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After losing $100 Million, has Square lost its edge?

Back To Square One Fast Company Business Innovation


Jack Dorsey doesn't know how to grade his performance. It's early May, and Dorsey has just finished his annual reviews of Square's 800 employees. He now needs to complete his own. So the Square CEO sends out a Google Doc to the entire company soliciting feedback, but he makes two suggestions that border on the masochistic: All comments should be anonymous, and all comments should be visible to everyone inside the company. "Write whatever you want," Dorsey tells his troops, adding that he wants to learn "where I've done well, where I've done poorly, and where I've completely screwed things up."

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My feedback would have been to focus.

Then I read the article:

He tells me he hasn't read through all the feedback yet from his Square colleagues--he received more than 500 responses--and will only hint that much of it stressed the need for more "focus" at the company. He's being intentionally vague, of course. When I ask what grade he'll give himself in the self-assessment he's writing, Dorsey tersely replies, "Not an F."

The big question:

By early 2014, investors had plunged $340 million into the startup, which was valued at $5 billion.

Since then, the mood has soured. Nick Bilton's insider tale, Hatching Twitter, painted an unflattering portrait of Dorsey as a backstabbing egotist who took more credit for Twitter's success than he deserved. Not long after, reports surfaced that Square had delayed its IPO due to revenue troubles. Then a scathing piece in The Wall Street Journal depicted Square as a company desperately searching for an exit after losing $100 million last year. The problem? Square's core business, processing transactions and taking a tiny cut for the effort, was simply not all that profitable. To put a finer point on it, venture capitalist Fred Wilson recently penned a blog post suggesting that Square would soon have to make "some hard choices."

The coming months for Square will be pivotal. As it burns through cash, the company must create new sources of revenue to justify its high valuation; in the process, it will try to prove that it can create a hugely profitable business as well as a transformative one.

The main challenge of a payments business:

Square's earnings told a different story. Making money from payments processing is a bit like building a business by selling soda simply for the bottle deposit: It takes a lot of effort just to convert a $1 bottle of Coke into a nickel return, and only in extreme bulk can those nickels start to add up. More troubling, with Square's business, the majority of those nickels go to the financial intermediaries it works with. At every swipe, Square takes its small cut of the transaction price, but 70% (or more) of that fee often goes to Visa, MasterCard, and other institutions that handle risk and fraud detection, as well as card-member rewards and services. With higher-end American Express cards, Square even loses money on charges. "If your business model is based on making pennies from transactions, you're in trouble," says a former top executive at one of the big card networks who has worked closely with Square.

Gokul Rajaram is an important leader of Square:

Tellingly, the visionary now leading the charge isn't Dorsey, but Gokul Rajaram, a 39-year-old product engineer who carries his smartphone in his shirt's chest pocket and exudes a nerdy affection for data. When Rajaram joined Square from Facebook in July 2013, he set out to interview employees from every part of the company to find out what needed fixing. The verdict was predictable: "We were doing a great job building a bunch of features on the payments side of the business," he says. "But we needed to be more aggressive and accelerate building products on top of the payments data." Some teams were inching toward this goal before Rajaram arrived, but he found the efforts "nebulous." After an all-hands meeting in August, he outlined what areas Square would (and wouldn't) work on. As the company kicked into overdrive, Wallet was discontinued.

Jack remarks that he focuses instead on building "something that resonates with everyone on the planet--then you're really understanding humanity, and that's what I personally want to feel."

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