July 25, 2012 1:45am EST – Square (PrivCo Private Company Ticker: SQUAREP) is closing a new $200 Million funding round, valuing the 3-year old privately-held mobile payments company at a whopping $3.2 Billion valuation, representing a doubling of Square's last valuation of $1.6 Billion just 1-year ago, in July 2011. While a valuation of $3.2 billion is rich, and virtually unheard of for a 3-year old company, Square has grown dramatically since its prior round of funding, now processing over $500 Million per month in merchant transactions according to PrivCo data, putting Square on track to do what PrivCo estimates will be $170 Million in revenue this year. According to PrivCo data, Square's 2012 revenue will be at least a 300% increase over Square's 2011 revenue of $42.5 million, impressive growth by any measure. The lead investor of Square's new funding round: little known private-equity firm Rizvi Traverse of Michigan, whose most high profile deals were the recent take-private buyout of Playboy Enterprises (PrivCo Private Company Ticker: PLAYP) late last year, followed by the January 2012 sale of privately-held independent film studio Summit Entertainment (PrivCo Private Company Ticker: SUMMTP).
PrivCo sources had Square originally seeking a $4 Billion valuation when it began its hunt for new funding in April. As August approached, and signs that prospective investors were pushing back on a high $4 Billion valuation, Square settled for a pre-money valuation of $3.0 Billion (a post-money valuation of $3.2 Billion with the $200 Million in new funds). This reduces founder Jack Dorsey's stake to just over 26%, worth $845 Million at the new valuation. Coupled with Dorsey's relatively modest stake (in % terms) in Twitter (PrivCo Ticker: TWEETP) holdings, which he also c-founded, Dorsey will officially become a billionaire on paper after this new financing and valuation (ironically, not from Twitter, but primarily from 2-year old Square).
Square's competitive positioning illustrates an interesting picture. The road to success for Square could be a rocky one, as competitors in mobile payments have not stood still, and have started to respond more aggressively. Among them, eBay's (NASDAQ: EBAY) PayPal payments unit is now pricing service fees fractionally lower than Square at just 2.7%. Furthermore, just last week privately-held SCVNGR's (PrivCo Ticker: SCVNGP) competing LevelUp payments service eliminated merchant transaction fees entirely (to zero).
If payment processing companies begin to compete this way on price, that could materially and adversely impact Square's gross margins, which are already very tight, as the vast majority of its 2.75% transaction fees go directly to Visa, Mastercard and banks in interchange fees, with Square keeping less than 1/2 of 1% (0.5%) in spread. Square does not have a lot of room to move down on pricing, and if it refuses, its market share could get eroded quickly as well-funded competitors undercut Square on price. As payment processing is mostly a commodity, local merchants tend to go with whoever offers the lowest % processing fee.
Sam Hamadeh, PrivCo's Founder and CEO PrivCo's Founder and CEO said Wednesday in a statement: "PrivCo has always felt that Square was a company being "built to be bought", and we still feel that is true, as the company would make a perfect acquisition for a major payment processor that is behind the curve on mobile payments. We don't see Square being an independent company forever."
Hamadeh added, "On a final note, here at PrivCo we are quite familiar with Jack Dorsey, and as entrepreneurs go, Square has about the sharpest leadership in Dorsey as they come."
Note to Readers: Square's card reader made its first public debut in January 2010 at a Congressional fundraiser hosted by PrivCo (and Vault.com) Founder Sam Hamadeh at his New York loft, and co-hosted by Square's Jack Dorsey and Facebook's Sean Parker, where Square was used for the first time to accept attendees' campaign contributions by credit card via an iPhone.