This analysis was first published in SvD Näringsliv, in Swedish, on May 24th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.
Klarna’s quarterly report and announcement of layoffs isn’t just a rude awakening for one of Sweden’s new flagship companies. The message — despite all the flowery language — will send a chill through every leader and owner of a Swedish tech company.
A good way to understand how a company is doing is to study the euphemisms that turn up in its quarterly report. The document, originally meant to bring clarity about how a company is performing, is often a masterpiece of creative and embellishing prose. Look at Klarna’s latest report for the first quarter of this year and you’ll find a few candidates in that category.
The highest inflation in 30 years and a war in Europe is described as “we acknowledge the global macroeconomic shifts and the headwinds affecting consumers’ daily lives”. The quotes are our translations from English. But doesn’t it sound poetic?
Keep reading and you’ll see that Klarna “has once again tightened its lending parameters to reflect this changing market context”. That sounds considerably better than the numbers, which show that credit losses rose to SEK 1.1 billion during the quarter.
Klarna is by no means alone in this, but when storms roll in across the tech industry it’s natural to look at its leaders for an indication of where things are headed. A quarterly report becomes particularly interesting. And it doesn’t look like the storm is ending anytime soon. Klarna’s loss grew to SEK 2.5 billion, compared with SEK 650 million in the same quarter last year.
Losing money as a tech company has almost been standard practice in recent years. As long as growth was strong, the market tolerated large losses. That era can now be considered over. For companies that have taken on a heavy cost base — or have fundamental problems with their business model — it can be very hard to pivot quickly enough. Yesterday, Klarna announced it would cut 10 percent of its workforce. The week before, the online doctor service Kry did the same. There will be more news of this kind.
Late-stage tech companies now face a complicated balancing act.
There were, however, glimpses of light. Amid the tech chill, the delivery company Budbee raised SEK 400 million in new capital from existing owners like Kinnevik and H&M. The major shareholders clearly believe in a continued strong rise in e-commerce.
If we see more deals of this kind, they’re likely to come from similar lead investors with strong balance sheets or to involve preference shares, which would guarantee investors get their money back before everyone else. As one Swedish VC put it: “I live in a world where every issue is done with preference shares unless the opposite is proven”. Venture capital without so much venture, in other words.
Late-stage tech companies now face a complicated balancing act. The metrics investors will evaluate them on have shifted very quickly. There’s talk of many planned investments dragging out, and even more that won’t happen at all. And if you’ve planned your fundraising poorly, it can be very hard to pivot to this new reality in time. If investments do happen, the terms are likely worse than they would have been six months ago. It’s difficult to navigate, to say the least.
The largest private companies look at — and are affected by — the stock market. When it falls, they fall too. And the smaller companies in turn look at those larger than themselves. The market drop has already cut Klarna’s valuation by 30 percent — a loss of roughly $15 billion. When Klarna now wants to cut staff and warns of tougher times ahead, there isn’t a Swedish startup CEO who won’t read this and think twice. And they’ll see through the pretty phrasing in the quarterly report too.
“Klarna is well positioned to support consumers in managing their cash flow,” you can read. That may well be true. A more interesting question is who will support Klarna’s own cash flow. It has fallen from SEK 7.6 billion to minus SEK 7.3 billion — in a year.
