Erick Schonfeld and John Biggs are good guys, and often give reasonable startup analysis on TechCrunch, but i've got beef with their review of Square on Fly Or Die this week. It seems that they think Square will be a formidable competitor to traditional payment networks (Visa, Mastercard, American Express, Discover) and banks (BofA, Citi, etc), because they're faster and more nimble. They also brushed off the effect that NFC might have in changing the landscape for mobile payments. Alas, this is not only a poor assessment, but one based solely on a lack of knowledge of the payment space. While it is possible that Square could be acquired by any one of these guys, I find it hard to believe that they will get a sizable valuation (relative to investment).
As you'll find in a prior post from Dec 31, 2009, I have been fairly critical of Square since it was launched, as it does not actually solve the problem of simplicity for small business, particularly when considering the rest of the landscape.
Scott Loftesness over at PaymentsViews (and a real expert on the space) had a monumental post on the subject on 12/1/2009 and a recent, more positive update here. Scott points out some of the issues with the business model, namely the dependence that Square has on existing payment networks (payments from/to traditional Debit/Credit networks unlike Bling Nation), paradigms created by others (namely micro-merchant accounts, designed and built by Paypal in the 2000's), and a dependency on a neat technology that will likely become obsolete with the introduction of NFC (Jack's co-founder patented the dongle concept, and was the impetus for the creation of the business). Add to the mix two larger 'incumbent' firms who are focused on disruption/innovation, namely Intuit and Paypal, and you've got yourself a problem.
The truth is, Square is a neat concept and is a great front-end interface for acquisition by Paypal, one of the payment networks (most likely AXP) or maybe a large bank with a small business banking focus. Regardless, the likelihood of this getting a 'huge exit', particularly given the size of investment to date (~$40M), is difficult to see.
Frankly, it reminds me tremendously of Revolution Money, which raised $92M and was sold for $300M to American Express. While one could argue that this was a 3x exit on invested capital, I'd be shocked if investors in the last round got anything beyond their initial investment back. Why did Revolution Money get such a low valuation - frankly, because it did not get the traction worthy of an independent company and was acquired for technology, namely their open API architecture, to allow AXP to compete with Paypal.
Where the two differ here, is that the cost of building the open API to AXP (a feat completed at great cost and time by Paypal X) probably made an acquisition of $300M, including a bunch of engaged employees and goodwill, seem sane. In the case of Square, both Paypal, Intuit, and now several banks, including AXP, are attempting to offer mobile payment solutions on their own, proving that the problem is not nearly as complex. Thus, it would simply constitute a UI acquisition, which cannot possibly cover costs.
Here's hoping Square can get to critical mass before they get into this kind of situation, but realistically, knowing how complex this business is, and how fierce the competition is (and will be), I have strong doubts... What say you?