The Square IPO

Unicorns and ratchets and lawsuits, oh my! Our heroes dive into the history of Jack Dorsey’s famous “other” company, Square. Was the Square IPO a canary in the coal mine signaling doom & gloom for the so-called unicorn companies of the early 2010’s, or a mispriced and misunderstood diamond in the rough? Acquired weighs in. Sponsors: Vanta: https://bit.ly/acquiredvantaServiceNow: https://bit.ly/acquiredservicenow26Legora: https://bit.ly/acquiredlegoraStatsig: https://bit.ly/acquiredstatsig26 More Acquired! Get email updates https://www.acquired.fm/email with hints on next episode and follow-ups from recent episodesJoin the Slack http://acquired.fm/slackSubscribe to ACQ2 https://pod.link/acquiredlpMerch Store https://www.acquired.fm/store! © Copyright 2015-2026 ACQ, LLC Topics Covered Include: Square’s deep origins in the early 90’s in St. Louis, MO with the initial meeting of its co-founders, Jack Dorsey & Jim McKelveyMcKelvey’s side glass blowing business http://www.glassfaucet.com/ and the “inspiration” for Square that came much later in the late 2000’sThe complicated involvement of Washington University (in St. Louis) professor Robert Morley, who had worked for years developing payment card reading technologyThe company’s early meeting with Scott Forstall at Apple, and its “significant” impact on the its name and designThe real disruptive innovation of Square and its business model (hint: not just building a mobile card reader)Square’s massive payments deal with Starbucks in 2012 and its impact on the companyThe evolution of Square’s business from a simple card reader to cloud-based Point of Sale (PoS) system and entire suite of merchant tools & business management servicesThe drama leading up to Square’s IPO (including at Jack Dorsey’s “other” company, Twitter), dynamics and narratives affecting its pricing, the effect of IPO “ratchets”, and the company’s performance over the ~2 years since The Carve Out: David: Bob Iger on Nick Bilton’s Inside the Hive podcast https://itunes.apple.com/us/podcast/inside-the-hive-with-nick-bilton/id1232383877?mt=2Ben: The World After Capital on GitBooks https://www.gitbook.com/book/worldaftercapital/worldaftercapital/details

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Ben Gilbert?

  I also don't think there's anything that we want to edit or cut.

• 0:03David Rosenthal?

  Oh, that was great.

• 0:04Ben Gilbert?

  We're getting good at this.

• 0:17Ben Gilbert?

  Welcome back to episode 43 of Acquired, the podcast about technology acquisitions and IPOs. I'm Ben Gilbert.

• 0:25David Rosenthal?

  I'm David Rosenthal.

• 0:26Ben Gilbert?

  And we are your hosts. Today, we are covering the 2015 Square IPO to much, much demand from a lot of our listeners out there, from David, from myself, living on our Google Doc for way too long. We now have enough distance from it that we feel comfortable retrospectively covering it as an acquired episode.

• 0:48David Rosenthal?

  Yeah, this one is gonna be fun. I've been looking forward to this for a while.

• 0:53Ben Gilbert?

  Yeah, we've never said that on a podcast intro before.

• 0:56David Rosenthal?

  Basically, this whole show is just like what Ben and I want to do and what we want to learn about.

• 1:02Ben Gilbert?

  We did our survey and we had a tremendous amount of feedback that said, it seems like you guys just kind of do whatever you want to do. And we hope that you guys like that because that is indeed how this works.

• 1:11David Rosenthal?

  Well, you know, that's the best product advice out there is solve your own problem, right?

• 1:18Ben Gilbert?

  That's right. That's right. Speaking of our survey, we promised you guys that someone would win a pair of AirPods. And while they are still shipping because of Apple's excellent, excellent six-week delay, which congratulations to Apple for creating a product that has that much demand, they're still in the mail, but we've got a winner. So shout out to Tom, who we will leave his last name anonymous. But Tom, we have reached out to you over email and congratulations and thank you to everyone that took the survey. It means a bunch to us.

• 1:51David Rosenthal?

  Yeah, thank you. We got some great data, and not just data, but feedback from you guys that hopefully you'll start to see incorporated in the show.

• 2:00Ben Gilbert?

  Yeah, we heard you loud and clear. We do not need to do hot takes. We get a lot of feedback about the hot takes. We're not doing it unless we really need to. We're not doing the hot takes.

• 2:08David Rosenthal?

  Like today.

• 2:09Ben Gilbert?

  Yeah.

• 2:11Ben Gilbert?

  We love reviews. So listeners, if you have a minute right now, you can pause this very podcast, pop open the Apple Podcasts app, and you likely are already in it if you are reflective of our analytics, and go and write a quick review. We really appreciate it. It's how we grow the show. It's how we bring on more guests, and it's how we do even better content. So thank you for doing that. All right, listeners. Now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF, then everyone would nod and you're done. But in an AI-first world, that doesn't hold up anymore.

• 2:51David Rosenthal?

  Yep. Your risk surface changes every week now. A vendor turns on an AI feature, or someone writes in a new model without telling IT, and your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this quote-unquote "shadow AI" running with no security review at all.

• 3:12Ben Gilbert?

  Right. And that's where Vanta comes in. They're the leading agentic trust platform, meaning they've built the thing that closes the gap. And the way that they close that gap is Vanta Agent. Think of it as a GRC engineer, that's Governance, Risk and Compliance, except that it's software and it doesn't sleep. It finds the issues, drafts the fixes, and cuts the time that you'd spend on vendor assessments in half.

• 3:34David Rosenthal?

  In half! Which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor, and Snowflake all stay audit-ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

• 3:52Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance, and the work to earn and prove trust. We're huge fans of Vanta over here, and literally hundreds of Acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off of Vanta at vanta.com/acquired. That's V-A-N-T-A dot com slash acquired for $1,000 off, and just tell them that Ben and David sent you.

• 4:20David Rosenthal?

  Yeah, anything else before we dive in? No, let's do it. Should I start with the history and facts? As always.

• 4:29David Rosenthal?

  Well, today, we start not where I think many listeners might think we would start when looking at Square and the Square IPO, which would be Jack Dorsey, of course, the man most associated with Square. But we actually start back in 1991 in St. Louis, Missouri, with another man named Jim McKelvey Jr., who was a co-founder of Square. And Jim had been born in 1965. He was raised in St. Louis, and his dad was actually dean of engineering

• 5:10David Rosenthal?

  at Washington University in St. Louis. And Jim Jr., his dad was Jim Senior, Jim Jr. went there for undergrad. He majored in computer science. And he also got really into glassblowing while he was in college as an artist. He was a budding Dale Chihuli. Shout out to Northwest artists here, the other University of Washington area after college. So this is the late 80s now. Jim worked for IBM for a couple of years. And then he got the startup bug, and he went and he started his own company, which was called Mira Digital Publishing. Now, if you're

• 5:54David Rosenthal?

  wondering what all of this has to do with Square and Jack Dorsey, just bear with me for a minute here. So Mira, this is, again, late 80s, early 90s. Initially, they created a product that was a competitor to Acrobat, to Adobe Acrobat and PDFs. But unfortunately, Adobe existed, and so that didn't work out too well. But they went at it for a couple of years. And then Jim started to realize Adobe was going to win the market. The whole landscape in technology was changing as the internet was coming. And so he decided to pivot.

• 6:30David Rosenthal?

  The company and and this was mid 90s now. This was 1995. So he wanted to pivot the company into going into publishing, actually into into conference publishing. But nobody else in the company really was on board with with this idea with this pivot, except for for one person. And that was his 15 year old intern, summer intern, who was in high school. And that person's name was Jack Dorsey. So Jack.

• 7:00Ben Gilbert?

  Now that's a connection.

• 7:01David Rosenthal?

  That is, we are reaching way back here at Acquired. And Jack had also grown up in St. Louis, Missouri, many years after Jim. And had gotten a summer job in high school, working for Mira. But Jack was totally on board with the pivot. And so he was kind of the first person to get bought in. And and that's how the relationship between the two official co-founders of Square started.

• 7:29Ben Gilbert?

  All right. So how they knew each other for years then before the founding of Square, like, you know, all the way through Twitter, all the way through through even before that obvious. Take us through that.

• 7:38David Rosenthal?

  So, well, obviously, many, many years go by and a lot happens. McKelvey, you know, he pivots the company. They get into conference publishing. But he also kind of rekindles his love of glass blowing. And he he starts another company called Third Degree Glass Factory. And he starts blowing glass again, and he gets really well known for making glass faucets. So like faucets on your sink. They're really beautiful. You can go, we'll link to it in the show notes. The company still exists today. And he makes glass faucets. So this was many years later. This was kind of late 2000s, around 2008, 2009.

