Time is flat circle, and all that was once old is new again. For example, in the venture days of yore, inside rounds were considered a bad market signal; if a startup couldn’t attract a new lead investor for the next round, what did that say about the company?
Last year, that bit of conventional wisdom was reversed by abnormal market conditions and greed; inside rounds became a sign of strength as venture players doubled and sometimes tripled on their portfolio companies, seeking as much capital as possible inside the door while the startup was still in its growth phase.
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And now we have returned to the former state of affairs. Inside rounds are again signs that things are not going smoothly for companies that follow them. Buy now, pay later outfit Klarna makes the point: The richly valued BNPL giant wants to raise new capital from existing lenders at a discount to its previous valuation. The Wall Street Journal reports:
The Sweden-based payments company is aiming to raise up to $1 billion from new and existing investors in a deal that could value it in the low $30 billion range after the money is injected, the people said. That would represent a drop of about 30% from the previous round.
Nobody likes a round down. They are watering down, messy and demoralizing. But they’re also way better than not raising money and dying, so companies pick them up when they need to.
Our question this morning is not or it makes sense for Klarna to raise internal capital at a lower price. As the WSJ notes, the company tried to raise its valuation slightly before changing course and pursuing a lower price. We know why Klarna is pursuing a down lap: necessity. Instead, our question is whether the company is lowering its valuation enough to bring its value in line with current market prices.
Let’s find out.
Klarna, Affirm and the BNPL valuation review
Fortunately for our needs, there are public BNPL players that we can observe as we work to better understand what the specific fintech earnings are worth. Affirm is public and other players who have BNPL services are also publicly traded.
Confirm, that it is in fact a pure BNPL game and a market that has some market overlap with Klarna is a perfect floating comp for the Swedish company. And the US company released its Q1 2022 (Q3 fiscal 2022) calendar results just over a week ago. This means that we have fresh data from a listed company.
Let’s collect and calculate some data to understand how well Klarna reprices itself. We start with the collection side (all periods calendar; data via the companies):