‘Race to zero’: Buy now, pay later suffers under widespread reset

Once a darling of the VC industry, consumer-focused buy now, pay later companies are facing shrinking investor interest as macroeconomic conditions threaten their business models.

Klarna, once Europe’s most valuable VC-backed company, has confirmed an 85% valuation cut from $45.6 billion to just $6.7 billion following an $800 million round that included investors such as Sequoia, Silver Lake and the Canada Pension Plan Investment Board.

Klarna blamed wider market conditions for the drop, with Sequoia partner Michael Moritz commenting in a statement that the cut is “entirely due to investors suddenly voting in the opposite manner to the way they voted for the past few years.” But Klarna’s massive haircut is also indicative of the challenges facing the BNPL space. Public companies like US-based Affirm and Australia’s Zip have seen their share prices plummet—over 77% and 89% respectively year to date.

“There was definitely a gold rush last year and we’re now seeing a significant cooling off,” Cherry Ventures’ founding partner Filip Dames said. “I don’t think investors will altogether turn away from the sector but we’re not going to get the same crazy prices as last year and potentially more down rounds.”

BNPL became popular during the pandemic as a way for users to spread the cost of purchases over a longer period. However, rising inflation and slower economic growth have reduced consumer purchasing power, and higher interest rates have tightened margins for BNPL providers. The sector is also attracting more scrutiny from regulators over concerns that users aren’t sufficiently aware that they are taking on debt.

Part of the issue is the “checkout button” model adopted by many consumer-focused BNPL players, according to Philip Belamant, CEO and co-founder of merchant-agnostic BNPL provider Zilch. Under this model, the providers rely on fees charged to retailers, but increased competition in the space has put pressure on their revenues.

“It’s a race to zero for a lot of these companies,” Belamant said. “Everyone has been undercutting each other to sign up retailers and some of those deals frankly could never be profitable for them. On top of that, they promise retailers that they’ll approve a certain ratio of people and find themselves in a position where they’re lending to people they shouldn’t be lending to. I’m not sure it’s sustainable and that’s where I think we’ll see a cooling off.”

While the consumer-focused BNPL sector has seen a slowdown in investor appetite, VCs are predicting growing investor interest in the B2B side.

Businesses are grappling with ongoing supply chain issues, and worsening macroeconomic conditions are increasing the need for flexibility when paying suppliers. In the past few months, several startups in the B2B space have been fundraising. In June, London-based Hokodo secured a $40 million Series B, while UK-headquartered peer Playter reportedly raised $55 million. 

“The [B2B] market is very much underserved,” Speedinvest principal Olga Shikhantsova said. “The pain points for businesses have always been much larger than for consumers but in a way ignored because they’re more complicated to address. The [VC market] is smaller now but the opportunities are massive in the B2B space.”

Featured image courtesy of Klarna