Polestar’s Losses Keep Growing — When Does the Money Run Out?

September 4, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on September 4th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Polestar’s losses are ballooning, driven by expensive costs from its SPAC listing. The EV company has been squeezed, and the question now is how quickly its owners will have to step up with fresh capital.

An ordinary IPO is usually preceded by a long and cumbersome process. The company has to be prepared for a whole new set of requirements and rules, management has to be trained, and a new way of reporting financial information has to be put in place.

On top of that comes the sales pitch to the market. This is where you display historical metrics and show how the business has developed up to today — which indirectly says something about how the future might look.

With a so-called SPAC listing, you get to skip that last part. No history is required; you can go public entirely on the basis of future hopes instead.

That fits perfectly for companies that have no history to offer. It is also much faster to get to the stock market, which suits young and innovative companies that need capital quickly.

It is no accident, then, that so many EV companies have gone public via SPACs. Tesla’s enormous stock market success is enough to pull the whole category along as the car industry heads toward general electrification. Faraday Future, Canoo, Rivian, Fisker and Lordstown Motors are all examples of EV companies that have benefited from this trend and listed relatively recently.

And then there is Swedish Polestar, which just reported its quarterly numbers. The figures showed a doubling of revenue but also runaway losses. On just over a billion dollars in revenue the loss was $885 million. Of that, a full $372 million was costs directly attributable to the SPAC listing.

That is equivalent to roughly SEK 4 billion.

Speed to market has its price, to put it mildly.

The choice of a SPAC for EV companies as a category may be logical, but for Polestar specifically it raises a number of questions.

Polestar is not a straightforward startup in this context — it was a wholly owned subsidiary of Volvo Cars. Volvo Cars is in turn listed on Nasdaq Stockholm since October 2021. And to make it even more complicated, Volvo Cars is 82 percent owned by the Chinese company Zhejiang Geely Holding Group (which is also the main owner of listed Geely Automotive). Access to capital exists at many different levels, and this Russian doll of listings looks like a complex and expensive way to solve the problem.

To understand a plausible motive, you need to go back about a year in time, to when news of Polestar’s combination with SPAC vehicle Gores Guggenheim first emerged. Back then enthusiasm was flowing on the stock market and money was pouring in.

A lot can happen in twelve months. The speed at which they moved to catch these favourable market conditions — even with the SPAC method — simply wasn’t fast enough. The Nasdaq 100 index fell around 20 percent between Polestar’s announcement and its first day of trading. But they still needed the capital.

Now an entire generation of listed EV companies has one more thing in common — it looks like their money is running out. As early as May this year, Fisker, Canoo and Lordstown Motors all warned that they might not have enough cash to last a year. Their share prices have also fallen between 42 and 62 percent apiece — just since the start of the year.

Polestar’s market cap, for its part, has nearly halved since the SPAC merger. Analysts at Bernstein Research wrote in June that the company might have to ask its main owners for more money.

As recently as Thursday, Polestar’s CFO Johan Malmqvist said in an interview with Bloomberg that “we are very excited about our upcoming launch”. The new SUV, Polestar 3, is released in October. But looking at the numbers, it will probably take more than additional car models to turn things around. It will take money.

If even Linkedin can’t function in China, who can?

September 2, 2022
by Björn Jeffery
The Daily

This column was first published in SvD Näringsliv, in Swedish, on October 15th, 2021.

There was only one realistic way into China as a foreign company. Now even that seems to be closed. When Linkedin dismantles its social network in the country, it could mark a new era for tech companies in China.

An established truth is that the only way to enter China as a foreign company is through partnerships. The local legislation and relations with the Chinese state simply require some form of Chinese ownership. But if you play those cards right, a huge market can open up.

It was the same story for Linkedin, when they launched in China in 2014. The Microsoft-owned social network partnered with venture capital firms China Broadband Capital and a Chinese branch of Sequoia Capital for exactly this reason. It is therefore noteworthy that Linkedin now announces that they are shutting down the part of the business where you can post articles and updates to each other. It seems that relations with the state were not sufficient to allow this activity to continue.

