from Kleiner Perkins.

[713] And, you know, it's hard to do that because the business wasn't as mature yet, and it's really hard to want to face that sort of public scrutiny.

[714] But as you say, the business was fairly mature then, and their model was pretty, you know, the fundamentals of the business has been the same for a very long time.

[715] Yeah.

[716] I wonder if, you know, and it would have been interesting to see if gone that path.

[717] I wonder, though, if the Starbucks deal was just too volatile at that point.

[718] And if, you know, they were still figuring out, you know, how bad it was.

[719] And again, good from a product and company building and sense, but bad from a financial sense.

[720] I wonder if that's what held them back.

[721] Right.

[722] Oh, that's interesting.

[723] Well, there we are.

[724] There we are.

[725] That's why, you know, Machine learning hasn't come to startup management yet.

[726] Yeah.

[727] It really is.

[728] I mean, it takes being really hard in the weeds, doing the research on this stuff, being a venture capitalist, being someone with early stage shares, or, you know, being a founder of a company that goes through many rounds of this stuff to really, like, see how this plays out.

[729] And I mean, I think you really see the value of experience.

[730] Like, every time I look into one of these companies, my eyes gets open by all the different scenarios that happen from staying private.

[731] it longer, from doing huge rounds, from really doing the math on what are all the possible outcomes, it's just gotten hairier and hairier.

[732] I like the story that the very first term sheet was a two -line piece of paper that said, I will invest in your company for a valuation of this where I get this percent.

[733] And like now, you know, you go into an eight -page term sheet and then 100 pages of definitive docs and all these different terms.

[734] And it's, you know, the complexity has just grown exponentially in the last 50, 60 years.

[735] Yep, which is not necessarily a bad thing.

[736] No, there's a lot more stake.

[737] Yeah, like there's tons of real value being created.

[738] So it makes sense to have all these provisions and carve it all up.

[739] Yeah, but I think you're right.

[740] And I think this is actually moving into tech themes.

[741] I didn't have this down, but this is a great one, which is like just the value of experience and when it comes to startup management and startup investing.

[742] And that could be lived experience or synthetic experience.

[743] experience right like that's why we do this show um but uh david and i are happy to uh get get some synthetic experience here uh at your all expense exactly exactly these decisions have a lot at stake and there's there's uh you can't just you know devise an algorithm for the right way to move forward um the only thing you can have is experience and uh you know being thoughtful about it great people around you yeah what uh what else you got for tech themes boy i really i really didn't save much I mean, well, I mean, one thing that I will say, and this might not be a tech theme, but it is incredible facing that tough period that they went through a good amount of attrition, an employee, a CEO splitting his time while being another CEO, a massively botched Starbucks deal.

[744] Through all this, they've really pulled out nicely.

[745] Like the company's in a pretty great place right now.

[746] It has predictable growth.

[747] You know, they're introducing new products to sell to existing businesses.

[748] And who knows, maybe they'll move into a negative turn.

[749] Or maybe they already are a negative turn.

[750] Who knows?

[751] But it is, it is really a testament to a lot of the things they did right that they've come as far as they have.

[752] Yeah.

[753] My tech theme I want to get in quickly is timing.

[754] And it's funny, I feel like the timing of the IPO was so bad.

[755] I mean, we're going to get into grading in just a minute here, but, man, they really messed up the timing on this one.

[756] But the timing of the company and the product, like, I think this is just a fantastic example of, you know, what we talk about a lot on this show of, you know, writing waves and timing those waves, right?

[757] You know, the growth in consumers wanting to pay via credit cards coupled with the growth in mobile devices, you know, and a writing.

[758] at 2009, 2010, that creating this, you know, massive opportunity to disrupt, you know, the payments and the, and the merchant industry, merchant services industry.

[759] And just instant product market fit.

[760] It's so, so rare.

[761] I mean, that's like a, it's like an iPhone style event that, that happens so rarely where something gets released and just everyone is like, yep, nailed it.

[762] Yep, nailed it.

[763] Yep, yep.

[764] All right.

[765] That's what I got for tech themes.

[766] Should we grade it?

[767] Let's do it.

[768] Let's do it.

[769] So I'm going to start from an A because it was like, you know, we'll start at the top.

[770] They needed cash.

[771] They were, the future looked bright.

[772] They were near cash flow positive.

[773] I'm going to knock them down to.

[774] From a fundamental perspective, as we talked about, I think it was the right time to go public.

[775] They had ironed out the Starbucks deal.

[776] The future was bright.

[777] Yep.

[778] Then I'm going to knock it down to a B because I think they did it a round or two too late.

[779] Not only would the climate have been better to IPO, but the fundamentals of the business would have justified going public earlier.

[780] And, you know, it's a hard thing to expect of people.

[781] But, you know, that knocks it down to a B for me. The whole Goldman Sachs thing, like unbelievable botch.

[782] Oh my gosh, if I was an employee, I'd be so infuriated.

[783] And I think that, um, For me, it's a C. Like, it's a, it's a, it's a good idea that was at the wrong time with terrible execution.

[784] Yeah.

[785] Man, it's so, I'm so tempted to do like a, you know, a Facebook IPO style grading here, right?

[786] And that, like, I want to separate out the company and the performance of the company, which I think is just fantastic.

