Time is a flat circle, and all that was once old is new again. For example, back in the venture days of yore, inside rounds were considered a poor market signal; if a startup could not attract a new lead investor for its next round, what did that say about the company?
Last year, that bit of conventional wisdom was inverted by abnormal market conditions and greed; inside rounds became a sign of strength as venture players doubled and at times tripled down on their portfolio companies, looking to get as much capital in the door as they could while the startup was still in its growth phase.
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And now we’ve returned to the prior state of affairs. Inside rounds are once again signs of things not going perfectly at companies that pursue them. Buy now, pay later outfit Klarna makes the point: The richly valued BNPL giant is looking to take on new capital from existing backers at a discount to its prior 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 roughly 30% drop from the previous round.
No one likes a down round. They are dilutive, messy and demoralizing. But they are also miles better than not raising money and dying, so companies raise them when required.
Our question this morning is not whether it makes sense for Klarna to raise inside capital at a lower price. As the WSJ notes, the company tried to bump up its valuation slightly before changing course and pursuing a lower price. We know why Klarna is pursuing a down round: necessity. Instead, our question is whether the company is cutting its valuation enough to bring its worth in line with present market pricing.
Let’s find out.
Klarna, Affirm and the BNPL valuation revision
Thankfully for our needs, there are public BNPL players for us to observe as we work to better understand what the particular fintech revenue is worth. Affirm is public and other players that have BNPL services are also publicly traded.
Affirm, being effectively a pure BNPL play, and one that has some market overlap with Klarna, is a perfect floating comp for the Swedish company. And the U.S. company released its calendar Q1 2022 (Q3 fiscal 2022) results a little over a week ago. This means we have fresh-off-the-vine data from a public company.
To understand how well Klarna is repricing itself, let’s do a little bit of data collection and math. We start with the collection side of things (all periods calendar; data via the companies):
- Affirm Q1 2022 GMV: $3.9 billion, up 73% year over year.
- Affirm Q1 2022 revenue: $354.8 million, up 54% year over year.
- Affirm Q1 2022 operating loss: $226.6 million, up 8.2% year over year.
- Affirm market cap, start of trading May 20, 2022: $7.4 billion.
Klarna is not public, so we are cribbing from its Q3 update and contrasting those numbers against the company’s full-year results to get some loose Q4 data points, which form an imperfect, if directional, comp to the recent Affirm results:
- Klarna calculated Q4 2021 GMV: $22.7 billion.
- Klarna calculated Q4 2021 “total net operating income”: $464 million.
- Klarna calculated Q4 2021 operating “result:” -$401.0 million.
- Klarna valuation, end of 2021: $45.6 billion.
There was a lot of tricky math to get right, but what matters is that we can now somewhat contrast Affirm’s most recent results and value with a recent quarter from Klarna. Here’s how the comparative calculations shake out:
- Affirm valuation per dollar of annualized Q1 GMV: 0.47x.
- Klarna valuation per dollar of annualized calculated Q4 GMV: 0.50x.
- Affirm valuation per dollar of annualized Q1 revenue: 5.2x.
- Klarna valuation per dollar of annualized Q4 “total net operating income”: 24.6x.
Not the numbers that you expected? Me either.
The 0.47x figure from Affirm and the 0.50x number from Klarna being so similar surprised me; at that juncture, you might wonder why Klarna is cutting its valuation at all as it looks to raise more capital.
The valuation per dollar of revenue metric is spicier. It’s worth noting that we are not comparing perfectly similar data. Affirm is reporting GAAP revenue, or top-line information in the U.S. standard. Klarna, in contrast, has its accounts prepared along IFRS norms. Therefore, we are dealing with revenue in one case and total net operating income in the other.
How do the two numbers differ? A quick read of the filings indicates that total net operating income deducts some costs that we would not shift out before calculating gross profit under GAAP rules. Thus, the Klarna number appears to be somewhat smaller than it might be, worsening its valuation differential with Affirm when we consider its effective revenue multiple, even if the two have somewhat comparable GMV multiples.
Given that tension, does Klarna have a far worse “take rate” than Affirm? Here’s the math:
- Affirm fiscal 2022 GMV outlook (H2 calendar 2021, H1 calendar 2022): $15.04 billion to $15.14 billion.
- Affirm fiscal 2022 revenue outlook (H2 calendar 2021, H1 calendar 2022): $1.33 billion to $1.34 billion.
- Affirm take rate: 8.8% to 8.9%.
- Klarna 2021 GMV: $80 billion.
- Klarna 2021 “total net operating income”: $1.62 billion.
- Klarna take rate: 2.0%.
Now, that final number is actually a little bit higher than it looks, as it is more a gross profit figure than a revenue result. Still, the gap between the two companies is clear when we consider Klarna simply ripping less revenue out of its GMV than Affirm. That appears to be the key differentiator between the two.
What is driving the gap? Klarna has an answer of sorts in its 2021 report (emphasis TechCrunch):
Growth in Interest income of 24% YoY (SEK 4,040m, USD 471m) remained below that of total net operating income as consumer demand for our interest-free, shorter duration payment products outpaced other payment alternatives. Interest expenses grew to SEK 822m (USD 96m) at period-end driven by significant ongoing volume growth.
If we’re reading that correctly, Klarna is driving huge GMV growth with low-take-rate loans, which is harming its overall ability to snatch revenue out of its consumer payment volume. That’s something it can tune, but I doubt it can boost take rates without slowing GMV growth, as to do so would limit its ability to offer apparently popular interest-free debts; who doesn’t love super low-cost loans?
What to think of Klarna at a valuation in the low $30 billion range?
Sadly, this is not going to be a clear answer. In GMV multiples terms, Klarna is going to look mighty cheap compared to Affirm at its upcoming lower valuation. However, in loose revenue multiples terms, the company will still appear expensive when compared to Affirm’s price-sales multiples.
So are investors getting a deal by putting more capital into Klarna at a lower price? Yes, if you value GMV more than revenues — but no if you are on the other side of the fence. TechCrunch presumes that Klarna has plans for how to better capitalize on GMV and pull more income from its transaction volumes. But until that happens, the company will be forced to thread a needle between growing its total market footprint versus its own income.
This makes the Klarna repricing mandatory; the company is too expensive given current market norms at its prior valuation. But the question of whether it is cutting enough will only be answered when the consumer fintech goes public. A date that, in our view, cannot come soon enough.