The collapse in Swedish fintech company Klarna’s private valuation is a sign of things to come for technology issuers in Europe’s public equity capital markets.
After a fresh fundraising, said to have included several failed attempts earlier this year, Klarna — which specialises in providing buy now, pay later financial services to consumers — said it had raised $800m of fresh funding at a post-money valuation of $6.7bn.
That is a brutal haircut from just over a year ago, when Klarna raised $639m at a $46bn valuation in a funding round backed by SoftBank. In May, Klarna announced its intention to cut 10% of its staff.
Goldman Sachs was adviser to Klarna on its latest capital raising, which attracted new commitments from Mubadala, the UAE sovereign wealth fund, and Canada Pension Plan Investment Board. Klarna’s existing shareholders including Sequoia, its founders, Bestseller, Silver Lake and Commonwealth Bank of Australia also participated.
Klarna has long been tipped as one of Europe’s brightest IPO candidates, but it has been caught in a storm in capital markets sparked by rampant inflation, rising interest rates and the war in Ukraine.
With the benefit of hindsight, SoftBank’s arrival in the shareholder registry looks like the top of the market for Klarna. Many of the investors in the company’s recent funding rounds will now be sitting on deep paper losses.
“It is remarkable how valuations have collapsed,” said the chief investment officer of a family office in London. “For companies like these that is a good thing because it means markets are more rational.”
Klarna’s latest fundraising highlights the sheer scale of the correction that has hit the technology sector in equity capital markets.
Investors have turned against technology stocks, particularly companies like Klarna that are fast growing but burn tons of cash, having piled into them in force for almost two years during the pandemic.
Shares in Affirm Holdings, a listed US rival of Klarna, have crashed over 77% this year.
“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," said Michael Moritz, partner at Sequoia, in a statement on Monday.
While Klarna is growing at a rapid rate, with over 150m users worldwide now, it is still burning cash almost as quickly as it can raise fresh money from the capital markets. Last year, Klarna lost Skr7.1bn ($660m).
In the first quarter of this year, Klarna lost a further Skr2.6bn ($240m), up from a loss of Skr650m ($62m) during the same period last year.
For public and private technology companies alike, Klarna is a harbinger of what is to come for the industry when it seeks to raise capital.
Last year, the sector was a major driver of issuance in European equity capital markets, as these growth companies rushed to go public or raise follow-on funding by selling new shares of convertible bonds.
Following the global equity market crash, the furious pace of deal making has ground to a near-halt. But many of these cash burning companies, like Klarna, still need lots of capital, and whether they like it or not, will soon be forced to return for fresh financing, at a time when rising rates locks many of them out of debt markets.
So far, only UK online grocery platform Ocado has bitten the bullet, raising £575m at a severely diminished valuation compared to its last capital raising in 2020 during the height of the pandemic.
Others will soon follow. Investors would be wise to exercise more caution this time round.