• 8:20David Rosenthal?

  They're beautiful works of art. And so he was selling them, but he couldn't get set up with with all the, you know, financial institutions, his bank and credit card companies. To be able to accept credit cards. So he had to sell them in, you know, by cash or check. And that was really kind of limiting the amount of $2,000 glass faucets that he. Could sell.

• 8:40Ben Gilbert?

  Yeah, you got to imagine if if just one of those sales falls through. I mean, that's a that's a huge deal. You know, depending on your lifestyle, like if you're a glass blower and you're kind of a starving artist and you know, you just have one of those fall through. Changes your whole life.

• 8:53David Rosenthal?

  It totally does, right? And and not to mention, I mean, you have to do the work. You have to blow the glass. You're doing all this by hand. Putting all this effort into it by yourself before you even try and sell it. And then if you can't sell it to a lot of your potential customer base because you can't accept credit cards, that's that's kind of a problem.

• 9:11Ben Gilbert?

  You know, we live in a square world now, so we're used to seeing all the food trucks with with square readers. But like, if you think about the the type of business owner who was able to get get approved for merchant account these days. You had to have you to be tremendously established. I mean, it was really unfriendly to entrepreneurs and not tech entrepreneurs, but like, you know, people who are starting these little businesses. And in fact, but to getting ready for this episode, I talked to someone that had a a business that had, you know, around 100 K of cash in the bank. It was doing like a quarter million dollars in sales a year, but was new, was sort of a few years old and and couldn't get a merchant account with a bank. I mean, how insane is that?

• 9:50David Rosenthal?

  Totally insane. I mean, thinking back on it now and how much Square and other, you know, financial startups like Stripe and the online world have changed the way this all works. But even just a few years ago, you know, you needed to be super established, doing tons of revenue before, you know, the financial system would would kind of let you in. So Jim's got this problem. He thinks maybe technology can solve it. So he calls up, you know, a good buddy who just actually coincidentally got forced out of his current startup. And that was Jack, who had been CEO of Twitter famously from 2006 to 2008. And then was forced out of the company.

• 10:33David Rosenthal?

  And so he's looking for a job. It's late 2008 and and his old first boss Jim calls him up, says, I've got this problem.

• 10:41Ben Gilbert?

  Yeah, I'm thinking back to like my, my first boss now and imagining ever getting that phone call like, well, I was an umpire. So it'd be the guy that ran the, the summer umpires group. But yeah, I can't really imagine.

• 10:54David Rosenthal?

  Well, you could have started BAMTech.

• 10:57Ben Gilbert?

  That's right.

• 10:59David Rosenthal?

  More on that later. So I just told this whole story about the origins of Square and it's a great story. And it's the official story. Now, is it the true story? That's a little more complicated.

• 11:14Ben Gilbert?

  David, why, why have I heard that there was like seven founders of Square?

• 11:18David Rosenthal?

  Yeah. So there was, there was a little more going on behind the scenes than, than that. And impossible to know exactly what. But it is true that Jim was Jack's first boss. And then he called him up in late 2008, right after Jack was forced out of Twitter with an idea to start a new company. It turns out that probably most likely, and Jack's actually talked about that, that idea wasn't Square. It was to start an electric car company and compete with Tesla.

• 11:50Ben Gilbert?

  Well, that's very different.

• 11:52David Rosenthal?

  You know, it's almost like accepting payments, you know, via a plugging into your audio jack on your phone, almost. But at some point along the way, a third person gets involved. And that person's name is Robert Morley. Robert, or Professor Morley, was a professor at Washington University in St. Louis. And, and I believe it was that Jim and Jack initially approached him about potentially helping with this electric car idea. And Morley says, no, that's, that's a terrible idea. But I've got this thing in my research that I'm really focused on and have been working on for years, decades.

• 12:32David Rosenthal?

  And that's around card reading technology, payment card reading technology. And I've got this device that you can plug into a mobile phone and it'll read credit cards.

• 12:44David Rosenthal?

  According to Morley's side of the story, got Jim and Jack really interested in this idea. And it was also true that Jim was a glass blower and couldn't sell his faucets via credit card. So they got really excited, turned them on to the potential of using mobile phones to accept credit cards rather than the super expensive and really clunky and big point of sale systems that NCR would sell, National Cash Register, or other sort of big fintech companies. And so, one way or another, they start working on it. Morley was never officially part of the company. He did, in 2014, before they went public,

• 13:27David Rosenthal?

  he did sue the company for both patent infringement on the card readers and for forcing him out at the founding stage. And Square and the company, and he settled in 2016 for $50 million. So Morley made $50 million. Everybody's happy and Square is a great company today.

• 13:48Ben Gilbert?

  Man, so you have to imagine, like, how does that all go down if you're Morley? It's based on a lot of his research. He had all these conversations. It seemed like he was in. Presumably, they would sign some documents when he parted ways. But are you just sitting there thinking, like, well, at some point, I'll get a payday out of this, so I'll just wait till the exact right time to sue?

• 14:10David Rosenthal?

  Yeah, I mean, it's, I don't know. We didn't talk to Morley or Jim or Jack for this episode. And I doubt they would tell us, anyway.

• 14:21Ben Gilbert?

  Yeah, yeah. But note, I'll pull forward a tech theme here, that this is not the first time we've heard this. I mean, there's so many scenarios where, right around acquisition, right around an IPO, this lawsuit comes in, and it's around the founding of the company, and it's really messy. And you could take away a lesson that's like, hey, have your documents all buttoned up from your founding era. But I think the real takeaway is, like, hey, have everyone be fair and equitable.

• 14:48David Rosenthal?

  Yep, yep. And, you know, I mean, at the end of the day, everybody's probably pretty happy here. But I think this also highlights this whole thing, both the official story and the unofficial story, highlights what I think Jack in particular is really, really great at, like what his superpower is. And we'll talk about this more in the episode, but he gets the power of stories. And the official, you know, Square origin story is super powerful, right? Like, you know, I'm trying to sell, I'm an artist, I'm making glass faucets and I can't sell them, but I have to make them upfront and I'm locked out of access to the modern financial industry.

• 15:29Ben Gilbert?

  Yep, just resonates with so, so many people. And I think I'll pull forward another tech theme, because we have so many good tech themes that I think it's worth doing these sort of like popcorn ones early. Reinvented founder stories, I think are probably more common than actual organic, you know, live as it happened founder stories. Like when you hear the picture perfect, too good to be true, you know, entrepreneur post-IPO describing this simple insight that they had when they were, you know, who knows if this one's actually true or not, so I'll, but I'll pick on it and say, I don't, I don't have any information. But with Zillow, right? You hear, you hear Rich talk about, Rich Barton talk about how he and Lloyd were, were both looking for houses after leaving Expedia and they couldn't believe that it wasn't online.

• 16:14Ben Gilbert?

  Like, you gotta think that it's much more like, hey, we should start a business together. Here's a few sectors I'm interested in. Let's assess the viability of this. I think it looks a lot more like what Travis Kalanick would describe as a jam session between very entrepreneurially minded people than it does this like, you know, idea popped me on the head one day.

• 16:36David Rosenthal?

  Indeed. It's a good story, though.

• 16:38Ben Gilbert?

  It's a great story.

• 16:39David Rosenthal?

  And I think like, you know, like I was saying, it, you need a story to communicate. Like, it's not necessarily bad or wrong to create these founding mythologies, because that's part of how you communicate, you know, to your potential customer base, what the company does, to the employee base. Like, you embody the culture and the values of a company in these stories.

• 17:05Ben Gilbert?

  Yep, and there's so many great things that fall out of it, like your engineering, you know, let's say you're doing agile, like your user stories, like you have your first user story, right? Like you have your very first, when you're describing your market, like it's very easy for, you know, an investor or a partner or a customer to conjure up the, you know, Jim the glass blower in their head.

• 17:25David Rosenthal?

  Yep, yep. Well, speaking of stories, we've got a couple more before we're done with history and facts here, and they're pretty good. So 2009, one way or another, the company's off and running. Jack is the CEO. He's still the executive, he's the chairman, either chairman or executive chairman at Twitter, but he's basically like barred from the company. There's a whole book, Hatching Twitter, all about this, which I actually haven't read, I need to. But I think there's, you know, at one point, they shut off his email account. So he's all in on Square at this point. And Jim is the co-founder and he's the head of hardware. And so they get to work, they have a name, they have a really

• 18:08David Rosenthal?

  great name, they have an iconic design for the card reader that's gonna plug into, into phones, iPhones and Androids.

• 18:17Ben Gilbert?

