Just how severe is Klarna’s fall from grace as its ‘down round’ funding cleaved some 85% off the buy-now-pay-later firm’s valuation?
By reflex, one would likely be dumbfounded that the fintech unicorn would be wonderfully – if not cynically – positioned for the current cost of living crisis which will no doubt stimulate demand from increasingly squeezed consumer budgets.
Only slightly more analysis, however, reveals that this is a story about the fact that there’s an even tighter squeeze on venture capital purses.
Klarna, last June, cemented its place among Europe’s so-called ‘unicorns’ (pre-market tech start-ups valued in the multi-billion dollar bracket), as it secured US$639mln in a funding round that valued the company at some US$46bn.
An unlucky thirteen months later though it has taken a hiding in its latest round, with an US$800mln raise in tough market conditions, pitched at a lower price – something referred to in venture capital circles with dread as a “downround”.
The company keen to put a strong PR foot forward, claimed a moral victory in being able to secure funds at all with chief executive Sebastien Siemiatkowski, calling the funding ‘success’ as “a testament to the strength of Klarna’s business that, during the steepest drop in global stock markets in over fifty years, investors recognised its strong position.”
Well, he would say that.
This would be the easiest jibe to point at the bruised executive nevertheless with only a brief glance at the state of the equities market for tech stocks, it's fair to say that his comments hold up.
It’s true that the global outlook presently looks quite bleak, and particularly challenging for higher-risk growth-seeking companies.
For a start-up like Klarna, investment is still very much needed.
The company has emerged among the leading names in its niche, digital buy-now-pay-later fintech.
While it has traction, tipping points in user numbers, retail partnerships, and territories are still to be reached,
Being an industry disruptor is an expensive business, not least when you're competing in a sector as tight as retail or in an industry that’s as strictly regulated as consumer financing.
Companies like Klarna will have to keep coming back to investors for some time until they’re self-sustaining.
In easier times, investor appetite is more common as optimism is easier to muster and blue sky is more easily imagined.
But, as confidence fades away against a backdrop of bear markets and lower liquidity, investors are far less likely to take a punt on growth.
As a result, investment horizons shift forward and companies are increasingly valued on the tangibles of today instead of the potential forecast for tomorrow.
“Overoptimistic assumptions have been discarded and so the market is much less willing to pay over the odds for a slice of the business,” said Chirs Beauchamp, an analyst at IG Group.
Diminishing prospects of a bumper stock market IPO or big money takeovers further dampened the appeal for earlier stage venture investors, that’s according to Victoria Scholar, head of investment at interactive investor.
“The buy-now-pay-later company is the latest victim of the torrid market conditions that are hammering fast growth, steeply valued tech companies,” Scholar said.
“Volatility in the public markets is weighing on valuations in the private markets as investors realise that the chances of a successful exit via an IPO in these conditions have sharply diminished.”
Looking at Klarna, specifically, the counter-intuitive part of the story is that the current economic climate feels ideally suited to growing a customer base.
Klarna, like a handful of competitors, offers customers the ability to split payments into instalments (commonly over three months) to spread costs and enable the purchase of bigger-ticket consumer goods. Its services will be very much in demand.
While there’s opportunity, there’s also challenge according to corporate restructuring firm Begbies Traynor (AIM:BEG).
Julie Palmer, a partner at the consultancy, says: “The crisis is starting to bite and it is probably starting to bite more at the end of the spectrum for people who may be more likely to use the ‘BNPL’ mechanisms.”
“So, a business like Klarna is going to be even more affected by people tightening the belt.”
Time will tell whether the capital market carnage is the overriding problem, or whether a company like Klarna is able to sustain through tougher times.
On paper, the 85% destruction of its valuation is a major blow.
Klarna has raised funds now, it remains to be seen whether its backers can still get paid later.