Square Prices Its I.P.O. at $9...Pop goes the bubble!

The long-running gold rush into hot technology start-ups showed signs of faltering on Wednesday, as a much-anticipated market debut had to scale back its ambitions.

Square — valued in a private financing last year at $6 billion — priced its initial public offering at a level that gave the payments company a valuation of $2.9 billion. The difference between the two may be seen as a sign that the market for venture-backed companies has reached too high.

The shares, which are to start trading on Thursday, were priced at $9 after Square was unable to get demand from investors within the $11 to $13 range it was seeking. The company and the Silicon Valley Community Foundation, a nonprofit, decided to sell $243 million through the offering, 25 percent less than the $324 million they had been aiming to raise.

The weak I.P.O. pricing raises the pressure on Jack Dorsey, Square’s chief executive. Last month, Mr. Dorsey was appointed chief executive of Twitter, the social media company he co-founded, with some critics questioning whether he would be able to manage two public companies.

Twitter has been flailing in its efforts to build its user base, a situation that demands Mr. Dorsey’s time and attention.

Square is not the first I.P.O. of the so-called unicorns — private companies valued at $1 billion or more — to go public below its latest private valuation. But it is the largest in recent years.

Of 140-plus unicorns, Square ranked among the top 15.

“The unicorn thing has gotten way out over its skis,” said Max Wolff, chief economist at Manhattan Venture Partners. “Square’s I.P.O says people are a little bit less caught up in the prospects of what you can become and are more grounded in what you are.”

Many investors have shifted their focus toward measures like earnings, which Square does not currently have, and away from revenue growth.

That shift in perspective can be seen with mutual funds, which have poured billions of dollars into private companies in recent years.

Lately, a number of funds have been discounting their positions in prized start-ups. While Square was on the road speaking with investors, it emerged that Fidelity had marked down the value of Snapchat by 25 percent. Dropbox, which provides cloud-based file storage, was devalued by BlackRock earlier this year.

From the beginning, Square has had challenges that caused it to face a trying process to go public. Its detractors have long been skeptical of the company’s business model, taking a small percentage of every credit card transaction it processes and splitting it with financial intermediaries, credit card networks and others, making it harder to achieve large-scale profitability.

It also faces a lot of competition from such traditional operators as First Data and PayPal and smaller upstarts like Stripe.

Square is also entering a difficult market for I.P.O.s in general.

Match Group, the owner of a number of dating sites including Tinder, also priced shares in its offering on Wednesday. The company sold 33.3 million shares for $12 apiece, the bottom end of the range it was marketing to investors.

The $400 million I.P.O is the first step in Match’s split from IAC/InterActiveCorp, the media conglomerate whose chairman is Barry Diller. At the I.P.O. price, Match has a market valuation of $2.9 billion.

Like Square, Match faces substantial competition, but it was able to show investors positive net income.

Many tech I.P.O.s this year, such as the software companies Box and Apigee, also priced their deals below those granted in the private markets.

Still, going public at this time may prove to be a highly savvy move by Square.

The lack of tech I.P.O.s this year — representing only 15 percent of the amount raised — enabled Square to capture the attention from investors and get the deal done.

But there is a mounting wave of technology start-ups that may want to go public in the next two years. There are 143 unicorns with a combined valuation of $507 billion, according to CB Insights, a venture-capital research firm.

If all these companies were to float 25 percent of their private valuations through I.P.O.s over the next two years, there would be $63.4 billion in unicorn I.P.O.s alone. That figure is 14 percent higher than the average total volume of I.P.O.s — regardless of sector — over the last two decades, data compiled by The New York Times and Dealogic show.

These statistics show it would be very difficult for the market to absorb such an abundance of tech I.P.O.s, especially at their current, private valuations. Too much supply could cause some unicorns to garner steeper discounts to get investors’ attention, or they might not be able to go public at all — ever.

To its credit, Square has spent the last two years trying to move beyond its core business of payments processing by offering its customers additional services. Square Capital, the company’s merchant cash advance program, has extended more than $225 million to customers since it started last year. The company also sells subscription-based payroll and scheduling services, and most recently introduced an email marketing program for attracting repeat business.

These revenue streams, however, are still nascent areas of potential growth for the company; payments processing still makes up roughly 95 percent of Square’s overall revenues, according to Square’s I.P.O. documents.

On a fully diluted basis, including options and warrants, Square’s market valuation is $3.2 billion, a more-direct comparison to the $6 billion figure achieved in its latest private round.

The lower valuation is especially problematic for Square because when raising private funding, it agreed to what is called a “ratchet,” a way for investors to protect themselves from another round, I.P.O. or sale at a lower price. At $9 a share, the ratchet prompts an additional 8.8 million shares for later investors, representing 2.7 percent of shares outstanding. These extra shares come at the expense of earlier investors, who see their stakes diluted.

The I.P.O. price was lower than Square’s Series D round, which was sold to Rizvi Traverse and JPMorgan Chase in the middle of September 2012 for $11.01 a share. The Series E of $150 million was conducted in the middle of 2014, and then an addition of $30 million in October 2015, for $15.46 per share to the same investors.

Goldman Sachs, Morgan Stanley and JPMorgan Chase managed the Square offering. The shares will be listed on the New York Stock Exchange under the symbol SQ.