At the beginning of the month there were reports that Linkedin had started to remove content from journalists covering China. A reporter at the news site Axios received a message from Linkedin stating that “your profile and public activity, such as your comments and links you share with your network, will not be visible in China.” It was not specified which material was intended, but a common theme was that the message was sent to journalists who covered China, and who were thereby able to be critical of the country.

The thesis that it is about the expression of uncomfortable opinions is supported by the fact that Linkedin still retains some business in the country, but that it is through a newly started app that provides job ads. The company as such is therefore not banned from the country – it is only a certain part of the business that can no longer be carried on. The company itself specifies that it has become a “significantly more challenging environment and greater requirements for regulatory compliance in China”.

Linkedin is not alone in experiencing this “challenging environment”. In one fell swoop, the entire Chinese tutoring industry was shut down after the government deemed it unsuitable for profit. This week that industry received some redress, when those companies are now allowed to assist with vocational training at least. That fits well with the modern China that Xi Jinping wants to build. And those types of swings can happen quickly – even for the companies that are on the inside.

The picture being painted is of a China that is closing itself more and more. The harsh pressure that has been put on the domestic tech companies has attracted the world’s eyes and caused stock market prices to fall. When established foreign companies – which followed market practices – are forced to reconsider their operations, this could create more uncertainty among the world’s investors.

If even the world’s second highest valued tech company, Microsoft, can’t manage to navigate the political landscape – what will all other companies do?

This column was first published in SvD Näringsliv, in Swedish, on October 15th, 2021.

New phenomenon turns players into investors

September 2, 2022
by Björn Jeffery
The Daily

This column was first published in SvD Näringsliv, in Swedish, on October 11th, 2021.

– When I started, I played almost four to five hours a day, says John Ramos, a 22-year-old man from the Philippines.

It sounds like a quote you’ve heard many times before from someone caught up in a gaming addiction. But this is something else, and it ends in a different way than they usually do.

Ramos has made gaming into a job. He has recently bought several homes with the winnings he has accumulated in the game “Axie Infinity” since he started last November. It is part of a new phenomenon in the gaming and crypto world called “play to earn”.

Behind the game is the Vietnamese game studio Sky Mavis, which was recently valued at $3 billion when the American venture capital giant Andreessen Horowitz invested in them. It is a company that has only existed for three years. Development has been rapid – and continues to do so. Revenue from purchases inside Axie Infinity is projected to reach $1 billion by 2021, with 17 percent of that going to Sky Mavis.

The trend is in an early phase, but can also be found in Sweden. The game developer Antler Interactive is developing a game called “My Neighbor Alice” together with the blockchain company Chromaway. It uses its own cryptocurrency Alice, which was publicly launched in March this year. While the trading of Alice is already underway, the actual game itself is not finished yet. It is expected to be released sometime next spring.

Making money playing computer games is nothing new in itself. But “play to earn” still differs from e-sports and game streaming to the extent that it is the game itself that generates the revenue – not the viewers and sponsors around. E-sports is rather similar to regular sports in its business model. You play to collect virtual objects and cryptocurrency within the game itself, and it can then be traded on crypto exchanges outside.

It may sound like a small difference in the grand scheme of things, but it turns the traditional business models of the gaming world upside down.

Normally, the revenue for a game goes directly to the gaming company that developed it. Sometimes the money is shared with game publishers who helped develop and market the game. Somewhat simplified, you can say that the more people play, the more profitable the game becomes – regardless of the underlying business model.

With “play to earn” you also play games, but the difference is that the more people participate, the more valuable what you own in the game becomes. You as a player thus profit from the success of the game by the fact that the assets you have acquired in the game get more potential buyers. The most expensive Axie – a cartoon animal that looks like a mix of a cat and a fish – was sold at the end of last year for about 125,000 dollars.

