Harvard Case - Square, Inc.: Financing a Unicorn
"Square, Inc.: Financing a Unicorn" Harvard business case study is written by Mark Simonson. It deals with the challenges in the field of Finance. The case study is 11 page(s) long and it was first published on : Oct 5, 2017
At Fern Fort University, we recommend that Square, Inc. pursue a strategic combination of debt and equity financing to fuel its ambitious growth plans. This approach should prioritize securing a significant debt financing round, followed by a strategic IPO to capitalize on the company's strong market position and growth potential. This balanced approach will allow Square to maintain control while accessing the necessary capital to expand its operations, enter new markets, and solidify its position as a leading player in the fintech space.
2. Background
Square, Inc. is a leading fintech company revolutionizing the payments industry with its innovative mobile payment processing platform. Founded in 2009, the company quickly gained traction by offering a user-friendly and affordable solution for small businesses. Square's success is driven by its robust technology platform, strong customer relationships, and a commitment to innovation.
The case study focuses on Square's financial strategy as it navigates rapid growth and seeks to secure funding for future expansion. The company faces a crucial decision: whether to pursue debt financing, equity financing, or a combination of both.
The main protagonists are:
- Jack Dorsey: CEO of Square, Inc. and a visionary entrepreneur with a proven track record of success.
- Keith Rabois: Chief Operating Officer of Square, Inc., responsible for overseeing the company's operations and strategic growth.
- The Square Board of Directors: Responsible for guiding the company's strategic direction and overseeing its financial performance.
3. Analysis of the Case Study
To analyze Square's situation, we can utilize a framework that considers both financial and strategic aspects:
Financial Analysis:
- Financial Statements: Square's financial statements reveal strong revenue growth, but also highlight the company's reliance on equity financing and its need for additional capital.
- Capital Budgeting: Square's ambitious growth plans require significant capital investment in technology, infrastructure, and expansion into new markets.
- Risk Assessment: Square faces risks related to competition, regulatory changes, and potential economic downturns.
- Return on Investment (ROI): Square needs to demonstrate a strong ROI on its investments to justify its growth strategy and attract investors.
Strategic Analysis:
- Growth Strategy: Square's strategy focuses on expanding its product offerings, entering new markets, and leveraging its technology platform to create new revenue streams.
- Competitive Landscape: Square operates in a competitive market with established players like PayPal and emerging startups.
- Market Opportunity: The fintech industry is experiencing rapid growth, presenting significant opportunities for Square to expand its market share.
- Financial Strategy: Square needs to develop a financial strategy that aligns with its growth objectives and mitigates potential risks.
4. Recommendations
Based on the analysis, we recommend the following course of action:
1. Secure a Significant Debt Financing Round:
- Rationale: Debt financing offers Square the opportunity to access capital without diluting its equity ownership. It allows the company to maintain control and leverage its strong financial performance to secure favorable terms.
- Implementation: Square should approach institutional investors and banks with a compelling pitch highlighting its strong revenue growth, market position, and potential for future profitability.
- Considerations: Square should carefully assess the terms of the debt financing, including interest rates, maturity dates, and covenants, to minimize financial risk.
2. Strategic IPO:
- Rationale: An IPO will provide Square with access to a large pool of capital, enabling it to fund further expansion and potentially acquire strategic assets. It will also enhance the company's brand recognition and credibility.
- Implementation: Square should work with investment banks to prepare for an IPO, including conducting due diligence, developing a prospectus, and roadshow presentations.
- Considerations: Square should carefully time the IPO to maximize its valuation and ensure market conditions are favorable. It should also consider the potential impact of an IPO on its corporate governance and shareholder structure.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: Square's core competency lies in its technology platform and its ability to innovate in the fintech space. The recommended financing strategy aligns with the company's mission to empower businesses and individuals through financial technology.
- External Customers and Internal Clients: The recommended strategy will benefit Square's customers by providing them with access to new products and services, while also enabling the company to attract and retain talented employees.
- Competitors: The recommended strategy positions Square to compete effectively with established players and emerging startups in the fintech market.
- Attractiveness: The recommended strategy is expected to generate a strong ROI for Square, as evidenced by its historical financial performance and the potential for future growth.
6. Conclusion
By pursuing a strategic combination of debt and equity financing, Square can secure the necessary capital to fuel its growth ambitions, maintain control over its operations, and solidify its position as a leading player in the fintech industry. This approach will enable Square to capitalize on the significant opportunities presented by the rapidly evolving fintech landscape.
7. Discussion
Alternatives:
- Pure Equity Financing: This option would provide Square with significant capital but would also dilute its ownership and potentially limit its control over the company.
- Bootstrapping: This approach would involve relying on internal cash flow to fund growth, but it could slow down the company's expansion and limit its ability to capitalize on market opportunities.
Risks:
- Debt Financing: High interest rates, restrictive covenants, and potential economic downturns could negatively impact Square's financial performance.
- IPO: Market volatility, regulatory changes, and negative investor sentiment could affect the IPO's success and valuation.
Assumptions:
- Square's technology platform and business model will continue to be successful.
- The fintech industry will continue to grow at a rapid pace.
- Square will be able to secure favorable terms for its debt financing and IPO.
8. Next Steps
- Develop a Detailed Financial Plan: Square should develop a comprehensive financial plan outlining its capital needs, sources of funding, and projected financial performance.
- Engage with Potential Investors: Square should initiate discussions with institutional investors and banks to gauge their interest in providing debt financing.
- Prepare for IPO: Square should engage with investment banks to prepare for an IPO, including conducting due diligence, developing a prospectus, and roadshow presentations.
- Monitor Market Conditions: Square should closely monitor market conditions, regulatory changes, and competitor activities to ensure its financial strategy remains aligned with its strategic goals.
By taking these steps, Square can effectively manage its financial resources, capitalize on market opportunities, and solidify its position as a leading player in the dynamic fintech industry.
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Case Description
In 2014, mobile payment company Square, Inc., based in San Francisco, California, was one of an increasing number of venture capital financed firms with valuations above US$1 billion, which had become known as "unicorns." By September 2014, the company had raised $371 million over five rounds of venture capital financing. Since the first funding round had been almost five years previous, it was possible that venture funding investors would be pushing for an exit. The firm considered an acquisition offer and an initial public offering, but it was apparent that neither option would yield its desired $6 billion exit value. With $139 million in cash on hand, Square, Inc., was on track to use $138 million of cash in 2014. It approached venture capital investors for a sixth round of financing. It was then up to the investors to determine if they could agree to suitable terms.
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