How Venture Capital Killed Square


Square was an innovator. They saw a great opportunity to combine a small piece of hardware with a mobile device to enable commerce for tens of millions of small businesses. And by small I mean the guy at the farmers’ market who sells 100 heads of cabbage a year.

The farmer’s market seller was Square’s bread-and-butter client. He was never going to buy a POS. Conventional payments companies didn’t want his business because he was too small. And in an increasingly cashless world, he wanted to accept card payments.

These sorts of clients would have netted Square a nice, profitable business. As soon as one seller at the farmers’ market starts accepting cards, everyone wants to accept cards. The hardware to make it happen is sleek, cheap (likely free), and it works. This is the perfect recipe for word of mouth adoption: solve a real problem in a small enough market that you become the market leader.

But Square got greedy. Or investors got greedy. Or maybe it was the inevitable result of investor money. As soon as Square took the first drop of Venture Capital, they had to become a billion-dollar company. In under 5 years. Or else (cue dooming music).

This means that the economics of the farmers’ market customer would not suffice. If Square had focused on the lady who hocks 8 ugly cat sweaters a year, it would have built a solid, profitable business.  Not a billion-dollar enterprise, but a consistent $20M revenue stream with EBITDA.

Instead, Square needed to burn through hundreds of millions of investor dollars to build a company that has no path to profit in sight. Square’s only real shot at profitability lies in the data it collects. The merging of SKU and PII could be useful, but I don’t know if it has enough of either.

Maybe it was fear of competition. Maybe it was hubris. Or ignorance. Regardless, there are hundreds of people who are now worse off. Square employees had stock options – that they likely purchased – at a share price much higher than the public market deems them to be worth today.

But celebrity founders always seem to do alright. Jack Dorsey retains hefty ownership in Square, even with share price reconciliation and his divided focus as Twitter’s boss. And let’s not forget the investors. If anyone loses money, they’re the last to do so.

PS I’m not kidding about the size of merchants who use Square. See this chart produced by the Strawheker group.