Af­ter Square’s IPO, no­body wants to fol­low in its foot­steps

Abroad, card-reader clones start to sound a lit­tle des­per­ate “You can see that their mar­ket is ac­tu­ally quite lim­ited”

Bloomberg Businessweek (Asia) - - CONTENT - −Ger­rit De Vynck

A year ago, Van­cou­ver startup Pay­firma’s nick­name, the Square of Canada, was a badge of honor. Pay­firma’s smart­phone-com­pat­i­ble credit card read­ers were in high de­mand, and lo­cal in­vestors sup­plied $13 mil­lion in fund­ing. Like Jack Dorsey, the chief ex­ec­u­tive of­fi­cer of Square (and Twit­ter), Pay­firma CEO Michael Gok­turk said he was aim­ing for “hy­per­growth.” Gok­turk dou­bled his staff to 80, in­clud­ing a chief op­er­at­ing of­fi­cer for­merly at In­tuit, and started talk­ing about an ini­tial pub­lic of­fer­ing.

Whoops. In Novem­ber, Square went pub­lic with a mar­ket value of about $2.9 bil­lion, less than half its pri­vate val­u­a­tion from a year ear­lier. In the runup to the IPO, an­a­lysts be­gan ques­tion­ing whether the card-reader maker should re­ally be priced like a high­fly­ing tech com­pany in an era of mo­bile pay­ment apps. Its stock price is hov­er­ing at about $13, right where it was af­ter its first day of trad­ing. Square de­clined to com­ment.

“Now that they started go­ing through the rig­ors of a pub­lic mar­ket, you can see that their mar­ket is ac­tu­ally quite lim­ited,” says Gil Luria, an an­a­lyst at Wed­bush Se­cu­ri­ties. “It’s go­ing to be much harder go­ing for­ward for com­pa­nies that try to em­u­late their model to raise cap­i­tal.”

At Pay­firma, Gok­turk says he was forced to ad­mit that re­cruit­ing 40 peo­ple didn’t help with the com­pany’s stalled U.S. ex­pan­sion—or much else. “We were still do­ing the same re­sults, from a sales per­spec­tive, from a rev­enue per­spec­tive, with a dou­bled staff,” he says, de­clin­ing to pro­vide rev­enue fig­ures. “We made the mis­take of over­hir­ing and hop­ing that we were go­ing to raise more money.”

Even­tu­ally, Pay­firma cut 30 of its 80 em­ploy­ees. Af­ter­ward, Gok­turk pub­lished a blog post on the com­pany web­site ask­ing Van­cou­ver’s other busi­nesses to hire the work­ers who’d been

let go, in­clud­ing a list of names, skills, and con­tact in­for­ma­tion. The list has since been re­moved, but Gok­turk says the ef­fort helped three-quar­ters of his for­mer em­ploy­ees find jobs.

There was no such good­will pro­gram when the lights went out at Powa Tech­nolo­gies, the U.K. Square clone once val­ued at $2.7 bil­lion. Powa filed for ad­min­is­tra­tion, the rough Bri­tish equiv­a­lent of bank­ruptcy pro­tec­tion, in Fe­bru­ary. The board re­moved found­ing CEO Dan Wag­ner, who last year said he wanted to build the “big­gest tech com­pany in liv­ing mem­ory.” It brought in ac­count­ing firm Deloitte to con­sult, which re­sulted in 72 jobs be­ing cut at Powa’s Lon­don head­quar­ters. In March, pieces of the com­pany were sold off.

Swedish Square look-alike IZet­tle has shielded it­self from much of the cardreader-re­lated fall­out be­cause it avoided hype in the first place, says CEO Ja­cob de Geer. “We ended up with a very good Euro­pean val­u­a­tion, I would say, but hav­ing the same type of busi­ness in the U.S., I’m pretty sure it would have been sig­nif­i­cantly higher,” he says. A per­son familiar with the com­pany’s pri­vate val­u­a­tion pegged it at about $500 mil­lion; de Geer de­clined to com­ment.

Square has been push­ing be­yond card read­ers as it looks for ways to grow, sell­ing add-on ser­vices such as cash ad­vances and soft­ware tools to an­a­lyze sales data. It’s also bring­ing in larger cus­tomers, which it said in its first post-IPO earn­ings state­ment will help it turn a profit this year.

Gok­turk says Pay­firma is fo­cus­ing on its strat­egy of bundling card read­ers, tra­di­tional check­out­counter hard­ware and soft­ware, and on­line sales tools as a monthly sub­scrip­tion pack­age, aimed at busi­nesses slightly larger than Square’s and IZet­tle’s clients. Pay­firma also has a re­fer­ral deal with CIBC, one of Canada’s largest banks, which helps bring in cus­tomers with­out hav­ing to hire sales­peo­ple. “We’ve ex­tended our run­way,” Gok­turk says, “to the point where we can now get to profitabil­ity with the cash on our bal­ance sheet.”

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