[787] Truly, I think one of the best tech companies, you know, built in the past 10 years, one of the very, very best from the IPO execution.

[788] But, you know, I do think kind of like what saved the Facebook IPO for me and allowed me to give it two grades was I think they really learned.

[789] And Mark talks about how like the IPO was a forcing function that, you know, really turned into kind of a company saving event for them and realizing they had this huge problem with mobile.

[790] I'm not sure that the same thing happened to a square.

[791] I think they just kind of messed things up financially as you were talking about.

[792] Ben.

[793] So I'm going to resist the temptation to do two grades, although I do want to make clear I have so much respect for a square as a company and as a, you know, company going forward.

[794] But I think the IPO process, I'm not going to be as harsh as you because, again, they probably needed the money.

[795] And I think had they gone public earlier, they probably hadn't had the Starbucks deal ironed out enough to, you know, that would have been a huge problem.

[796] So I'm willing to be a little more generous, but I'm going B minus.

[797] Yeah.

[798] Well, you know, in this hypothetical world, I can predict that it went well.

[799] And it is funny how like we only know how the exact reality played out, right?

[800] We don't know how the alternative reality played out.

[801] So it's not fair really to say that that would have been better.

[802] Yep.

[803] All right.

[804] Good.

[805] I'm glad you didn't give it two grades because I was going to rip on you pretty hard.

[806] I could feel it coming, so that's why I pulled back.

[807] It reminds me that what's the whose line?

[808] Is it any way a line where he's like the show where all the facts are made up and the points don't matter?

[809] Feels a lot like that.

[810] That's what we do here, it acquired.

[811] All right.

[812] Speaking of which, I know you all said you hate follow -ups, and so we're just not going to do them.

[813] But in this case, we have to say we were right.

[814] Yeah, we got a brag.

[815] Yeah, we got a brag.

[816] Disney acquired, you know, a majority stake in.

[817] Bamtech, exactly as we predicted they would.

[818] Maybe even sooner.

[819] I think we should go back and listen, but I think it was like, sometime in the next year or two, but it was like four or five months later.

[820] Yeah.

[821] So good timing, Ben, speaking of timing.

[822] Yeah.

[823] And that's unbelievable.

[824] Like, can we just rewind a second and think about like, holy crap, Disney's pulling all their content off of Netflix and doing a Disney direct offering?

[825] It's their own streaming service.

[826] through Bamtech to directly to consumers.

[827] Like this is, I can't wait to see how this all shakes out.

[828] Yeah, seriously.

[829] Future episodes to come.

[830] Yeah, multiple, multiple.

[831] All right, carveouts.

[832] Oh, carveouts, mine is so perfect for today.

[833] It combines everything we've talked about.

[834] So Nick Belton has, who wrote hatching Twitter, he was at the New York Times, now he's at Vanity Fair.

[835] He has a great new podcast called Inside the High and he had Bob Eager, the Disney CEO, on.

[836] And it was great.

[837] We'll link to it in the show notes.

[838] But Bob talks about their M &A strategy and Lucasfilm and Pixar and Marvel and, you know, the Disney Flywheel.

[839] It's great.

[840] You'll, you guys will love it.

[841] I certainly did.

[842] Awesome.

[843] I got to check it out.

[844] So mine is a book that is currently being written.

[845] But if you guys haven't checked out Git Books before, it is a really interesting product that's like GitHub for books.

[846] and you can sort of look at the contribution history and the revisions of a book while it's out there in public and can be written and revised in real time for people to read it.

[847] So it's a complete thing that you can go read, but it's interesting as the world changes.

[848] It continues to be rewritten.

[849] And the book itself is called World After Capital, and it is written by Albert Wenger of Union Square Ventures.

[850] It is so interesting.

[851] Like, it is one of these things where you often get focused in your own niche or your own work and you read the things that are related specifically to your job.

[852] But you don't think about the, like, macro implications of what we're all doing.

[853] And it's a really interesting book where he sort of argues that we're moving past a world where capital is the expensive and scarce thing and that capital is cheaper.

[854] ever, and it's less meaningful than ever before, and that knowledge.

[855] And he talks about attention a little bit, but really focuses on knowledge as being the scarce resource.

[856] And what does that mean in a world where knowledge is the scarce resource and talks a lot about AI, machine learning?

[857] So if that stuff's your jam and you like to be a futurist a little bit and have a little bit of a sociology bent to it, go check it out.

[858] That is a really, really cool book.

[859] And you can read it in pieces as you would expect from a nice web -based publication.

[860] That's awesome.

[861] I didn't know GitBooks existed.

[862] I'm going to have to check that out.

[863] That's awesome.

[864] Yeah.

[865] Well, that's what we got today.

[866] Our sponsor for this episode is a brand new one for us.

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[869] Yeah, for those of you who haven't listened, Vijay's story is amazing.

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[893] You can click the link in the show notes or go on over to stat sig .com to get started.

[894] And when you do, just tell them that you heard about them from Ben and David here on Acquired.

[895] Thank you so much to you guys for listening.

[896] Check out the Slackacquired .fm.

[897] We are nearly 900 and would love to have you join us.

[898] And lastly, pause this podcast right now and go leave us a review on iTunes.

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[900] So thanks, everyone.

[901] Thanks, everyone.

[902] We'll see you next time.