Klarna Devaluation – Warning for Startups, Opportunity for Investors

Klarna’s devaluation could be a warning to startups to maintain realistic, and even potentially discount valuations in the current climate, providing buying opportunities for shrewd investors.

The sudden drop in the stock market in early May, combined with the continued crisis in Ukraine, the global pandemic entering its third year, and surging inflation, is bound to pose significant hurdles to startups around the world.

Nowhere was this more evident than Klarna’s recent devaluation, and they are not the only ones taking a hit in today’s market.

Almost a year ago in June 2021, when market sentiment was not as volatile as it is today, Klarna, the company which offers buy-now-pay-later credit to shoppers, raised cash at a $45.6 billion valuation, and a year earlier in September of 2020, raised at a $10.6 billion valuation.

The massive increase was a result of the huge growth in the buy-now-pay-later market during the pandemic, and Klarna’s rapid geographical scale, which saw it reach 150 million customers around the world.

Recent volatility in the stock market has particularly taken its toll on newer and highly valued tech businesses, such as Affirm, one of Klarna’s main competitors, which saw its stock price sink 85% from its November 2021 high.

Now, with all of the global turmoil, Klarna Bank AB is seeking to tap investors for more cash, which would result in a decrease in its valuation by about a third.

The new investment would result in the Swedish company, which was valued at approximately $46 billion almost 12 months ago, being worth around $30 billion.

While Klarna now operates in 20 markets across the world, its operating losses per year jumped almost two-fold last year to $487 million.

Klarna’s investors, including Softbank, Sequoia Capital and Permira, all contributed to fundraising in 2021, which resulted in Klarna becoming Europe’s most valuable startup.

However, Klarna seems to be facing scrutiny from regulators about offering shoppers the option to pay in installments.

As the interest-free buy-now-pay-later model soared last year, the UK stated that it would begin regulating the sector, and more recently, the Swedish Authority for Privacy Protection launched an investigation into Klarna’s checkout service.

On a global scale, the brakes have been put on fundraising somewhat, as both the number of mega rounds ($100 million or more) and total amount raised, decreased in the first quarter for the first time in almost two years.

According to researcher CB Insights, the number of tech companies going public this quarter is expected to be the lowest since 2016, as shareholders in some of the highest valued private tech companies, such as Stripe Inc and Instacart Inc have marked down the value of their holdings.

All of this points to companies needing to revisit valuations, and buying opportunities for investors, with discounts aplenty.

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