So far, 2022 has been a terrible year for the markets.
The Federal Reserve's (Fed) decision to hike rates to fight inflation, which is at a 40-year high, has hit tech companies particularly hard. Investors who fear a difficult future and in the worst case a recession have been liquidating their positions and opting for caution.
They want to see how the economy will react in the coming months. This wait-and-see attitude penalizes companies that live on promises of future products and services. That's especially true since experts believe that, in the event of a recession, households and consumers will considerably reduce their spending. This is particularly bad for the so-called high-growth tech stocks.
Investors also fear that the current price increases will penalize products and services deemed non-essential. For tech startups, investor caution is particularly felt in their fundraising to finance their growth.
The Valuation Collapses by 85.3%
The Swedish fintech Klarna, once one of the most beloved startups among investors, has just had the bitter experience of disenchantment.
Klarna, which is a lender specializing in "buy now, pay later" (BNPL), has seen its valuation plummet by 85.3% during its last funding round. The company announced, on July 11, that it had raised $800 million in fresh money from existing and new investors. This transaction values the firm at $6.7 billion, very far from the $45.6 billion that the company weighed during a cash injection from the Japanese group Softbank (SFBQF) in June 2021.
"Klarna has not been immune to the significant downdrafts of fintech stock in public markets," the firm explained in a press release. "The company’s peers are down 80-90% vs peak valuations and consequently the adjustment in Klarna’s valuation is on par with its public peers from its $45.6bn valuation in June 2021," it said.
"The fresh investment in Klarna occurred during possibly the worst set of circumstances to afflict stock markets since World War II: high inflation, rising interest rates, mounting fears of a recession, the after effects of the first global pandemic since 1918, strains on commerce caused by supply chain disruptions, rising gas prices, and, especially in Europe, the dislocations caused by the war in Ukraine," the company added.
The venture capital firm Sequoia Capital, which was already a shareholder in Klarna, took part in the recent round and also sought to minimize the fall in the valuation of the startup.
"The shift in Klarna’s valuation is entirely due to investors suddenly voting in the opposite manner to the way they voted for the past few years," commented Michael Moritz, Partner at Sequoia. "The irony is that Klarna’s business, its position in various markets and its popularity with consumers and merchants are all stronger than at any time since Sequoia first invested in 2010. Eventually, after investors emerge from their bunkers, the stocks of Klarna and other first-rate companies will receive the attention they deserve."
The defiance comes after speculation that Klarna was looking to raise money at a discount valuation. The merit of this strategy is that in the current context investors believe that a large number of valuations of tech companies and startups that live on promises are inflated. By raising money at a discount, a company gives the impression of having a more realistic valuation, which makes it easier for it to convince currently very cautious investors to participate in its fundraising.
"However, this isn’t necessarily the case for Klarna," a spokesperson said in an emailed statement. "Klarna has been profitable for 14 out of our 17 years in existence (unheard of in the fintech world), our mature markets make $1 billion in gross profit, and our investments in growth and product over the last few years have transformed us into a global player."
"We know how to be profitable and can choose when to prioritize profitability vs. hyper growth and our success in the space," the spokesperson added.
Are We Witnessing a Bursting of the Fintech Bubble?
The financing attracted Sequoia Capital, Silver Lake, Canada Pension Plan Investment Board and Abu Dhabi's Mubadala Investment Company. And it will be used to to expand Klarna's services in the United States where the company has almost 30 million users in total.
Beyond the macro environment, Klarna is also paying for investors' questions about the sustainability of the economic model of BNPL, especially as they now face competition from behemoths like Apple (AAPL), high inflation and recession fears.
Under the typical BNPL plan, a customer purchases a product online, and in some cases in store, with a minimum and maximum sale amount. The customer then makes periodic payments that could be weekly, every two weeks, maybe monthly and in at least one case, up to a year. The payment plan is usually interest free with the only fees being late fees.
The most popular buy now, pay later services among users have been PayPal (PYPL), Afterpay, Affirm (AFRM), Klarna and Zip Pay, according to a survey in 2021 of 2,005 online customers by C+R Research.
In a series of tweets, Klarna's CEO and co-founder Sebastian Siemiatkowski expresses his disappointment but does not lose hope that Klarna's valuation will go up again soon.
"But let's be honest, it is odd. Seeing Klarna valued slightly more than mid 2019..." the co-founder of the buy-now-pay-later company tweeted. "OK better than Paypal same value as at the end of 2017 ... but odd considering all the things achieved, how much larger and better we are now."
"What does not kill you makes you stronger."
Klarna's setbacks have some analysts wondering if the Fintech bubble has burst. Block ((SQ)) stock, Jack Dorsey's financial services company, is down 61% since January, PayPal stock has fallen 62.6% over the same period and Affirm stock prices have plummeted 79%.