  David, what's that, what's that name that they have?

• 18:19David Rosenthal?

  The name starts with an S, and then a Q, and then a U. It's squirrel.

• 18:27David Rosenthal?

  And the card reader design, also totally iconic, and matches the name perfectly. It's an acorn.

• 18:39David Rosenthal?

  So, so yeah, they go down this path, and, but fortunately, for the world and for Square, before they launch, they go to Apple, they go to Cupertino, and they meet with Scott Forstal, who at the time is, you know, like the most important person besides Steve Jobs when it comes to the iPhone. We've talked a lot about Scott on this show. And, and of course, Jack is, he's been forced out of Twitter, but he's a celebrity. So it's, it's, you know, they're not, this isn't just some, you know, rinky-dink startup from, from St. Louis. No offense to St. Louis, but easy to get a meeting with Scott. And Scott points out to them that, hey, you know, they're having lunch at Apple at the cafe

• 19:22David Rosenthal?

  there. And Apple actually uses another company called Squirrel Systems that does their point-of-sale system at the cafe. And so Jack's like, hmm, well, that's not a good idea. So they changed the name to Square. And then fortunately, they also changed the design of the card reader to be a Square.

• 19:41Ben Gilbert?

  And it is worth noting at this point that Square was not a point-of-sale company. So it wasn't this obvious, like you would have searched other point-of-sale systems to realize, oh, there's a Squirrel Systems. If you remember at the beginning of Square, I mean, it was, it was more about accepting credit cards on the go. And just this single dongle that plugged into your iPhone, there wasn't even an iPad app, let alone this ubiquitous, you know, every coffee shop on the planet uses, uses Square Register as their, as their point-of-sale system. And so you could imagine, like, you think you're competing in this category of, we're just working with kind of the un, not the underbanked, but like the under merchant accounted right now. We're providing

• 20:22Ben Gilbert?

  this new, you know, mobile payment system. Mobile is new. It's only two years since the iPhone. You really don't think you're going to be competing, really, in that, that, that point-of-sale market of people that stand behind a counter?

• 20:35David Rosenthal?

  Yeah. I mean, I remember when Square first came out, being really excited and getting a reader myself. I mean, I wasn't a business. I didn't sell anything. I thought it was like, oh, this is great. When I sell stuff on Craigslist, I can take payment on credit card. That's what I thought I would use it for.

• 20:52Ben Gilbert?

  In fact, I even used it like what people use Venmo for today, because I was so excited. My, my buddy Andy and I were taking a backpacking trip and we both bought the same backpack. And I put them both on my credit card. And I was like, hey, pay me with Square. And I like pulled out on the way home, I like pulled out my card reader and accepted his credit card, knowing that I was going to take, yeah, yeah. Yeah. Like, I got less money. I took the, I took the fees as the, or I paid the fees as the merchant. And, but it was like, too, too cool not to do it.

• 21:21David Rosenthal?

  You wanted to take, you know, payment on a credit card on your phone?

• 21:24Ben Gilbert?

  I'd never, you know, as a person, I'd never been able to do that.

• 21:27David Rosenthal?

  I know. It's pretty cool. That's the, that's the end of the fun stories of the history and facts for, for Square. But I think this is really the key innovation. I mean, part of it is the hardware thing. And we talked about the lawsuit and, and morally, but Part of the innovation was being the technology to accept payments on your phone. But the bigger part of it was enabling anyone to accept payments. You know, like we were talking about, there was this huge barrier to doing so and entering the industry. And what Square was able to do, and it also, I think, was technology innovation, but it was on the backend.

• 22:07David Rosenthal?

  They were able to let so many people, like you and me, you know, Ben, consumers into this world of accepting payments because they got really, really good at fraud prevention. And this was the, you know, part of the reason why the industry didn't let anyone in before was, you know, protectionism, probably, but the stated reason was fraud. That if you let anybody accept payments, you're just opening the door to tons and tons of fraud happening.

• 22:35Ben Gilbert?

  Yeah, I think you nailed it. And there's a couple of amazing data points here. So I think you're right that the thing that Square did that is entirely differentiating is unlocked a completely new set of people who could, who could accept transactions, right? They did it in an incredibly design-focused way. So every POS system ever has sucked, right? It's just been awful. And they invented this category of sort of cloud point of sale, which is really the big market than they're in now. It's not as much mobile, you know, mobile card reader as much as it is cloud, a cloud point of sale system. And, you know, they're competing with like the micros of the world there that are sort of the, you know,

• 23:17Ben Gilbert?

  tethered to a phone line, point of sale system and really hard to integrate with. And so when you look at, you know, the market they were entering, so they did three things really well. They did the incredible, amazing user experience as a merchant. They unlocked new merchants that could never be merchants before. And they did the best job of reducing fraud with this new merchant class. And so when you look at, you know, the Square device was revolutionary, but it wasn't the first. I mean, Intuit had something called Go Payment that was totally already catching on. It wasn't even like, oh, well, you can find prior art or something like that. Yeah, like it was it was totally happening, but Square had a phenomenally better experience.

• 23:59David Rosenthal?

  And PayPal had a reader too.

• 24:01Ben Gilbert?

  That's right.

• 24:02David Rosenthal?

  Afterwards, but it launched pretty quickly afterward.

• 24:05Ben Gilbert?

  And and the Square folks called that the triangle because it was shaped like a triangle and was copying Square in a lot of ways.

• 24:12David Rosenthal?

  That thing was so ugly.

• 24:13Ben Gilbert?

  The interesting data point around this is both PayPal and I think Verifone was the other one that that basically weren't doing the underwriting in the way that Square does. And they were taking huge losses. So they were actually subsidizing payments when they realized, oh crap, there's this entire new class of merchants emerging. They didn't have the the underwriting system and basically the the machine learning system. And I mean, that wasn't the all the rage yet, but effectively machine learning system to constantly be learning and constantly be basically re underwriting that that merchant of after every transaction.

• 24:49David Rosenthal?

  Predicting whether, you know, whether new merchants and existing merchants were going to be fraudulent or not.

• 24:55Ben Gilbert?

  Exactly, exactly. And so Verifone, this is crazy. Verifone actually shut down their competing product because of fraud losses, because they were taking kind of a 1% loss on every transaction from every customer. And when they shut down, they very publicly accused Square of subsidizing the small businesses. And it's funny that like Square's like actually a core competency of our business is we're really, really good at this. And the the trick that they were using is a really interesting one. And obviously they have this incredibly sophisticated, you know, team that that does this, but they basically would only take on a little risk at first. So you couldn't do these these sort of, you know, a bunch of transactions and massive transactions at first. They would just say, hey, we're not going to put you through a bunch of hoops.

• 25:38Ben Gilbert?

  We're just going to give you a little bit, you know, basically a little bit of credit. We're going to, we're going to let you, you know, start racking, racking up your your transactions till we trust you. And with every time that you completed a transaction and it wasn't a chargeback and it wasn't fraud and it wasn't all these things. They basically gave you a little bit more rope. And so that way they could actually get you started quickly and trust you more over time, which was just nothing. It was completely innovative in this industry.

• 26:04David Rosenthal?

  Yep. And just to put a data point around that, when Square started, there were 30 million businesses in the US that had under $100,000 in revenue. And that's just businesses, people that had already incorporated a business. But only 6 million of those could accept credit cards. So 24 of the 36 million small businesses in the US, under $100,000 in revenue, could not accept credit cards. Like, that's just unfathomable today.

• 26:33Ben Gilbert?

  Man, if you are like Visa, MasterCard, American Express, you have to be just besides yourself at the market this unlocks for you.

• 26:40David Rosenthal?

  Yeah, totally. So 2010, they launch as Square, not as squirrel, and with the Square reader, not the Acorn reader. And they make the card reader free. So if you want to join Square, you sign up online, you enter some information, it's pretty easy. You give them your address, and then they send you a card reader in the mail for free, versus like, you know, buying a $2,000, $5,000 point-of-sale system from Fairphone, or NCR, or whomever. It's a game changer.

• 27:15Ben Gilbert?

  Yeah, like, on top of technology innovation, just massive business model innovation.

• 27:20David Rosenthal?

  Totally. And then, once you start accepting payments, it's a straight 2 and 3/4% charge on every credit card transaction, which is different from how it worked with large providers at the time. That would be a sliding scale. It would depend on what type of card people were using, if you were using the...

• 27:42Ben Gilbert?

  David, have you ever applied for a merchant account before?

• 27:44David Rosenthal?

  No.

• 27:45Ben Gilbert?