The more people playing, the more people can participate in the trade. Seen from this perspective, it is more like a cryptocurrency or a common stock, where the value is governed by supply and demand. If you then drape this trade in a game, you get a hybrid where players have clear incentives to spread the game on to others. You don’t spread the game necessarily because it’s so much fun – but because you can profit from it yourself.

This development is interesting and fast-growing, but it also brings with it an aftertaste of industries that one might not want to associate with. Recruiting new players to make one’s own investment more valuable is similar to MLM (multi-level marketing, i.e. sales where individuals sell directly to other individuals) and also has some similarities to pyramid schemes.

When you start playing computer games to earn money, many new questions appear. Is this entertainment or an investment business? Is it perhaps more like a casino than a board game? In an almost lawless land between gaming and cryptocurrencies, we’ve only seen the start of this trend – and its problems.

This column was first published in SvD Näringsliv, in Swedish, on October 11th, 2021.

The Number That Should Worry Klarna’s CEO Most

August 31, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on August 31st, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Klarna will shrink its loan amounts to bring down credit losses. But while the company’s focus has been on the US, the Swedish business is now shrinking for the first time.

It is every CEO’s job to present and package reality as positively as possible. Sebastian Siemiatkowski, CEO and co-founder of Klarna, knows this very well. Which comes through clearly when you read the company’s interim report for the first half of the year, and his letter to shareholders in particular.

The more complex picture — the one Klarna does not communicate — is not quite so rosy. The company is losing around SEK 35 million a day. Cash flow is negative SEK 9.8 billion, of which just under a third is acquisition-related, compared with positive SEK 1.5 billion in the same period last year. And while the American market is growing fast — but expensively — revenue from Sweden is actually falling by 9.5 percent. That is the first time it has happened.

The fact that the Swedish market is shrinking is notable.

Klarna has been the clear market leader in Sweden for many years, but has faced increasing competition from similar products and offerings. That the company’s focus has been on the US has been obvious — revenue there is growing by more than 100 percent — but now, for the first time, there are signs that this may have come at the expense of more established markets. The fact that Swedish e-commerce has declined overall after a pandemic-fuelled boom probably plays a role as well. Finally, a change in the company’s product mix, where a sort of “perpetual credit” has been scrapped, also contributes.

Even Germany, Klarna’s single largest market, grew by just over 6 percent in the period. Klarna is the country’s second-largest payment system after PayPal, but a long line of challengers is appearing on the horizon there too. And this summer came the news that even the big bank Deutsche Bank is entering the hot “buy now, pay later” market in the country. Competition is intensifying.

Turning the business back to profitability requires both that established markets keep working, and that the US expansion stops bleeding money. Klarna writes in the report that they have changed their approach to credit losses and that they will lend smaller amounts to reduce that outflow. It remains to be seen what effects this will have, but between the lines you can at least sense some seriousness about the enormous losses the company continues to have.

Looking ahead, the challenge is exactly this balancing act between maintaining established, mature markets and growing into new ones at the same time. Siemiatkowski writes that the credit losses have been a “conscious consequence” of the company’s growth rate. It is true that growth has been rewarded by investors — almost at any cost — for many years. But it is, to put it mildly, optimistic to believe that changing their lending would not affect existing and future customers in ways beyond just credit losses.

The company has large and established competitors in the US as well, including Affirm and Afterpay (part of Block). Klarna’s success and growth rate there is tied to its competitiveness, something that can be diluted by changes of this kind.

The optimism from Klarna’s chief is familiar. In an interview with Dagens industri in May this year, Siemiatkowski said that “I am optimistic and I think there are good conditions” to defend the company valuation of around $45.6 billion that Klarna had previously received from investment company SoftBank. Less than two months later they raised new money at a valuation around 85 percent lower.

A positive outlook is a good starting point for a CEO. But that alone will not pull Klarna out of the tough market situation it finds itself in. Retooling a giant operation like Klarna can take longer than you think. Because the money is running through the company and the conditions for attracting new investors on favourable terms are harder than they have been in many years.

