Startups

As Klarna looks to raise more capital, is it cutting its valuation enough?

Comment

Image Credits: Nigel Sussman (opens in a new window)

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.


The Exchange explores startups, markets and money.

Read it every morning on TechCrunch+ or get The Exchange newsletter every Saturday.


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.

More TechCrunch

After Apple loosened its App Store guidelines to permit game emulators, the retro game emulator Delta — an app 10 years in the making — hit the top of the…

Adobe comes after indie game emulator Delta for copying its logo

Meta is once again taking on its competitors by developing a feature that borrows concepts from others — in this case, BeReal and Snapchat. The company is developing a feature…

Meta’s latest experiment borrows from BeReal’s and Snapchat’s core ideas

Welcome to Startups Weekly! We’ve been drowning in AI news this week, with Google’s I/O setting the pace. And Elon Musk rages against the machine.

Startups Weekly: It’s the dawning of the age of AI — plus,  Musk is raging against the machine

IndieBio’s Bay Area incubator is about to debut its 15th cohort of biotech startups. We took special note of a few, which were making some major, bordering on ludicrous, claims…

IndieBio’s SF incubator lineup is making some wild biotech promises

YouTube TV has announced that its multiview feature for watching four streams at once is now available on Android phones and tablets. The Android launch comes two months after YouTube…

YouTube TV’s ‘multiview’ feature is now available on Android phones and tablets

Featured Article

Two Santa Cruz students uncover security bug that could let millions do their laundry for free

CSC ServiceWorks provides laundry machines to thousands of residential homes and universities, but the company ignored requests to fix a security bug.

18 hours ago
Two Santa Cruz students uncover security bug that could let millions do their laundry for free

OpenAI’s Superalignment team, responsible for developing ways to govern and steer “superintelligent” AI systems, was promised 20% of the company’s compute resources, according to a person from that team. But…

OpenAI created a team to control ‘superintelligent’ AI — then let it wither, source says

TechCrunch Disrupt 2024 is just around the corner, and the buzz is palpable. But what if we told you there’s a chance for you to not just attend, but also…

Harness the TechCrunch Effect: Host a Side Event at Disrupt 2024

Decks are all about telling a compelling story and Goodcarbon does a good job on that front. But there’s important information missing too.

Pitch Deck Teardown: Goodcarbon’s $5.5M seed deck

Slack is making it difficult for its customers if they want the company to stop using its data for model training.

Slack under attack over sneaky AI training policy

A Texas-based company that provides health insurance and benefit plans disclosed a data breach affecting almost 2.5 million people, some of whom had their Social Security number stolen. WebTPA said…

Healthcare company WebTPA discloses breach affecting 2.5 million people

Featured Article

Microsoft dodges UK antitrust scrutiny over its Mistral AI stake

Microsoft won’t be facing antitrust scrutiny in the U.K. over its recent investment into French AI startup Mistral AI.

20 hours ago
Microsoft dodges UK antitrust scrutiny over its Mistral AI stake

Ember has partnered with HSBC in the U.K. so that the bank’s business customers can access Ember’s services from their online accounts.

Embedded finance is still trendy as accounting automation startup Ember partners with HSBC UK

Kudos uses AI to figure out consumer spending habits so it can then provide more personalized financial advice, like maximizing rewards and utilizing credit effectively.

Kudos lands $10M for an AI smart wallet that picks the best credit card for purchases

The EU’s warning comes after Microsoft failed to respond to a legally binding request for information that focused on its generative AI tools.

EU warns Microsoft it could be fined billions over missing GenAI risk info

The prospects for troubled banking-as-a-service startup Synapse have gone from bad to worse this week after a United States Trustee filed an emergency motion on Wednesday.  The trustee is asking…

A US Trustee wants troubled fintech Synapse to be liquidated via Chapter 7 bankruptcy, cites ‘gross mismanagement’

U.K.-based Seraphim Space is spinning up its 13th accelerator program, with nine participating companies working on a range of tech from propulsion to in-space manufacturing and space situational awareness. The…

Seraphim’s latest space accelerator welcomes nine companies

OpenAI has reached a deal with Reddit to use the social news site’s data for training AI models. In a blog post on OpenAI’s press relations site, the company said…

OpenAI inks deal to train AI on Reddit data

X users will now be able to discover posts from new Communities that are trending directly from an Explore tab within the section.

X pushes more users to Communities

For Mark Zuckerberg’s 40th birthday, his wife got him a photoshoot. Zuckerberg gives the camera a sly smile as he sits amid a carefully crafted re-creation of his childhood bedroom.…

Mark Zuckerberg’s makeover: Midlife crisis or carefully crafted rebrand?

Strava announced a slew of features, including AI to weed out leaderboard cheats, a new ‘family’ subscription plan, dark mode and more.

Strava taps AI to weed out leaderboard cheats, unveils ‘family’ plan, dark mode and more

We all fall down sometimes. Astronauts are no exception. You need to be in peak physical condition for space travel, but bulky space suits and lower gravity levels can be…

Astronauts fall over. Robotic limbs can help them back up.

Microsoft will launch its custom Cobalt 100 chips to customers as a public preview at its Build conference next week, TechCrunch has learned. In an analyst briefing ahead of Build,…

Microsoft’s custom Cobalt chips will come to Azure next week

What a wild week for transportation news! It was a smorgasbord of news that seemed to touch every sector and theme in transportation.

Tesla keeps cutting jobs and the feds probe Waymo

Sony Music Group has sent letters to more than 700 tech companies and music streaming services to warn them not to use its music to train AI without explicit permission.…

Sony Music warns tech companies over ‘unauthorized’ use of its content to train AI

Winston Chi, Butter’s founder and CEO, told TechCrunch that “most parties, including our investors and us, are making money” from the exit.

GrubMarket buys Butter to give its food distribution tech an AI boost

The investor lawsuit is related to Bolt securing a $30 million personal loan to Ryan Breslow, which was later defaulted on.

Bolt founder Ryan Breslow wants to settle an investor lawsuit by returning $37 million worth of shares

Meta, the parent company of Facebook, launched an enterprise version of the prominent social network in 2015. It always seemed like a stretch for a company built on a consumer…

With the end of Workplace, it’s fair to wonder if Meta was ever serious about the enterprise

X, formerly Twitter, turned TweetDeck into X Pro and pushed it behind a paywall. But there is a new column-based social media tool in town, and it’s from Instagram Threads.…

Meta Threads is testing pinned columns on the web, similar to the old TweetDeck

As part of 2024’s Accessibility Awareness Day, Google is showing off some updates to Android that should be useful to folks with mobility or vision impairments. Project Gameface allows gamers…

Google expands hands-free and eyes-free interfaces on Android