Square recently completed its fourth round of venture capital funding, which was significant more in that it showed investors’ confidence in what the company has already done than the company’s ability to get the funding, according to Rick Oglesby, senior analyst, retail banking, for Boston, Mass.-based Aite Group.
Major investors in the latest round of funding were Starbucks Coffee Co., Citi Ventures and Rizvi Traverse Management.
“The founder of Square was also the founder of Twitter, so funding has never been an issue,” Oglesby told Loyalty 360. “A lot of companies get money, but they never go anywhere. Square has been very successful in what it’s done so far.”
The company started a couple of years ago by providing payment processing services for people selling items on Craigslist and other micro-merchants by enabling customers to attach a small payment card reader device to their smartphones.
“They democratized payments,” Olgesby said. “They developed a whole new market for people who were selling on Craigslist and accept credit cards. In terms of the technology, it was a whole new market. Then they grew in that space. For investors looking to buy a company, that is very important. Venture capital investors look at a number of different businesses.”
Venture capital investors look for strong returns because they know that such start-up ventures are very risky by their nature as new, unproven businesses, Olgesby added. “They need one that pays off, that is the critical component.”
And critical in producing the payoff is continued growth. Square did that by moving upstream in the payments industry and bringing in the business of small merchants, offering them a table-based point-of-sale solution, then eventually offering a digital wallet.
Square made two significant advances in August:
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The company made its card reader available in more than 1,000 AT&T company owned retail stores, adding to the growing list of more than 20,000 retail locations across the country where the devices are available.
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Square took a giant step by inking a partnership with Starbucks. A Starbucks spokesperson said that as of mid-September, the company was still in the process of integrating the Square technology with the Starbucks POS systems.
“Square offers a unique and distinct product solution,” Olglesby said. “They have potential in every market they have entered. That is the type of thing that investors look at longingly. When they went into Starbucks, they stepped out of what had been their footprint. [In Starbucks], they are offering only components of the technology so that the merchants don’t have to buy entire new systems in order to use it. They’re operating a lot more like a payments network, like Paypal.”
One year ago, Square had approximately 150 employees and processed over $1 billion in payments on an annualized basis. Today, Square has over 400 employees and is processing over $8 billion in payments on an annualized basis.
Square is still tiny in comparison to Paypal ($120 billion in annualized payments) and Visa ($6 trillion), Olglesby said. “Square has a lot of potential. The upside is huge.”