SoftBank and Masayoshi Son Face the Fight of Their Lives

August 30, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on August 30th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

They lost billions in the scandal-ridden WeWork, handed Klarna a record valuation and allowed Uber to steamroll its competitors. Now Japanese SoftBank and its CEO Masa are fighting the match of their lives. Can they survive the tech chill?

Dressed in a black suit and black turtleneck, Masayoshi Son, CEO of SoftBank Group, steps onto a stage in Tokyo in May 2021. He looks pleased. With good reason, you might say. He is about to present the best result in Japanese corporate history.

The presentation begins with a black-and-white photo from 1981. It shows Fukuoka in southern Japan — the city where the story of Masayoshi Son, usually called Masa, and the company SoftBank begins. Masa tells the audience how he once told his first two employees that one day they would count the company’s value in the trillions of yen.

That day came and went long ago. And now he is about to blow past that milestone as Masa announces that SoftBank has made a profit of 4,900 billion yen — around SEK 380 billion at today’s exchange rate. To put that in perspective, it is roughly twice what Toyota made in profit during the same period.

A year earlier the situation was radically different, with a loss of 800 billion yen, SEK 62 billion. The result stands out on the chart of the company’s 40-year financial history that Masa layers over the photo of his hometown.

Masa concedes that, depending on how the stock market develops, the company may see “a few peaks and valleys”.

That would turn out to be the understatement of the year.

A year later, in May 2022, Masa steps onto the stage again. This time he is sombre. Masa has to explain how that record profit has now flipped — again — into a record loss. Covid-19, inflation and the tech chill on the stock market have made for a tough year for the Japanese conglomerate. The bottom line ends at minus 1,700 billion yen, about SEK 132 billion. In a single year.

“We are now going into defence mode,” Masa says, a little grimly.

The big question everyone is asking is whether SoftBank can turn this around and climb back to the same heights — or whether Masa will be remembered as the tech boom’s loudest cheerleader.

Even early in his career, Masa had an eye for good but risky investments. SoftBank started as a software distributor and quickly added both computer magazines and events to its offering. Interest in computers exploded during the late 1980s and SoftBank became Japan’s largest events company in computers and technology.

In 1994 Masa took SoftBank public at a valuation of $3 billion. That allowed him to start investing in internet companies. One of them was called Yahoo, and the partnership evolved into a joint company the following year — Yahoo Japan. The site went on to become enormously dominant in the country over the coming years, just like its American counterpart on the other side of the Pacific.

With the success of Yahoo Japan behind him, Masa could crank up his risk appetite further. In 2000 he invested $20 million in a young Chinese entrepreneur named Jack Ma and his company Alibaba. Today the company is one of our era’s largest and most important tech giants — and 20 years after Masa got in, the investment’s value has grown to more than $150 billion. Very likely one of the single best investments in history.

Masa’s eye for talented entrepreneurs also led him to another man who used to wear a black turtleneck on stage — Steve Jobs, then CEO of Apple.

In an interview with TV journalist Charlie Rose, he described his reasoning:

“If I’m going to get into the mobile operator market, I need a weapon. And who can create the world’s best weapon? There is only one person — Steve Jobs.”

This was 2005, two years before the iPhone was released, and Apple had enjoyed great success with the iPod music player. The company had never publicly mentioned a phone. Masa, however, had his own idea of how it might go:

“I called up Steve Jobs and went over to see him. I brought my little sketch of an iPod with phone functionality and gave it to him. He said, ‘Masa, don’t give me your sketch. I have my own.'”

Masa saw the potential years before the iPhone even existed. And he tried to get Jobs to give him exclusivity in Japan on this prospective phone — whenever it might be released. Jobs said he couldn’t do that, mainly for one very obvious reason: SoftBank was not a mobile operator.