  So, when I was working on a startup in college, I actually applied for a merchant account. And you get this thing that's like, maybe 12 to 15 pages thick, and it has, I don't know, 50 to 100 lines on each page. And each one is a different scenario, where you have a different fee structure for each card. So there's zero way that you could ever like, put that in a spreadsheet and calculate it yourself and make sure they're charging you right, or perhaps model out what your average fee is going to be for your business, because it's literally like, oh, if someone types in their card number versus swiping it, it's different. If it's this card that is a Visa signature instead

• 28:27Ben Gilbert?

  of a Visa, or is underwritten by this bank, or whatever, every single one is different.

• 28:32David Rosenthal?

  Yeah, I mean, and if you're like, you know, you're a retailer or a cafe or a food chat, like your margin is already super small to begin with. So now you're just like, now you can't even calculate, you know, whether you're profitable on things. It's just terrible.

• 28:46Ben Gilbert?

  Can we just, can we just pause for a minute and say, the credit industry is like the biggest fast one pulled of all time. Like, can you imagine, so like, let's say we live in a world where like, the credit card system was never established, and suddenly this guy's like, oh, I'm gonna start a credit card. And he comes to you as a retailer and he says, "Hey, people can pay with this thing instead of cash, and they're, they're gonna want to, because it's gonna be really easy. And I'm actually gonna take like 3% of your entire business." So-

• 29:16David Rosenthal?

  Yeah, but I'm not even gonna tell you how much I'm gonna take. Like, I'm just gonna run some voodoo, and then you gotta trust me.

• 29:23Ben Gilbert?

  Right. Unbelievable. I mean, this is a little bit of like, the better consumer experience always wins out. Like, if, if somebody gets in the, provides the way that people are gonna pay for services at your business, that is the easiest thing, and there's sort of a network effect going on, like, it's going to happen. So there's another, another tech theme pulled forward. Then it's going to happen. But like, just, can you imagine how resistant retailers must have been when this first started of like, suddenly you lose 3% of your revenue?

• 29:51David Rosenthal?

  Well, it took decades. And, and you know, the other thing that this, you know, hypothetical shyster named Credit Card would pull on these businesses is, not only am I gonna take a, you know, undefined and uncalculable percentage of your sales, rather than, you know, when you take cash, then you have the cash. Like, it's there. It's in your cash register.

• 30:11Ben Gilbert?

  Yeah. By the way, I may, I may take this away from you.

• 30:13David Rosenthal?

  Yeah. I'm, well, I may take it away from you, one, via chargeback. But two, even if I don't take it away from you, I'm not gonna give it to you for like, 30 to 45 days. Unreal. You know, so when you took credit cards before, that money wouldn't show up in your bank account for at least 30 days. And if you're a small business trying to meet payroll, trying to, you know, pay off your suppliers, like, that's a problem. So the other big product feature that Square had was, they deposit the funds into your bank account within one to two business days, which again, was huge compared to the industry at the time.

• 30:49Ben Gilbert?

  Yeah, that's, that's pretty incredible.

• 30:52David Rosenthal?

  You know, how they did all this and they launched pretty quickly after they were founded.

• 30:58David Rosenthal?

  I don't know. I mean, that would be a great story of building all this. Like this is not easy stuff.

• 31:03Ben Gilbert?

  All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part.

• 31:17David Rosenthal?

  Yeah, the hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like the risks are real.

• 31:31Ben Gilbert?

  Exactly. And the challenge with AI is governing it, securing it, measuring it, and making sure that it actually delivers value. That is why ServiceNow built the AI control tower.

• 31:41David Rosenthal?

  Yep. AI Control Tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent, visible and secure in one place.

• 31:59Ben Gilbert?

  And ServiceNow can do this because they've spent more than 20 years building the operational backbone of the enterprise. The workflows, governance, approvals, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security.

• 32:15David Rosenthal?

  ServiceNow already runs more than 100 billion workflows annually and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates.

• 32:32Ben Gilbert?

  And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

• 32:41David Rosenthal?

  So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely at scale, go check out servicenow.com/acquired and tell them that Ben and David sent you.

• 32:52Ben Gilbert?

  Okay, so at Pioneer Square Labs, we work on all these startups. And we've started like 60 and we've sort of killed a lot of them along the way. And we've spun out six and you know, the, the, every single one, whether it's a successful thing that actually launches or an early project you're working on, like it is so hacked together and the consumer experience is so like almost there at the start. You're just trying to prove that like your one insight is true. And I remember when I found out about Square, like the first press release, you go to the website and it's like one of the best designed websites I'd ever seen because it's like a huge tenet for, for the company and a principle that Jack believes in. And in fact, like I was doing like web design at that time and, and web development and people would just keep pointing back to Square like, oh, make it look like that.

• 33:36Ben Gilbert?

  And every iteration for years was like the gold standard of beautiful designed website. And when my Square reader arrived, it was beautiful. The packaging was Apple caliber, like the, the messaging was all perfect. Like there was nothing about this company, at least as a customer, that felt like scrappy or new or an experiment, or it's like it was like birthed as a perfectly formed product.

• 33:59David Rosenthal?

  Yeah, it would be great. It would be super fun to have, uh, somebody, if you're out there who was there in the early days of Square, to come on and do a follow-up with us about like, how did you build all this stuff in like 12 months or less?

• 34:14Ben Gilbert?

  Yeah.

• 34:15David Rosenthal?

  Really cool. In 2009 and 10, you know, no less, when it was definitely not as easy as now to build all this stuff.

• 34:23Ben Gilbert?

  Right. And it really speaks to Jack as a product visionary too. I mean, when people refer to him as, as Jobs, like, I mean, I think in the way that, that Steve Jobs and Johnny Ive and those folks could conceive of something and then release it perfectly into market the first time, um, you know, Square, Square has iterated quite a bit in a very Apple way of, of, um, you know, small interactions over time and small iterations over time, but amazing how, how good it was at first.

• 34:49David Rosenthal?

  Yeah. So they launched in 2010. Before they launch, uh, they had raised a series A from Coastal Ventures in 2009, but they launched and then basically they just grow like wild. Fire. I mean, we've talked about all the reasons why this was a complete game changer for, you know, small merchants and people that didn't even accept payments at all before. Launched in 2010, they raised a Series B from Sequoia from Roloff, both who was a partner at Sequoia and had been the CFO of PayPal in 2011. Then, a couple of months later, in 2011, they raised $100 million Series C from Kleiner. 2012, they raised another $200 million from Chris Sacca,

• 35:35David Rosenthal?

  who and Rizvi Travers, Chris had used that vehicle to buy up a lot of secondary shares in Twitter, famously, and then he used the same vehicle to invest in Square. And then simultaneously, well, right after that, then they do this enormous deal with Starbucks in late 2012. And this was gonna be, this was such a huge announcement at the time. So Starbucks invested, as part of this round, into Square and committed to transferring, to moving all of their payments at all Starbucks-owned stores in the US onto Square technology.

• 36:19David Rosenthal?

  And up into this time, you know, Square was for the customer we've been talking about, the sort of small merchants. But the idea that a Fortune 500 retailer would move everything onto Square was just pretty shocking at the time.

• 36:34Ben Gilbert?

  Yeah, and you know, I actually didn't dig that much into this deal, but to me, it's shocking that Square was anywhere close enough to feature-complete to make this deal make sense. I mean, I think there's a lot of discussion we'll do about this deal of the financials of it. But the, from a product perspective, I remember being shocked that like, was Starbucks gonna like, contribute to, I guess Square probably had to do a ton of sort of custom development effort, and it probably forced them to enable a lot of the functionality in the Square Register that they have today.

• 37:07David Rosenthal?

  Yeah. And we talked about this a little bit in the Starbucks episode with Dan. But I think a couple of things, you know, one, Square wasn't ready. This was a really bad deal. And, you know, I joked earlier that the, the end of the fun stories in this episode for Square, at least until the very end of this episode, but this was the beginning of the end of the fun. But, you know, I read a lot of, you know, things written by Jack and interviews with him, you know, looking back on this in preparing for the episode. And, you know, he does say, and, and he's probably right, that what it forced, what this deal forced Square to do was become enterprise class in terms of, you know, payments and

• 37:51David Rosenthal?

  fintech and security really quickly. I mean, they basically had no choice.

• 37:56Ben Gilbert?

  Yeah. Yeah, that's interesting. And it also, I mean, it really also, I guess, gave them, gave them those product features to move a lot more of their business to, to this point of sale market instead of the, the mobile card payments. And I think that the difference is subtle. And I mean, it's best simplified as going from iPhone to going to, to iPad. But they, they forked the code base. It became Square and then a different app called Register. If you, if you look at the vast majority of their revenue today, they have, on a per quarter basis, 482 million in transaction-based revenue and everything else pales in comparison. It's like 59 million in subscription and services-based hardware revenue.

