Square denies sell-out plans; all eyes on the dicey-looking financials

The Wall Street Journal says Square is looking to sell itself off to a major tech firm. Square, however, threw cold water on the report. But questions remain over its leaked finances.

Image: Square

Another day, another Silicon Valley startup in trouble?

Square, the mobile payment startup founded by Twitter co-founder Jack Dorsey, is reportedly looking to sell itself to a larger technology giant, so says a report by The Wall Street Journal.

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According to the paper, citing two people understood to be familiar with the matter, Square had deep-level discussions with Google and others in efforts to snap it up for an undisclosed sum. 

Except that may not be the case, after Square on Monday issued a stern denial to sister-site CNET; though leaving enough wiggle-room to suggest that it isn't to say that informal talks weren't taking place at some point.

But questions remain over the service's financial health.

Square, which as a private firm doesn't yet disclose its finances, recorded a greater year-over-year loss of roughly $100 million in 2013. The company, more than five years old, dished out about $110 million more in cash than it took in last year, and has chomped through half the estimated $340 million it raised from four rounds investors and financing since 2009, the report said.

It's not uncommon for a startup to eat up more than its incomings, particularly during a time of significant growth. But at the same time, many companies spend as much as they can to build up and flog themselves off to a larger player — particularly such as to the likes of Apple, Google, and eBay, all of which were named in the report, who can afford to take a small financial ding on a loss-making venture.

That is, however, if it's good enough to be bought in the first place.

Square is valued at just over $5 billion, insiders suggest, and if the report rings true, Square drew in about $550 million in revenue on $20 billion-worth of transactions. 

But the worth and the revenue don't appear to add up. Square typically charges a 2.75 percent fee on every credit card transaction, but about 80 percent is funnelled into network and payment fees. That leaves 0.55 percent of every transaction landing in Square's coffers — in other words, a razor-thin margin. Square either has to ramp up that figure so that the end-customer suffers, or somehow find a way to subsidize the fees it has to pay so that it can gain a better final cut from each transaction.

Square may not have a huge amount of direct competitors — the exception is PayPal, which already has its own mobile-based payments system, dubbed Here. Google is expected to ramp up its efforts in the coming months as its Wallet payments system continues to take shape.

The mobile payments firm has a few options. It can continue to drum up capital and invest in its growth, or it can offer itself up for sale to a tech titan, which it has spent the past day denying. Failing that, an initial public offering (à la Twitter, another major tech firm in the red ) wouldn't be the dumbest idea on the plate. 

In any case, if the business model can't survive as it appears now, Square isn't going anywhere fast any time soon.