But that was a problem Masa could solve. The following year SoftBank acquired Vodafone’s Japanese operator business, and in 2008 they got exclusive rights to the iPhone in Japan. The rest is history.

Having a long time horizon is a recurring theme throughout SoftBank’s history. And while ordinary companies tend to struggle to even figure out where the business should go more than five years out, Masa is aiming centuries ahead. In 2010 he speculated about what SoftBank would look like 300 years from now, and he regularly gives presentations in which he lays out his view of the coming 30 years.

But vision without execution doesn’t create much shareholder value. To capitalise on his visions Masa needed money. A lot more money, in fact. And to fill the coffers he had to go far outside the public markets to cover his needs. This was where both the risks, and the world’s attention, really started to accelerate.

In 2017 SoftBank Vision Fund was born — a standalone venture capital vehicle sitting under the SoftBank Group umbrella. The fund raised $100 billion, of which SoftBank itself put in $28 billion. The rest of the money came from more controversial places, as the majority came from sovereign funds in Saudi Arabia and the United Arab Emirates. Two years later the fund raised another $100 billion-plus.

Vision Fund quickly made a name for itself by investing enormous sums at very high valuations. And given the fund’s size, they could do it in many companies at once, within a short period and all over the world. The portfolio companies are well known and include TikTok’s parent ByteDance, transport company Uber, crypto platform FTX and office hotelier WeWork. In Sweden, Vision Fund led Klarna’s 2021 funding round that valued the fintech at $45.6 billion, more than 400 percent higher than their round the year before. That was the valuation that then had to be cut by around 85 percent when Klarna needed to refill the coffers earlier this summer.

This is where SoftBank starts to become a liability rather than an asset for the companies they invest in.

In a boom where everything points upwards, SoftBank’s money was a fast way to accelerate growth. You could buy market share and outspend your competitors.

But when sentiment in the market turns — as it clearly did in the tech world earlier this year — the high valuations can go from a trophy to a heavy yoke. Staff options are usually tied to the company’s valuation, so having to cut it can have big consequences for your employees. But finding investors willing to top — or even match — where SoftBank and Vision Fund have come in is not easy. And then big drops in value can suddenly appear. That was the trap Klarna fell into — and they are far from alone.

So Masa stands on the stage again, in August this year. He is under pressure once more. Vision Fund has just posted a record loss of $23.4 billion, about SEK 246 billion — in a single quarter. When Vision Fund’s many companies went public, SoftBank’s value surged, but when tech stocks crashed it fell just as quickly. Masa is now promising cutbacks to restore the market’s confidence.

There is much to suggest he can turn the company around again. SoftBank has been through many transformations in its roughly 40 years. From events company to mobile operator to one of the world’s leading tech investors. More transformations are probably still to come.

But he cannot do it alone. Because although Masa’s timing has been remarkable, the question is whether his enthusiasm is enough to charm new investors in a tech world where the air has gone out of the balloon and most people are planning for months rather than years.

Not everyone, as we know, is working on the same 300-year horizon as Masa.

Elon Musk’s New Chance to Walk Away From Twitter

August 24, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on August 24th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

A whistleblower claims Twitter has a bigger spam problem than the company admits — exactly what Elon Musk has been saying. But that doesn’t necessarily mean the billionaire can walk away from the deal to buy the company.

There isn’t a Twitter user in the world who doesn’t know the service has a spam problem. It ranges from Russian bots spreading disinformation to scammers luring people in with cryptocurrency. The phenomenon is well known and beyond dispute. That the service is influential among politicians and media — and therefore a plausible arena for political influence — is equally uncontroversial.

The question that has come into focus lately is more about how big these problems actually are, and how much they affect Twitter as a company.

It’s in this light you can see the latest report from a Twitter whistleblower. And not just any whistleblower — it’s the company’s former head of security, Peiter Zatko. In an extensive document, Zatko goes through a long list of violations, including that the company misled both its board and regulators about its security practices, and that it lacks the resources and tools to understand how big the spam problem really is.