• 38:41Ben Gilbert?

  They actually, they do 10 million, but 14 million of that is a, is a loss. And the vast majority of that 482 million is, is really in that, really in the point-of-sale category that is not quite where they started. I mean, they've, they've used that, that as a wedge to get into the, the merchants that otherwise wouldn't have been able to get an account. But now they're in this, they're in this rising tide of cloud point-of-sale. And, and, you know, I was thinking about this before the episode, a lot of, a lot of the growth ahead of them is really just this industry of, of cloud POS that grows. Much more so than than, you know, Square being able to to continue to bring on more people

• 39:25Ben Gilbert?

  that wouldn't have been able to be merchants before, or perhaps stealing share from other cloud POS providers like Clover, or there's all these other new ones launching that it's really like they kind of pioneered this category and then really solidified their position in the category by forcing themselves to do all this work, much of it probably from the Starbucks deal. And now it's just like they get to sit on top while that industry accelerates.

• 39:51David Rosenthal?

  Yeah, well, I would agree, but I would argue for a slightly different framing of it, which is it's not just cloud POS. And I actually think the the software and data products, you know, line item of other revenue they have is hugely important. What this really did is it took Square from being just a payments rails system for anybody to, you know, accept credit card payments to a whole suite of a solution for a merchant of any size, really, but a world class suite of tools for a merchant to run their business, of which payments is is probably the

• 40:35David Rosenthal?

  most important part, that's accessible to anybody from, you know, the coffee shop down the street to Starbucks. And that's what I think this deal did. And so if you look at what, you know, the point of sale system itself and the Square register, it's no longer just about taking payments, it's about managing your inventory, managing your SKUs, managing your employees, timing, you know, time punching in and out. And then since then, Square has added so many different features, you know, payroll for employees, Square Capital to do lending against your revenue, you know, appointment booking, basically everything you would need if you're a business to manage and run your business. And I think that all really happened or started

• 41:20David Rosenthal?

  because of this Starbucks deal.

• 41:22Ben Gilbert?

  Yeah, I could see that. I like that framing. It is it is worth noting, and I think it's another business model innovation that they're Handling all this stuff in largely for free or for a very reasonable cost. And the way that they monetize it all is through the transaction. So for Square, it's not like, what else can we sell through this channel? It's more like, what can we add to this channel? What can we add to make the lives of small business owners easier? So that number one, they stick around longer and continue to use this product. Number two, their business does better so that we both do better.

• 41:52David Rosenthal?

  Yeah, well, it's a flywheel, you know? It's an acquired flywheel. And they do charge, you know, it's like AWS, right? Like they charge some amounts of fees for some of their services. And some of the services are free, like they bought caviar. And so for restaurants, you know, caviar and food delivery is an option that they offer. And then there's Square Capital, which is loans. And they make money off of those businesses. But really, the beauty is in helping the merchant grow their business, which grows transaction volume, so Square makes more money. And then they use more Square services, so they make more money from the ones that they charge for. And the whole thing drives itself.

• 42:34Ben Gilbert?

  Yep, yep, great point. And so this Starbucks thing, I mean, it leaves them with a massive hangover, right? Like this is something where, here, this is actually, this underscores the point. So I was looking at the investor site earlier and checking out the way they break out revenue. And I mentioned subscription and services based revenue and hardware revenue. There's actually a fourth breakout, which is Starbucks transaction based revenue. And it's obviously, now that the deal is over, it's zero. But it's still on all their year over year comparisons because it was broken out separately. It was something that was just extremely, you know, that there was, they generated good revenue from it, but extremely costly to the business.

• 43:14David Rosenthal?

  Well, let's, let's jump forward and accelerate through the end of history and facts here, where we'll cover all this. So last we left them, 2012, they'd raised this huge round, done the Starbucks deal. They were valued, I think, at three and a quarter billion dollars in that round. Remember, this is 2012, the company was founded in 2009. Then in 2014 kind of rather than go public, they're toying with going public. They decide instead to raise a $150 million Series E from the Singapore Sovereign Wealth Fund and Goldman Sachs. We're going to come back to Goldman in a minute. And that's at a $6 billion valuation. And that that round becomes pretty important in a minute.

• 43:59David Rosenthal?

  So, you know, in the meantime, growth is great. Like they're growing payment volumes hugely. They're growing revenue hugely. And they're making money off of, you know, off of the transactions. They're making real margin dollars off of it. They're still paying down their their fixed costs. But but the business is working.

• 44:20Ben Gilbert?

  And I think they were coming out of that Starbucks thing and looking toward the IPO. They were close to break even. If you look at that at them today, you know, they're they just took a $16 million net loss on last quarter. But if you look at the way that that's really come down. I mean, you're right, David, on a on a sort of transaction. Yep, yep.

• 44:39David Rosenthal?

  Yep. And so they are they've completely paid down their fixed costs. And, you know, they have a bright future ahead now. So all this is going on. This is throughout 2014. 2015 rolls around.

• 44:51David Rosenthal?

  Not a good year for Square. Well, so the first thing that happens, June 2015, Dick Costolo resigns as the CEO of Twitter. And Jack, Steve Jobs moment, comes back as interim CEO of Twitter, which is also a public company at this point. Square's not public yet, but they're preparing to go public on the back of all this momentum. But during the year, they realized this Starbucks deal is this a terrible deal. And they are financially now strategically, it was great for the company for all the reasons we said. But because of the pricing that they're giving Starbucks, they're just losing money on on every transaction that is that they're handling for Starbucks.

• 45:30Ben Gilbert?

  They did they did renegotiate that at one point, right?

• 45:33David Rosenthal?

  They did renegotiate, but the outcome of the renegotiation is basically that they're just gonna Starbucks is gonna pull out. And because part of the renegotiation was that Square no longer had to be the exclusive provider for Starbucks for payments. And Starbucks could get better. pricing elsewhere. So they they over time, basically just start pulling out of the deal. So that's throughout 2015. Then October of 2015, Square is all working to go public throughout the throughout the year, is dealing with all these these things and and they eventually do go public in November. October 5th, 2015, Twitter announces that Jack isn't interim CEO, he's permanent CEO of Twitter.

• 46:15David Rosenthal?

  And also permanent CEO of Square. So he's he's truly like Steve Jobs with, you know, Apple and Pixar at this point.

• 46:24Ben Gilbert?

  Was he CEO of Pixar while being CEO of Apple?

• 46:27David Rosenthal?

  I think he was, yeah.

• 46:29Ben Gilbert?

  Wow, wow. Parallels in in more ways than one, but this, yeah, I totally remember this moment of like, okay, so can you can you do that? Like, is that?

• 46:40David Rosenthal?

  Yeah.

• 46:41Ben Gilbert?

  What?

• 46:42David Rosenthal?

  Is that possible? And everybody knew Square was that they it hadn't been publicly announced yet, but everybody knew they had privately filed to go public. And we're we're gonna do our narrative section that we now do on IPOs in a minute. But let's just say the narrative was not good in the press. So November rolls around, Square had announced their public filing, they'd done their roadshow, all while Jack is also now the new CEO of Twitter. And they go public at on November 19th, 2015, at $9 a share, which equates to a $2.9 billion valuation. Now, remember, the last round they did

• 47:22David Rosenthal?

  was at a $6 billion valuation. So it is, as as then got widely reported in the press, it is ratchet time. So.

• 47:33Ben Gilbert?

  And and that and that nine that $9 per share was below the published range of what they were shooting for, $11 to $13 per share.

• 47:40David Rosenthal?

  They priced under the range. They said they were aiming to do the IPO at $11 to $13 a share. They ended up pricing even under that. Basically, the whole tech world thought, you know, this is like the first unicorn to die.

• 47:54Ben Gilbert?

  Oh, yeah. So so this, I mean, this was a moment where everyone thought the music had stopped, like. The doors were closed on the tech IPO market. People were worried about a global financial crisis, or at least a recession. And Square was trying to tell this other story of like, no, it's great. Like, we're doing better than ever. And we've got sound fundamentals, which is totally true. But like, the story that they were telling the world, I mean, everyone's thinking, are you crazy? Like, nobody's IPO-ing right now.

• 48:24David Rosenthal?

  But they did. And so as a result of it, and this got so much press, this ratchet. So at the last round that they'd done, which, remember Goldman Sachs was a big part of investing into this last round. And then Goldman Sachs led the IPO. It was 150 million. And I think Goldman invested 50 million. I could be wrong on that.

• 48:44Ben Gilbert?

  Yep, they did.

