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Science

Why you should care about Square, unicorns and the new tech bubble

Want to know why "everyone" is talking about unicorns, Jack Dorsey and a tech firm called Square? No, not Foursquare. Just Square. It's debuted at the New York Stock Exchange and rocketed. Read on.

To be frank, you have every reason not to care about Square and its initial public offering (IPO) on the New York Stock Exchange on Thursday. You may be one of the many millions of people on the planet who have never heard of Square - and nor should you have.

But a relatively small and yet influential group has been in a positive tiss about this company and its going public for weeks, if not months.

Why? Simple. It's a unicorn.

And this unicorn just hit the ground running at the New York Stock Exchange on Thursday. Within about 30 minutes of trading, shares in Square had jumped 52 percent, from a starting price of $9 to $13.66.

PrivCo, a research firm, says Square's debut "will set a precedent" for how other unicorns are viewed by investors at a time of considerable doubt over tech valuations.

What the **** is a tech unicorn?

A unicorn in tech is a privately held company valued at over $1 billion, based on fund-raising alone. Square is a unicorn - but its unicorn status has been shrinking of late.

At the time of writing, a list compiled and updated by Fortune in August had Square valued at $6 billion. After its last round of funding, however, its estimated market value dropped to just over $4 billion.

Way above Square were companies such as Uber (upwards of $50 billion), Xiaomi ($46 billion), Airbnb ($25.5 billion), Snapchat ($16 billion), SpaceX ($12 billion), Pintrest ($11 billion), and Dropbox (upwards of $10 billion) - all in the top ten.

What's shocking about the list - aside from the fact that it's dominated by men - is that some analysts fear there is no real analysis of these companies' true financial prospects - indicating the potential for a new bubble in the private tech markets.

Matthew Kennedy, an analyst at Renaissance Capital, described Square's valuation prior to the IPO as "worrying."

Square set the price per share late on Wednesday at $9. It was somewhat below a price range of $11 and $13 which the company had said it expected in a regulatory filing in early November.

The feeling was, Square wanted to keep the initial price as low as possible so as to maximize its chances of scoring a huge bump when it hit the trading floor in New York. And if that was Square's tactic, it clearly worked.

So what does Square actually do?

Good question. Square is a tech startup, specializing in a mobile payments. It was founded by Jack Dorsey about three years after he co-founded Twitter.

Twitter IPO in 2013

Jack Dorsey (2nd L) at Twitter's IPO in 2013. He's CEO of Twitter and Square

Square started by offering financial transaction software for smartphones and tablets, as well as "dongles" that enable the mobile devices to read the magnetic strip on credit cards.

Will this lead to a mobile payments boom?

Not to be confused with a tech bubble - mobile payments will bloom, whether we like it or not, but they may not boom just yet.

A study published in May by Gartner, an IT research and advisory firm, suggested many consumers don't trust mobile payment methods.

However, there is growing competition among the tech giants in the US, including Apple, Amazon and PayPal, who want to shape the future of shopping by changing the way we pay.

Ebay und PayPal Banner

Mobile payments are the new tech battleground, but are we heading for a bubble?

In 2014, released the iPhone 6 with software called Apple Pay, which for contactless payments, using Near Field Communication (NFC) technology. Samsung also has a "mobile wallet" called Samsung Pay.

But both have a long way to go before they achieve success, with Gartner estimating NFC transactions will account for "only 6 percent" of mobile payments in 2018.

Square takes a 2.75 percent commission on transactions using its mobile dongle. Transactions via PayPal and others also come at the cost of a commission, usually to the seller.

Payment trackability

But the real issue here is being able to trace payments. Put simply, tech firms and governments want us to move more and more payments online, because it means our transactions can be tracked.

That may be good for us, but it's even better for them.

Mobiles in Kenya

In African countries such as Kenya, mobile payments have long had a strong footing

Hence the recent interest in Bitcoin - despite its association with criminal trades on sites like Silk Road and more recently with the Islamic State terror group. Governments, financial institutions and others are keen to harness the cryptography used for digital currencies to increase payment security, whatever the ends entail.

The US government has even held Bitcoin as "cash" reserves.

The future looks…

Square's IPO was highly anticipated, although regulatory filings on the third quarter showed a net loss of $53.9 million on revenues of $332 million. But this drop in value ahead of the IPO is precisely what made it interesting.

Analysts believe Square's IPO will set a benchmark - or even a correction in private markets - and shape other anticipated IPOs by Dropbox and Airbnb, for instance.

As Jack Dorsey - a man who has seen it all before - must have been quietly confident. Research by Ipreo, a market intelligence provider, has Twitter at number three in its ranking of Top Tech IPOs since 2010. You'd think Dorsey knew what he was doing.

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