​Why all eyes are on Square, a money-losing "unicorn"

Unicorns are considered special and rare, but whether they can extend their appeal to the public markets will be tested today when Square prices its initial stock offering.

Unicorns, the unofficial designation for private companies that have earned valuations of more than $1 billion, are the hot startups that hold the allure of legendary returns for their backers. Once rare, they've become more common of late -- with 17 christened in the U.S. alone this year -- thanks to investors hoping to rope one of their very own mythological beasts.

Square, which is run by Twitter (TWTR) co-founder Jack Dorsey and which provides mobile-payments services to businesses, is valued at an eye-opening $6 billion. You may have seen its products, even if the brand name is unfamiliar. Square provides small square-shaped credit card readers that fit into mobile devices, as well as an iPad stand used at the checkout counter.

While its business is growing quickly -- Square's sales jumped 54 percent last year to $850 million -- the company is losing money. That is par for the course for fledgling tech companies, which often invest heavily in developing and marketing their wares in a rush to grab marketshare.

Yet while venture capital funds may forgive losses as long as a company is growing quickly, public market investors don't always have the same patience.

"Check, it's grown fast. Check, its customers love them. The final check is: Will it be something that will be massively profitable? That's something that people are saying they can't quite see yet," said Rob Frohwein, the founder and chief executive of Kabbage, a private company that provides small business loans.

Square's initial public offering could also serve as a benchmark for other companies thinking thinking of going public.

Square has been "heralded for a long time, so for them to go out and have challenges doesn't bode well for the rest of the market," Frohwien said. So-called fintech companies like Square, which combine technology and finance, have to prove that they can deliver on the promise to create a better business model than traditional banks or payment processors, he noted.

Already, there are signs that the magic of unicorns is wearing thin. Square is expected to price its 27 million shares on Wednesday at $11 to $13 apiece, below the $15.46 per share valuation that was given in its last round of private financing, which valued the company at $6 billion, according to Bloomberg. That means the low end of the pricing range would peg Square at $3.6 billion, or far below where its private backers had hoped.

While that could spell trouble, Square doesn't have recent history on its side, either. Two other unicorns that went public in the past year have had rocky receptions. Etsy (ETSY), the crafts marketplace, has lost 71 percent of its market value since selling shares to the public in April. The other, LendingClub (LC), has lost almost 50 percent of its market value since its December 2014 IPO.

On top of questions about valuation and Square's losses, investors may have concerns about Dorsey, who recently took on the role as chief executive of Twitter. Dorsey has said he's splitting his time between the two companies, raising questions about about whether he can stay focused.

In the end, as usual, the bottom line will count most of all.

"The market is saying, 'I expect you to prove it to me better than the financials you have today.' That's the case with Square today," Frohwein said.