• 48:46David Rosenthal?

  So the terms of that round, though, were that the company essentially promised those investors in that round a 20% return on their money at IPO. So not just would they get their money back at the same valuation, but they would also get a 20% return. And the mechanism by which that played out, remember, the IPO happened at essentially half of the valuation of that round. So not only did they not get a return, they lost money. The way it played out is the company had to issue additional stock to those investors when the IPO happened. And $93 million of additional stock. Now, that's not terrible relative.

• 49:31David Rosenthal?

  You know, the company had a $2.9 billion market cap, but it's a lot. And also, this got issued as stock. So if those investors held that stock, since then, the company's basically just killed it because they had sound business fundamentals and lots of growth potential ahead of them and a huge TAM. So now they're trading at $25.59 as of today, up hugely, almost a $10 billion market cap. And so if those investors had held on to that stock, the stock that they bought in the private round initially, and then what they got in the ratchet, you know, they would just be making huge returns right now.

• 50:10Ben Gilbert?

  Okay, so let me talk about the conflict here. This, because this blows my mind when we were digging into this and really figured this out. So the way IPOs work is that the bankers get basically banker fees for taking the company public. And so Goldman Sachs gets about $10 million in banker fees from this IPO, which makes a lot of sense, given where it priced, given all those things. They also get 90, whatever, 90 something million dollars in that ratchet because they participated in a huge way in that previous round. When you look at this, the incentive for Goldman as the lead underwriter on this IPO

• 50:53Ben Gilbert?

  is to actually price it lower because their banker fees that they get as a percentage of the valuation of the company is actually significantly less than the amount of money that they would get from it being priced lower. And so, obviously, it's different people at Goldman doing this, but it's kind of shocking that that's possible, that you would pick Goldman, given their conflict there.

• 51:19David Rosenthal?

  It's totally crazy. I mean, banks have long argued that you should let, it's been kind of like common wisdom in startup world, that if you're thinking about going public and a bank wants to, one of the main investment banks wants to participate in sort of a mezzanine round before you go public, you should do that because then you're going to align incentives with them if they ultimately do take you public, where the higher they price the stock, the more money they're gonna make because they're already a shareholder in your company. But if you have a ratchet like this, then, just as you said, Ben, you've set up the incentive for them to price the stock lower because...

• 51:57Ben Gilbert?

  It's perverse.

• 51:58David Rosenthal?

  It's totally perverse. And, you know, who knows? What did Goldman intentionally guide the company to price the IPO too low? Who knows? But here we are. And the facts of the matter are, just like you said, Ben, the company's killed it over the last year and a half, and the stock is now up almost three times since the IPO.

• 52:26Ben Gilbert?

  And let's talk about why they've killed it. So Square, as we both argued in different ways, I think me that they were sort of the creator of this new category of cloud POS and they're the most well-recognized name in it and they're doing extremely well in this massive rising tide. So they'll continue to kind of grow with that industry. And your point of view was that, yeah, and indeed, they also are bundling all these other amazing services to make these businesses perform better and make à la carte fees on those, but also increase the number of transactions that they take a piece of. So, great, the company's doing well. The other magic to this whole thing is this is the sort of business that also has zero

• 53:08Ben Gilbert?

  churn because for Square, on a per-cohort basis, so for folks that aren't familiar, a cohort is like a whole bunch of people who are becoming new customers in the same timeframe. So they would all come in and their net churn was zero. So basically, what that meant is the way that this business works is they would lose customers, they would churn out at a certain rate, but the amount of money that the customers from that cohort who stayed there would generate from growing their business was approximately equal to the business that Square was losing from these customers that churned out of the cohort. So it actually, if you look at every new cohort they add, they flatten out over time

• 53:50Ben Gilbert?

  and make a consistent amount of revenue for the company, basically indefinitely. And so it makes a lot of sense for, once Square has this CAC to LTV ratio where they can figure out, boy, when we deploy X in marketing spend, we make it back plus 30% or so in less than two years and we're able to just keep pouring money on to do our marketing efforts and we just keep getting basically zero net churn cohorts that all stack on top of each other forever. So very predictable business in an industry that's absolutely a rising tide. It's something where if you look at it on its fundamentals rather than as like a speculative,

• 54:33Ben Gilbert?

  who knows if this will actually pan out thing, like it seems like it's a great growth company.

• 54:38David Rosenthal?

  I mean, we've basically talked about the content of the narrative section here, but... It's really, it's like a tale of two stories, a tale of two companies here. You know, it was the best of times, it was the worst of times. If you listened to the press around the time of the Square IPO. And I think, you know, I remember, you know, lots of investors sort of, you know, talking to and chattering. You know, it was like, this is the worst of times. Like, this is the death knell for all these unicorn companies. And, you know, Square is like prime example of super overvalued. And it turns out that their actual business, which is payments, is a super crappy business, really low margin. If any margin and, and, and, you know, example number one of that is look at this Starbucks deal. Like, it sucks.

• 55:22David Rosenthal?

  Square is losing so much money on it. And that means, you know, they'll never be able to serve large merchants. And so this company is doomed, right? Like, that was the narrative that was so dominating the press cycle and the investor cycle. But, you know, I think the lesson here is like, in, in any kind of situation like that, you really got to dig into the company's fundamentals, whether the narrative is like this company can do no wrong or whether this company is doomed. You know, and Square's narrative through the whole thing, you read their IPO, you read the, you read the S1. You know, they, they say, they actually say in the S1, you know, like, we serve small business merchants. Like, we make commerce easy. We make it accessible to everyone. Like, we're not a payments company.

• 56:05David Rosenthal?

  We're about, you know, helping merchants increase their business. And because of these flywheel effects, that, you know, is good for us too.

• 56:14Ben Gilbert?

  Yep. And boy, that's really, it's funny. I mean, it's the, not to talk about Rich Barton in every episode now, but when you, when you hear him talking, he talks about the name Expedia and the name Zillow, like picking an empty vessel and then you get to fill it with, with your marketing and you get to fill it with the, your product and your brand that you, the, the value prop to customers. Like, Square was not a, a payment word, right? Like, it's something that they can choose to, to fill with whatever they want to be. And the, in the way that Snap is a camera company and we all said, oh, Snap is a camera company. Like, Square isn't a payments company. You know, Square is a small business company. And I think that that's got a lot of power to it.

• 56:54David Rosenthal?

  Yeah, I mean, there's a there's a great interview with Jack where he talks about, he's asked sort of like, what is Square? And he's like, well, look, there are three things that every business needs, whether you're, you know, and he says, whether you're Facebook or Twitter, or whether you're, you know, a coffee shop, you need access to capital. And capital can be, you know, raising money, but it can also be, you know, sales from your customers, like we were talking about earlier. If you can't access the money from your, the capital from the sales you're making to customers, because you're not getting it for 30 to 45 days, that's a huge problem. So you need access to capital to build and grow your business. You need to acquire customers and then you need to retain customers and build loyalty.

• 57:35David Rosenthal?

  And like what Square's done, I think, is, or at least what Jack would say Square is trying to do, is to help small businesses, well, businesses of all types, physical businesses, do all three of those things better.

• 57:51Ben Gilbert?

  All right, listeners, now is a great time to talk about a new partner of ours here on Acquired, Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 58:04David Rosenthal?

  Yep, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Logora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 58:21Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 58:36David Rosenthal?

  And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Logora's bet here is interesting, since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 59:00Ben Gilbert?

  And they recently launched Logora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective, then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 59:19David Rosenthal?

  And Logora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Logora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Logora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 59:49Ben Gilbert?

  Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at logora.com/acquired and just tell them that Ben and David sent you. So drifting toward what would have happened otherwise, let's talk about access to capital a little bit. And this will help us guide a little bit of, you know, what our criteria for grading this toward the end of the episode will be kind of twofold.

• 1:00:30Ben Gilbert?

  One is always, you know, did this IPO allow them to do something that they previously couldn't do before? Like, was it a good business decision to IPO? And the two components of that are the idea of it and the execution of it. And so kind of working backwards from that and thinking about access to capital. After this Starbucks thing, they're left in this place where they're near cash flow positive, like that is right on the horizon. They know that then when they spend marketing dollars, this very predictable thing happens where they are able to get a return on that marketing spend. So it's really about, hey, let's, let's, you know, go get some more capital so we can,

• 1:01:11Ben Gilbert?

  we can keep taking advantage of scale, getting closer to cash flow positive and pour some dollars on this business. So then you have this decision of, well, do we do that from the private markets like we did with our Series D and we did with our Series E, or do we go to the public markets? This isn't really talked about enough, but if you look at sort of the liquidation preference in all these venture rounds and all of that stacking on top of each other, the valuations are a little silly because think about it this way, if you're a public company and somebody says, "I will give you a valuation of $1 billion and I will own X shares that are worth 20% of the company," then they actually own X shares that are worth 20% of that company. But if a private investor-

• 1:01:55David Rosenthal?

