Klarna is a leader in the buy now, pay later space. Yet in recent months the company has sought to quietly distance itself from the BNPL label. The company has expanded into new areas like open banking. And the company no longer refers to itself as a BNPL platform.

This gradual shift of course suggests that Klarna has bigger ambitions for itself. Certainly, Klarna’s leaders must realize that BNPL has become too crowded. Not to mention too controversial. BNPL default rates have been rising. And regulators around the world began the space like curious, hungry sharks. All of these trends would compel smart leaders at least to make a few tweaks.

This positioning shift will likely serve Klarna in the long run. But any tech company that was flying high last year on easy venture cash, as Klarna certainly was, will have to endure a reckoning this year. And Klarna is no exception.

Pulling the Tooth

This week the company made an announcement no company enjoys making. Klarna revealed it is cutting its global workforce by about 10% (roughly 700 jobs).

The company is also said to be seeking a fresh round of capital at a reduced valuation (the dreaded down round).

Klarna Co-founder and CEO Sebastian Siemiatkowski blamed the measures on a perfect storm of unanticipated headwinds.

“As much as we may like it to be the case, Klarna does not exist in a bubble. We serve 400,000 merchants and 150 million consumers, which means that we have a profound impact on the world,” said Klarna Co-founder and CEO Sebastian Siemiatkowski in a statement announcing the layoffs.

“At the same time, we are highly influenced by it. And when we set our business plans for 2022 in the autumn of last year, it was a very different world than the one we are in today. Since then, we have seen a tragic and unnecessary war in Ukraine unfold, a shift in consumer sentiment, a steep increase in inflation, a highly volatile stock market, and a likely recession. All of which have marked the beginning of a very tumultuous year.”

He also said that the conditions that are leading Klarna to make tough choices are going to be here for a while.

“While crucial to stay calm in stormy weather, it’s also crucial not to turn a blind eye to reality. What we are seeing now in the world is not temporary or short-lived, and hence we need to act,” Siemiatkowski wrote.

The CEO made no reference to the funding in his statement. However, the Wall Street Journal reported last week that the company is seeking new capital at a valuation about one-third lower than the $46 billion valuation it received last year following a $639 million equity round led by  SoftBank’s Vision Fund.

Perfect Storm?

Klarna, which hasn’t yet gone public, is not alone. BNPL players across the board are getting hit by the combination of inflation, regulatory scrutiny, rising defaults, and the broader collapse of tech valuations.

Klarna’s rival Affirm, to cite just one example, has lost nearly three-quarters of its value since the beginning of 2022. Affirm closed at 95.21 on January 3. Yesterday it finished trading at 24.52.

We recently spoke with Jason Sive, CEO of the South African fintech Mobicred. His company offers a virtual credit facility that is often compared to BNPL but really bears a closer resemblance to traditional revolving credit. He said the BNPL space is being hit with a “perfect storm” of headwinds.

“Investors have run out of patience. They’re saying, ‘You guys are at scale, and you’re still losing money’,” Sive explained. “‘And we don’t believe you anymore, because you’ve been saying this for a long time.’ And interest rates are rising, so tech stocks have been hammered. So [BNPL platforms] have been in a bit of a perfect storm.”

A Long Term Bull

Siemiatkowski tried to close his layoff announcement on a positive note. And he alluded to Klarna’s efforts to move beyond BNPL.

“Lastly, I want to highlight that Klarna continues to hold a strong position in the market. We have a diversified business that distinguishes us from the competition,” he wrote. “Therefore I do remain relentlessly optimistic about Klarna’s future, despite what we now need to go through.”

We do wonder if Klarna endorser A$AP Rocky is happy with his decision to take equity over cash for his endorsement.