Square's tie-up with Starbucks may be this year's most important venture capital deal.
The deal not only has the potential to change the way people pay for coffee and everything else, it also shows how small innovation applied to everyday tasks may be the next new thing for venture capital. Call it the rise of the ordinary innovators.
Under the deal announced last week, Square, the mobile payments device start-up, will process debit and credit card transactions for the coffee shop chain, whose customers will be able to use Square's payment mobile phone app at participating stores. As part of the deal, Starbucks will invest $25 million in Square and Starbucks's chief executive, Howard Schultz, will join the Square board.
It may sound boring, but the mobile payment sector is hot. Start-ups like Square, Revel Systems and LevelUp are competing with big names like PayPal, Google and Facebook as well as old-line companies like NCR in a rush to help eliminate ca sh. The basic idea is that you use your mobile device to pay for everything. Merchants can get in the game, too, as Square has shown. Square products allow an iPad or mobile phone to be used as a cash register.
Many of these companies aim to process all transactions, but Square's business model is built on a basic premise: pushing payment devices to businesses that have had difficulty using credit cards.
Square followed the Apple model and designed a simple square-shaped dongle (hence the name) that fits in a mobile phone and turns it into a credit card processor. Put another dongle in an iPad and, voilá! A cash register.
Not surprisingly, the food trucks and taxis of the world love this product. But the ease of use and Square's flat fee of 2.75 percent of the total charge have hastened the product's spread to other merchants, like my local yogurt shop. Square was begun in October 2010 and is already projected to have $6 billion in gross revenue on an annu alized basis.
In response to the Starbucks deal, Aaron Levie, the chief executive of the online file storage firm Box, wrote on Twitter that “Square just dropped a bomb on the retail payments industry, in one of those Godfather-dead-horse-in-your-bed epic move moments.â€
The “Godfather†analogy may not be quite right, but it is fair to call this deal a game changer. Its partnership with Starbucks has the potential to put Square in the leadership position in the mobile payments game. To the extent that mobile payment becomes widely used, it will revolutionize the way we spend money.
And while it may be revolutionary, Square is really just an example of what Silicon Valley is increasingly about: process and networking at its finest. Square was co-founded by Jack Dorsey, who also founded Twitter. It has marquee Silicon Valley investors, including Khosla Ventures, Sequoia Capital and Kleiner Perkins Caufield & Byers, and besides Mr. Shultz of Starbucks, its board includes Lawrence H. Summers, the former Treasury secretary.
On the process side, Square shows how these venture capital networks can be used to transform the ordinary. Its idea was not particularly new, but Square designed a simple but usable device, patented some of the underlying technology, leveraged other technology like the iPad and added some marketing.
With the Starbucks partnership, Square is also showing the opportunity for old-line companies to capitalize on their large customer bases.
This is really no different from what Thomas Edison did more than a hundred years ago. Edison would pinpoint areas where innovation was possible and percolating, then piece together pre-existing inventions and ideas to push technology forward with a usable device. The light bulb is a perfect example, a device based on previous designs for something everyone was pursuing. Edison just managed to put it all together and take the credit.
That is what Sq uare accomplished. It linked existing ideas and products with innovation in design and usage to create a new technology.
In such a world, it is not just your idea that matters, but being at the center of the innovation network. The founders of Square had their own good idea, but it was one that incrementally built on existing ones. It also merely tweaked an ordinary habit - how you pay for things. The difference is that Mr. Dorsey knows the people to finance it, the designers to make it better and the firms to market it. He also kept things simple with the idea of returning to the time when there was only cash and it was easy to use and spend.
With a widely known board member like Mr. Summers, who can add credibility with large merchants, and the assistance of the best venture capital firms, who can do the same while helping in technology, experience and networking, Mr. Dorsey has the pedigree to link up with Starbucks.
Square's success shows that venture c apital has the potential to turn the ordinary into multibillion-dollar businesses. This is nothing new, but it may reflect the future as the best venture capital firms move further afield from the Internet, the old V.C. stamping ground.
The future of venture capital and Silicon Valley may be more like Edison's laboratory, looking for the innovation in ordinary tasks and doing so based on leveraging pre-existing ideas and products.
This is a world where the haves are likely to continue their extraordinary run, armed with the tools to succeed. Innovation will come from the princelings of the Silicon Valley hierarchy, as successful entrepreneurs will already have the resources to make these breakthroughs.
As for Square, it is seeking a $3.25 billion valuation. The mobile payments space is competitive, and there are many barriers for Square, including the fact that the credit card companies consume most of Square's profits. Square's success is uncertain, but th e Starbucks alliance is likely to be only the first for it and other mobile payment operators.
The bigger lesson is likely to be the more lasting. Silicon Valley's future may not lie in being enchanted about the newest social networking start-up. It's more likely to be in the simple and ordinary. It's about spotting the everyday problems and providing solutions that leverage on venture capital's networking and operational skills, not to mention its knack for spotting someone else's good idea.
In this situation, Silicon Valley will become less about the dreamers and more about the marketers, the connected and the everyday.
Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the world of mergers and acquisitions.