A complicating factor is that Zatko was recently fired from Twitter. After just a few months as new CEO, Parag Agrawal decided to fire both Zatko and the company’s chief information security officer. According to the company, it was due to “poor performance”. This happened in January of this year, so you can’t rule out that the conflict between them still lingers. At the same time, there are considerably less dramatic ways to signal dissatisfaction with being fired than writing an 84-page whistleblower report and going public with your name in CNN and the Washington Post.

At first glance, Tesla CEO Elon Musk looks like a winner in all of this. He is currently in a legal dispute with Twitter as he wants to terminate the deal to buy the company for around SEK 470 billion. Musk claims Twitter’s user numbers are inflated and that the volume of spam bots and fake accounts is far higher than previously stated. Zatko’s report is therefore tailor-made for Musk, and his lawyers have already requested more information from him ahead of the trial that starts on October 17th in the state of Delaware in the US.

It’s not quite that simple, though.

That Twitter has a spam problem is, as noted, well known — including to Musk. He explicitly asked for more information on the volume of spam, which suggests the problem was known before the agreement to buy the company was signed. The question of whether Musk needs to honour his side of the deal isn’t primarily about the volume of spam, either — even if he has tried to make it sound that way.

What will be settled in court is whether what Twitter told Musk affects the company in a “materially adverse” way. So what counts as material, in this context?

According to Matt Levine, a Bloomberg columnist and former lawyer specialising in corporate acquisitions, the Delaware court has previously said that a revenue shortfall of around 40-50 percent can be considered material. A very high bar, in other words. That would mean Musk has to show that the spam volume is so high it would result in Twitter losing half its revenue. That is a considerably harder thing to prove than simply showing there are more spam accounts than previously stated.

The report from the whistleblower could therefore harm Twitter in more than one way. If it turns out that information was withheld from regulators, that alone could result in hefty fines. But if new grounds can be found in the report for why the company has suffered material harm, it may also have given Elon Musk the ammunition he needs to get out of the deal.

Musk’s original bid for Twitter was $54.20 per share. Yesterday’s close was $39.86. He has billions of reasons to look for new arguments, in other words.

How Sweden Went from Startup Paradise to Tech Black Hole

June 24, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on June 24th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

In a matter of months, Sweden went from one of the world’s hottest countries for startups to dark headlines about layoffs and cutbacks. A deeper look shows that what has crashed, above all, is a particular way of building companies.

“AI will affect us all. Get to know it and get to know your path forward.”

In a foreword to a book from 2018, Marcus Wallenberg reflected on the phenomenon that would reshape industries and revolutionise business: AI — artificial intelligence.

The book was written by Luka Crnkovic-Friis, CEO of the AI company Peltarion. On its shareholder register you’d find Wallenberg’s holding company FAM, which alongside EQT invested SEK 110 million in the company that same year. The vision was to build a platform for AI that other companies could use, and so accelerate that transformation of society.

The headlines were big and the customer list impressive. The company was one of Sweden’s most hyped.

Even before Peltarion had even launched its product, NASA, Tesla and General Electric were said to be customers. The company took part in seminars in the Swedish parliament on the opportunities and challenges artificial intelligence could bring to Sweden. The future looked bright — for Peltarion, and for Swedish tech more broadly.

Then came 2022.

The market’s enthusiasm turned abruptly. Tech companies that had listed in 2021 had already started falling in the autumn, and the slides kept coming. Many companies have now lost more than 70 percent of their market value.

Old memes — joking internet phenomena — resurfaced talking about “buy the dip”, buying assets in a downturn. Except now with the pitch-black addition that “the dip keeps dipping”. The declines don’t seem to stop.

And from sending out press releases about helping social services deal with vulnerable children, or building platforms for the education of the future, came a different kind of news. Peltarion had been acquired. The buyer was the games company King, the company behind the mega-hit Candy Crush Saga.

