Oct 15, 2015 ยท 5 minutes

So let's get this straight.

Square, Inc., has raised $590 million in private funding rounds – or about $100 million a year – to support it as it racked up an aggregate loss of $500 million in that time. It wants to raise at least $275 more in an IPO this year, the worst year for tech IPOs since 2009 and one that is growing finickier as the year wears on. 

Square's dongle and its 2.75-percent transaction fee brought digital payments to many small merchants, but it also brought in copycats from better-funded rivals like Intuit, PayPal and Amazon. A high-profile deal with Starbucks turned into a big bust that led to $56 million in losses. Yet when that deal ends next year, Square warns, it could cause revenue to “decrease meaningfully in the future.” And fraud – actually, a single fraudster – somehow bilked the company out of $6 million this year.

That's okay. Running a growing business is hard, especially when there are signs that the global economy you want to expand into is entering a frightening-looking slowdown. A CEO facing an unfriendly IPO market, a slowing economy, a rising tide of competition and a few recent, embarrassing snafus simply doubles down, works twice as hard. Right? What a CEO doesn't do in such a time is take a second job at another, even more challenged company. 

There is a good reason why Jeff Bezos didn't sign on as publisher of the Washington Post, opting instead to simply offer input and advice. Or why the more respected CEOs of tech companies – the ones that are actually making a sustainable profit – don't moonlight. Even Steve Jobs didn't run Pixar day-to-day when he held the title of CEO. 

Jack Dorsey, though, has as much ambition as Bezos or Jobs. And looking through Square's prospectus, it's clear that what Dorsey has accomplished with the company is an impressive feat of management. “We’ve built one of the fairest and most efficient payments businesses in the world,” Dorsey wrote in his founder's letter. “Creating more inclusion and greater equality in the global economy is both a social need and a huge business opportunity,”

In that founder letter – cheerily titled “A Note from Jack” and featuring a clumsy joke about his mom being his first boss – Dorsey laid out the creation myth of the company: Co-founder Jim McKelvey couldn't accept credit cards when selling his art, and both founders realized the problem wasn't the technology, but the system.

This story has the classic narrative arc of disruption, but the problem is that Square wasn't alone in telling it. Many other companies – startups and tech giants alike – saw the same opportunity, especially with the sudden ubiquity of smartphones and tablets. Companies like PayPal, which had established relationships with merchants, had been making their own inroads. And PayPal was quick to develop its own card reader, PayPal Here

Like PayPal before it, Square is an attempted end-run around the ridiculously high fees and cumbersome processing that credit-card companies charge merchants. And like PayPal, Square has been semi-successful in that goal. Financial institutions are incumbents that deserve to be disrupted, with their opaque practices, inflated fees and byzantine processes. But for all the talk about a fintech revolution, they are also proving to be stubbornly difficult to disrupt on any massive scale.

That's another thing that Square's prospectus makes clear: just how long and arduous an uphill battle the company faces to achieve its goals. Square has made its task even harder by focusing on small merchants. Last quarter, 89 percent of Square's customers were smaller merchants with annual payment volumes below $500,000. This is a market of business owners whose need for digital technology is far greater than their capacity and time to employ and maintain it. It is, as I've written, like farming on clay soil.

And so Square is approaching the public markets bearing some of the hallmarks that investors are starting to dislike, like a history of losses and negative cash flows. In its favor, those losses are slowly growing smaller this year: Operating loss fell to 13 percent of revenue in the first half of 2015 from 21 percent in the year-ago period. And after burning through $109 million in cash during 2014, it burned through $11 million in the first half of 2015. Less cash burned, but still a lot of smoke.

There are other details which new investors may find less than enticing, such as the dual-stock structure that will allow existing insiders like Dorsey ten times more voting power than people buying into the IPO. And the ratchet provision that guarantees private investors a 20-percent return no matter where the Square IPO prices – a concession that could dilute other shareholdings. Investors in the public markets, needless to say, will be given no such guarantees.

Until now, IPOs like Fitbit and GrubHub received warm welcomes because of their history of growing profits. But now IPO investors are in a grouchy mood. Pure Storage went public last week and stumbled below the $3 billion valuation of its last private round before recovering. First Data, a mammoth payments processor of an earlier vintage, went public this week at $16 a share, well below the expected range of $18-$20 a share. Retail chain Albertsons didn't even make it out of the gate, choosing to postpone its offering. 

So how will they greet a company without a cent in profit and with a part-time CEO? A lot of news stories writing about the Square IPO noted the warning in the risk factors that Dorsey's role as Twitter CEO could harm his ability to focus on Square. That was really just a legal formality, dotting the i's by disclosing a piece of news everyone has known for weeks, if not months. 

What's really new in this prospectus is just how much Square needs Dorsey full time. He may have assembled a team of strong executives who can handle much of the heavy lifting, but there are too many challenges facing Square in the coming year or two that need the full-time attention of a founder CEO. Starting with the sometimes-circus that leading a highly visible public company can entail.

The same, of course, could be said for Twitter, which may be several quarters away from becoming a broken company without careful attention to its complex challenges. The good thing about being CEO of two companies is that, if one sinks, you can always jump to the other and claim you've kept it afloat. That's a good outcome for the CEO, but for investors in the weaker company, it's a scenario to be avoided at all costs.

And it's easy to imagine that very scenario on the mind of institutional investors as Square takes its roadshow around Wall Street.