Stock market investors have been getting whiplash trying to follow the twists and turns in the technology industry’s most noteworthy initial public offering of the year. With most of the tech “unicorns” — private companies claiming valuations of at least $1 billion — choosing to stay private, they are not getting the pick of the herd.

Even with that caveat, the tortuous path that has brought payments company Square to Wall Street takes some explaining.

In today’s inverted tech financing environment, public and private markets are switching roles. It turns out that they are not always suited to their new jobs. And in this Alice-Through-the-Looking-Glass world, the lower an IPO price, the more its early investors may be cheering.

Square has become the unfortunate test case for this somewhat weird time in the tech financing markets. The first of the high-profile unicorns to go public, its IPO has oscillated violently between success and failure in recent days — capped by the sort of massive first-day bounce that only Wall Street’s god of irony could have scripted.

One indisputable fact: few people will emerge smelling of roses from this mess, not least the underwriters who slashed the issue price to $9, or $2 below the bottom of the range they had said was likely only a week earlier. A bounce of more than 50 per cent when trading opened on Thursday may prove short-lived, but it suggests that either the underwriters got the psychological game that surrounds any IPO pricing badly wrong, or they set the bar deliberately low.

Either way, Square left many millions of dollars on the table. First-day spikes like this during the dotcom boom sowed considerable discord between Wall Street and Silicon Valley, where entrepreneurs and start-up investors believed their ventures were being sold on the cheap.

One oddity of the Square IPO is that it looks like a company that would have been better suited to stay in the private markets for longer. Forget, for a minute, the fact that it has only half a chief executive in Twitter boss Jack Dorsey. The even bigger issue for investors is Square’s unfinished business model.

Having once seen itself as a consumer-facing payments company, it is trying to become a cloud software and small business lending company. But it is too early in this attempted “pivot” for stock market investors to give it the benefit of the doubt.

This is an inversion of the normal role of public and private markets. Most unicorns — even those with more developed business models than Square — are still happy tapping private investors for cash. Ride-hailing apps Uber and Lyft are out looking for another $1.5 billion between them.

But even here, there may be evidence of growing investor wariness. A $70 billion valuation has been touted for Uber in its latest fund-raising round, but there do not appear to be bidders at that price. When the darling of the present generation of start-ups cannot hit the increasingly lofty price points that are set for it, it does not bode well for the others.

All of this indicates that investor sentiment towards tech start-ups has turned since the stock market volatility brought on by China’s economic slowdown this summer. The convoluted financing arrangements that companies like Square have pursued in the past add an extra, unpredictable twist.

By guaranteeing returns to late-stage investors, many have sent confusing signals about their valuations, leaving it to Wall Street to unscramble the mess.

Investors in Square’s final private fund-raising round had reason to cheer twice over the company’s travails. The official IPO price was less half the $18.56 a share they had been guaranteed from an IPO, forcing Square to hand over a bundle of new shares to make up the difference. The day-one bounce has now given them an extra shot in the arm.

The last laugh may well be Square’s. An IPO, after all, is a necessary rite of passage that may provide few clues about future business success.

Google had to slash the price of the shares in its IPO after a botched sale, before quickly rebounding, while Facebook traced an opposite path — pricing high before its stock price collapsed.

As they enjoy the Schadenfreude of watching Square’s stumble into the public markets, other tech start-ups should pause and think about their own position. Most will either fail or be acquired and never make it as far as Wall Street. If they are really lucky, an IPO like this could happen to them some day as well.

Financial Times