  And if the price goes down or the company gets sold for $200 million, like, tough luck.

• 1:02:01Ben Gilbert?

  Yeah, exactly. You still own exactly 20% of that company. Whereas in the private markets, the reason, or one of the reasons that we have all these inflated valuations is because the risk that the investor takes by putting money in is dramatically reduced by the preference. So the way that that sort of works is you can say, "Hey, I'm going to take 20% of this company and give you $200 million and value you at $1 billion." But if you sell for less than $1 billion-

• 1:02:29David Rosenthal?

  Yeah, if you sell for $500 million, I'm still going to take my $200 million back.

• 1:02:34Ben Gilbert?

  Right, right.

• 1:02:34David Rosenthal?

  And if you guarantee a return like the ratchet, it's like, "I'm going to take my $200 million and I'm going to take a 20% return." And so you, founders, employees, rest of the shareholders in the company, you thought you just sold for $500 million, but you actually sold for, whatever, call it, $200 million at that point.

• 1:02:55Ben Gilbert?

  In this scenario, you take huge private round on huge private round on huge private round and you build up all this liquidation preference, all this money that's going to go to these investors that are happy to say, "Sure, we'll give you a higher valuation because it's lower risk for us. If you want that higher valuation, sure, but if things go south, then we're going to get the money off the top before any of the common shareholders do." And so you get yourself into this situation where suddenly you have a $6 billion valuation, you start to realize that the public market- Markets aren't going to give you that $6 billion valuation because it's a very different climate out there. You have a lot, a lot of people on that roadshow that you're talking

• 1:03:36Ben Gilbert?

  to that are all talking with each other. It's not a small conversation between a CEO and a few partners at a firm. It's much more like, you know, it gets pushed down if there's a narrative out there that wants to push it down. And so I think depending on the story that's told, when you're IPO-ing, you can really get burned by that. And that's what sort of Square was realizing was, uh-oh, we are not going to be able to IPO at $6 billion, or it's looking like we're not going to be able to. And there was like a nine-month period for Square where they're issuing all these stock options as part of the compensation. So employees are hired in, they're given, you know, 25% of their compensation in the form of stock options. But, you know, it turns out those stock options have a strike

• 1:04:21Ben Gilbert?

  price where the valuation of the company is $6 billion.

• 1:04:23David Rosenthal?

  Right. And today the valuation is only 10. I mean, it's not, it's $4 billion higher, but on a percentage basis, if you got stock options, then, you know, it's relative to the performance of the company and the growth of the company since then, you know, you're not really being rewarded for that.

• 1:04:43Ben Gilbert?

  Right. And people started to sort of realize this, where they're hired in and they're like, wait a minute, you know, I'm never going to be able to, or in any short amount of time, like, these stock options that I was given aren't going to be worth anything. And so I'm being undercompensated for my work. And so they start losing employees, and they're gonna, you know, if they go do another private round, it's gonna have to be either a down round, or a flat round, or if they go up, then there's even more liquidation preference that goes on top. And so they sort of have to go public in a lot of ways to get all that liquidity and make it so that when you issue the restricted stock units to your employees, like, that that's an option for you. And I think they actually started issuing RSUs before they went public, but it was a little bit of like

• 1:05:28Ben Gilbert?

  a too little, too late situation where you have all these employees over, you know, nine months to a year, who's, who's stock options are worth nothing and realizing it.

• 1:05:36David Rosenthal?

  Yep. Well, you know, I mean, I think for me, this just highlights like when you are talking about valuations of companies and investing in companies, and that's actually only part of what we do as, you know, startup investors, as I was talking about on the Opsware, you know, on the Opsware episode, the most important thing is helping build companies. But when you have your investor hat on, that's why you really need to value companies based on fundamentals.

• 1:06:08Ben Gilbert?

  Which is of course so hard to do in the early stages, right?

• 1:06:11David Rosenthal?

  Totally. But by the time Square was raising these rounds, like, it was possible. And if you're a founder in a company too, you also want your company to be valued on fundamentals, right? Like, taking a $6 billion valuation because you can get it and it feels good is like, all nice and well, but you just screwed your employees, you know? And if you take it with all this structure.

• 1:06:36Ben Gilbert?

  And it's, you know, we're not accusing anybody of doing that, because it's one of these things where like, the, the whole world is telling you yes, and, and it, it seems like it's the, the, the train's gonna keep going, and then you're gonna IPO, and you're gonna do another up round, and it's all just gonna happen. But when you, when you start reasoning from, from fundamentals, it does get a little, a little scary.

• 1:06:56David Rosenthal?

  I completely agree with you, Ben. Like, I, I don't know, you know, this board management team personally, but I seriously doubt they were actively trying to screw their employees.

• 1:07:05Ben Gilbert?

  No, they seem like, you know, incredible, incredible leaders and operators.

• 1:07:09David Rosenthal?

  Yeah.

• 1:07:11Ben Gilbert?

  So. It is, okay, so we're, we're in what would have happened otherwise. And in thinking about that, you know, one option, and, and this is, I think, really hard to expect this of someone, but one option is, back when they had that, I think their Series D, that, that was Starbucks and Citi and, and Saka was in the, the neighborhood of three and a half billion, instead of that, that private round, that they could have just tried to go public. And doing that earlier might have.

• 1:07:47Ben Gilbert?

  You know, been able to do a flat or up IPO at a higher valuation or maybe at that three and a half billion dollar valuation, at least up from their, from their series C from Kleiner Perkins. And you know, it's hard to do that because the business wasn't as mature yet. And it's really hard to want to face that sort of public scrutiny. But as you say, the business was fairly mature then and their, their, their model was pretty, you know, the fundamentals of the business has been the same for a very long time.

• 1:08:17David Rosenthal?

  Yeah. I wonder if, you know, and it would have been interesting to see if they'd gone that path. I wonder though, if the Starbucks deal was just too volatile at that point. And if, you know, they, they were still figuring out, you know, how bad it was. And again, good from a product and company building and sense, but bad from a financial sense. I wonder if that's what, what held them back.

• 1:08:42Ben Gilbert?

  Right. Oh, that's interesting.

• 1:08:44David Rosenthal?

  Well, there we are.

• 1:08:47Ben Gilbert?

  There we are.

• 1:08:48David Rosenthal?

  That's why, that's why, you know, machine learning hasn't come to startup management yet.

• 1:08:55Ben Gilbert?

  Yeah, it's, it really is. I mean, it takes being really hard in the weeds, doing the research on this stuff, being a venture capitalist, being someone with early stage shares or, you know, being a founder of a company that goes through many rounds of this stuff to really like see how this plays out. And I mean, I think you really see the value of experience. Like I, every time I look into one of these companies, my eyes gets opened by all the different scenarios that happen from staying private longer, from doing huge rounds, from really doing the math on what are all the possible outcomes. It's just gotten hairier and hairier. I like the story that the very first term sheet was a two line piece of paper that said, I will invest in your company for a valuation of this where I get this percent.

• 1:09:37Ben Gilbert?

  And like now, you know, you go into an eight page term sheet and then 100 pages of definitive docs and all these different terms. And it's, you know, the complexity has just grown exponentially in the last 50, 60 years.

• 1:09:51David Rosenthal?

  Yep. Which is not necessarily a bad thing. I mean,

• 1:09:53Ben Gilbert?

  No, there's, well, there's a lot more at stake. Yeah. Yeah, like there's, there's, Tons of real value being created. So it makes sense to have all these provisions and carve it all up.

• 1:10:02David Rosenthal?

  Yeah, but I think you're right. And I think this is actually, moving into tech themes, I didn't have this down, but this is a great one, which is like, just the value of experience and when it comes to startup management and startup investing. And that could be, you know, lived experience or synthetic experience, right? Like, that's why we do this show.

• 1:10:25Ben Gilbert?

  Dave and I are happy to get some synthetic experience here at your all expense.

• 1:10:30David Rosenthal?

  Exactly, exactly. These decisions have a lot at stake and there's, you can't just devise an algorithm for the right way to move forward. The only thing you can have is experience and, you know,

• 1:10:43Ben Gilbert?

  Good judgment, great people around you.

• 1:10:45David Rosenthal?

  Yep. What else you got for tech themes?

• 1:10:48Ben Gilbert?

  Boy, I really, I really didn't save much.

• 1:10:51David Rosenthal?

  Yeah.

