There are laws for people and there are laws for business, but you are a new category, a third category, people as businesses,” Brian Chesky, Airbnb’s chief executive, told an audience last fall. “As hosts, you are microentrepreneurs and there are no laws written for microentrepreneurs.
Fun fact: the most common business structure is called sole proprietorship and its exact definition is “people as business”.
The problem with being so dependent on processing revenue is twofold: First, the profit margins aren’t great. Competition and the commoditization of payment pipes have driven down the fees payments companies charge merchants, while the cut paid out to credit card companies has remained largely the same. Secondly, the public markets today would likely be forced to value Square at a lower revenue multiple than if it made revenue from software sales, which typically come with better profit margins.
It’s not that the margins aren’t great, it’s that a merchant acquirer can only take so much off the top before either the merchants walk or Visa/MC/Amex lock you out. One of the great misconceptions of this investment cycle has been to treat processing volume as revenues (see: Uber, AirBnb, Square). But revenue isn’t the money a processor handles, it’s the money it handles on which it has a claim. In Square’s case, as in the case of most all merchant acquirers, that number is around 0.5% of transaction volume, which for $30b in transactions yields ~$150m in net revenues. That’s nothing to sneeze at, surely, but it’s also not Earth-shattering.
The public markets value merchant acquirers at anywhere between 1/50th and 1/100th of transaction volume. If you believe Square is worth $8b, then you should also believe that it will reach $400 - 800b in transaction volume. And that’s just to break even; if you expect a positive ROI, those numbers have to go even higher. Now, that’s certainly possible, but I’ve yet to see an evidence-based argument explaining how Square can capture 10-20+% of the total US transaction volume, especially considering the strength of its competition.
Payment volumes make for misleading, but exciting, headlines, which is exactly why they’re used so often. I like Square. I think offering payment processing services to individuals and small businesses who otherwise face discouragingly high barriers to those services is a terrific business idea. I think their execution on that idea has been excellent. But I also think the valuations being assigned to the business—and the qualitative justifications undergirding those valuations—are just plain silly, and very much a sign of the times.
I love history and like to think in historical metaphors. Broadcast licensees are no more in the “television” business than a canal company was in the barge business. Your business horizons are greater than your current product. The canal companies succumbed to the railroads because they failed to define themselves beyond “barges” to see they were in the “transportation” business. (Instead, in fact, they expended their resources trying to get the government to restrict the railroads.)
In a modern example, the cable companies didn’t make that mistake. They redefined themselves from video retransmitters to telecommunications companies … We would like to help “television stations” similarly to pivot to become digital “information providers.”
Here’s the former head of the cable AND the wireless industry at the NAB Show telling you he’s your friend. That’s as crazy as the former head of the cable and the wireless industry at the NAB Show telling you he’s your friend. There is no more ridiculous metaphor.
If I would have used this model, I would have drastically lowered my sell time while still earning a 2.7% markup on my portfolio. Minus fees, this method would have liquidated my entire account and earned me a net 1.7% premium in just 5 days.
Perhaps. Without cohort comparators though, this claim is far too strong.
Lady Lamb the Beekeeper - Bird Balloons
UPS engineers found that left-hand turns were a major drag on efficiency. Turning against traffic resulted in long waits in left-hand turn lanes that wasted time and fuel, and it also led to a disproportionate number of accidents. By mapping out routes that involved “a series of right-hand loops,” UPS improved profits and safety while touting their catchy, environmentally friendly policy. As of 2012, the right turn rule combined with other improvements — for the wow factor, UPS doesn’t separate them out — saved around 10 million gallons of gas and reduced emissions by the equivalent of taking 5,300 cars of the road for a year.