• 1:10:54Ben Gilbert?

  Yeah, I mean, well, well, I mean, one thing that I will say, and this might not be a tech theme, but it is incredible facing that tough period that they went through, a good amount of attrition, an employee, a CEO splitting his time while being another CEO, massively botched Starbucks deal. Through all this, they've really pulled out nicely. Like, the company's in a pretty great place right now. It has predictable growth. You know, they're introducing new products to sell to existing businesses and who knows, maybe they'll move into a negative turn. Or maybe they already are a negative turn, who knows? But it is, it is really a testament to a lot of the things they did right.

• 1:11:37Ben Gilbert?

  That they've, they've come as far as they have.

• 1:11:39David Rosenthal?

  Yeah. My tech theme I want to get in quickly is timing. And it's funny. I feel like the timing of the IPO was so bad. I mean, we're going to get into grading in just a minute here, but man, they really messed up the timing on this one. But, but the timing of the company and the product, like, I think this is just a fantastic example of, you know, what we talk about a lot on this show of, you know, riding waves and, and, and timing those waves, right? You know, the growth in consumers wanting to pay via credit cards. Coupled with the growth in mobile devices, you know, and right at 2009, 2010,

• 1:12:20David Rosenthal?

  that creating this, you know, massive opportunity to disrupt, you know, the payments and the merchant industry, merchant services industry.

• 1:12:29Ben Gilbert?

  And just instant product market fit.

• 1:12:31David Rosenthal?

  Instant.

• 1:12:32Ben Gilbert?

  It's so, so rare. I mean, that's like a, it's like an iPhone style event that that happens so rarely where something gets, gets released and just everyone is like, yep, nailed it.

• 1:12:44David Rosenthal?

  Yep, nailed it. Yep, yep. All right. That's what I got for, for tech themes. Should we grade it?

• 1:12:50Ben Gilbert?

  Let's do it. Let's do it. So I'm going to start from an A because it was like, you know, we'll, we'll start at the top. They needed cash. They were, the, the future looked bright. They were near cash flow positive. I'm going to knock them down to-

• 1:13:06David Rosenthal?

  From a fundamental perspective, as we talked about, I think it was the right time to go public. They had ironed out the Starbucks deal. The future was bright.

• 1:13:15Ben Gilbert?

  Yep. Then I'm going to knock it down to a B because I think they did it a round or two too late. Not only would the climate have been better to IPO, but the, the fundamentals of the business would have justified going public earlier. And, you know, it's a hard thing to expect of, of, of people, but, um, you know, that, that knocks it down to a B for me. The whole Goldman Sachs thing, like unbelievable botch. Oh my gosh, if I was an employee, I'd be so infuriated. And I think that, um, that for, for me, it's a C. Like it's, it's a, it's a good idea that was at the wrong time with terrible execution.

• 1:13:51David Rosenthal?

  Yeah. Man, it's so, I'm so tempted to do like a, you know, a Facebook IPO style grading here in that like, I want to separate out the company and the performance of the company, which I think is just fantastic. Truly, I think one of the best tech companies, you know, built in the past 10 years, one of the very, very best from the IPO execution. But, you know, I do think kind of like what saved the Facebook IPO for me and allowed me to give it two grades was- I think they really learned and Mark talks about how like the IPO was a forcing function that, you know, really turned into kind of a company saving event for them. And realizing they had this huge problem with mobile.

• 1:14:35David Rosenthal?

  I'm not sure that the same thing happened to a Square. I think they, they just kind of messed things up financially. As you were talking about Ben. So I'm going to resist the temptation to do two grades. Although I do want to make clear, I have so much respect for Square as a company and as a, you know, company going forward. But I think the IPO process, I'm not going to be as harsh as you because again, they probably needed the money. And I think had they gone public earlier, they probably hadn't had the Starbucks deal ironed out enough to, you know, that would have been a huge problem. So I'm willing to be a little more generous, but I'm going B minus.

• 1:15:22Ben Gilbert?

  Yeah. Well, you know, in this hypothetical world, I can, I can predict that it went well. And it is funny how like, we, we only know how the, the exact reality played out, right? We don't know how the alternative reality played out. So it's not fair really to say that that would have been better, but.

• 1:15:37David Rosenthal?

  Yep. All right.

• 1:15:39Ben Gilbert?

  Good. I'm glad you didn't, I'm glad you didn't give it two grades because I was, I was going to rip on you pretty hard.

• 1:15:43David Rosenthal?

  I could feel it coming, so that's why I pulled back.

• 1:15:46Ben Gilbert?

  It reminds me that, what's the who's line, is it anyway, a line where he's like, the, the show where all the, all the facts are made up and the points don't matter. Feels, feels a lot like that.

• 1:15:55David Rosenthal?

  That's what we do here at acquired. All right. I know, speaking of which, I know you all said you hate follow ups and so we're just not going to do them. But in this case, we have to say we were right.

• 1:16:07Ben Gilbert?

  Yeah, we gotta brag.

• 1:16:08David Rosenthal?

  Yeah, we gotta brag. Disney acquired, you know, a majority stake in BAMTech, exactly as we predicted they would.

• 1:16:16Ben Gilbert?

  Maybe even sooner. I think we were, we should go back and listen, but I think it was like, uh, sometime in the next year or two, but it was like four or five months later.

• 1:16:24David Rosenthal?

  Yeah. So, um, good timing, Ben, speaking of timing.

• 1:16:28Ben Gilbert?

  Yeah. Yeah. And that's, that's unbelievable. Like, like, can we just rewind a second and think about like, uh, holy crap, Disney's pulling all their content off of Netflix and doing a Disney direct offering. Uh, it's, it's their own streaming service through BAMTech to directly to consumers. Like this is, I can't wait to see how this all shakes out.

• 1:16:50David Rosenthal?

  Yeah, seriously. Future episodes to come.

• 1:16:54Ben Gilbert?

  Yeah, multiple, multiple. All right, carve outs?

• 1:16:58David Rosenthal?

  Oh, carve outs. Mine is so perfect for today. It combines everything we've talked about. So Nick Bilton has, who wrote Hatching Twitter, he was at the New York Times, now he's at Vanity Fair. He has a great new podcast called Inside the Hive, and he had Bob Iger, the Disney CEO, on. And it was great. We'll link to it in the show notes, but you know, Bob talks about their M&A strategy and Lucasfilm and Pixar and Marvel and, you know, the Disney flywheel. It's great. You'll, you guys will love it. I certainly did.

• 1:17:30Ben Gilbert?

  Awesome. I got to check it out. So mine is a book that is currently being written. But if you guys haven't checked out Git Books before, it is a really interesting product. It's like GitHub for books and you can sort of, look at the, the contribution history and the revisions of a, of a book while it's out there in public. And, and you know, can be written and revised in, in real time for, for people to read it. So it's a, it's a, complete thing that you can go read, but it's interesting as, as, as the world changes, it, it continues to be rewritten. And the book itself is called World After Capital, and it is written by Albert Wenger of Union Square Ventures.

• 1:18:12Ben Gilbert?

  It is so interesting. Like it is one of these things where you often get focused in your own niche or your own work. And, and you, you read the things that are related specifically to your job, but you don't think about the like macro implications of what we're all doing. And it's a really interesting book where he sort of argues that, that we're moving past a world where, capital is the expensive and scarce thing. And, and that, that capital is cheaper than ever and it's less meaningful than ever before. And that, that knowledge and he talks about attention a little bit, but really focuses on knowledge as being the scarce resource.

• 1:18:52Ben Gilbert?

  And what does that mean in a world where, where knowledge is the scarce resource and talks a lot about AI, machine learning. So if that stuff's your jam and And you like to be a futurist a little bit and have a little bit of a sociology bent to it. Go check it out. That is a really, really cool book and you can read it in pieces as you would expect from a nice web-based publication.

• 1:19:14David Rosenthal?

  That's awesome. I didn't know good books existed. I'm gonna have to check that out. That's awesome.

• 1:19:20Ben Gilbert?

  Yeah.

• 1:19:21David Rosenthal?

  Well, that's what we got today. All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig.

• 1:19:30Ben Gilbert?

  Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale.

• 1:19:41David Rosenthal?

  Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next.

• 1:20:02Ben Gilbert?

  This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved.

• 1:20:14David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started.

• 1:20:25Ben Gilbert?

  Thank you so much to you guys for listening. Check out the Slack, acquired.fm. We are nearly 900 and would love to have you join us. And lastly, pause this podcast right now and go leave us a review on iTunes. We really sincerely appreciate it. So thanks, everyone.

• 1:20:42David Rosenthal?

  Thanks, everyone. We'll see you next time.