Instead of revolutionising society, they would now build their AI into King’s mobile games. The artificial intelligence — which was supposed to help digitise and transform society — will make sure more candy gets swiped.

What actually happened?

If you listen to the company itself, it is “a monumental chapter in Peltarion’s history” and “King’s scale and reach […] are a good match for our technology”.

Becoming an AI division for a global games company isn’t a bad outcome for a business. But in an interview with Dagens industri in 2018, Crnkovic-Friis said that even if they had tens of thousands of customers on their platform, it would be “a drop in the ocean compared with the companies that could benefit from it”.

The shareholder group had written down the value of their investment significantly in the years before the deal. No price tag has been disclosed either, which usually suggests it wasn’t as high as had been hoped.

Whatever happened behind the scenes, you can tell a big shift has taken place. And it’s probably no coincidence that it’s happening right now.

A lot of startups are in exactly the same situation. The surrounding conditions have suddenly changed. Companies like Peltarion — and many others — may have to pivot on short notice.

Let’s take a quick look in the rear-view mirror.

In 2000 the dot-com bubble was a fact. You could call it a business-model crisis. Many of the companies simply had no real revenue to speak of, and therefore very limited profitability. The companies’ valuations reflected a belief in the future that suddenly went up in smoke. With a weak business model at the core, there was no saving them.

In 2008 came the financial crisis. It had nothing to do specifically with tech companies, except that the whole of society got dragged down in a dark spiral. In hindsight, that period became the start of an enormous boom for tech. One that accelerated further around the Covid crisis in 2020, when central banks printed money like never before and interest rates were at record lows.

Now, in 2022, startups in Sweden and around the world face a funding crisis. The situation is serious, but markedly different from 2000. Today, most companies have more realistic business models at their core. But they may have become overvalued, and forced a type of growth the company can’t quite sustain.

After more than ten years of huge venture investments in growth-at-all-costs, the tap has now been turned off. And it has happened very quickly.

A new report from the investment bank GP Bullhound shows that in the second quarter of 2022, barely half as much money was invested in large venture rounds as just three months earlier.

The IPO window is closed too. In 2021, companies went public for $46 billion. Half a year into 2022, the equivalent figure is one (1) billion dollars. The outlook for the rest of the year doesn’t look much brighter.

What the market is seeing is the effect when very strong momentum turns. Picture a rubber band that can be stretched and expanded. At some point it can’t go any further, and the rubber band flies off in the other direction — or snaps entirely.

In a recent podcast interview, Aswath Damodaran, professor of finance at NYU Stern School of Business in New York, talked about exactly this phenomenon.

“Momentum is the strongest force in the market, much bigger than earnings, cash flows or any other fundamentals. As a trader you live on momentum, but you die with it too. That means you make money when momentum is with you, but if you don’t get out in time, the momentum that was your friend suddenly becomes your enemy.”

The funding crisis companies now face is the effect of momentum that has turned. Over ten years — and the last two years in particular — of access to highly risk-tolerant capital, many companies optimised for the conditions that prevailed. Growth was what was rewarded, and as fast as possible.

The business models may be better this time around, but many need more time to play out. There’s talk of “growing into your valuation”, meaning you need to live up to the promises you made when you took in your investment. But valuations of young companies are highly subjective. Many entrepreneurs are now stuck between the expectations of their previous valuation and the now-sober view the market offers.

LinkedIn co-founder and investor Reid Hoffman published a book in 2018 called “Blitzscaling”. The title referred to growing your business so fast that competition simply couldn’t keep up. It could be expensive and complicated, but once competition was out of the picture you’d catch up.

The clearest example of blitzscaling is the transport company Uber, which grew enormously fast but has also been saddled with enormous losses and big problems around working conditions and regulation. On the surface, though, they’ve been a success. Uber has come to represent a kind of on-demand economy and was used as a reference in thousands of startup pitches. “We’re like Uber, but for X” could be heard in hundreds of meeting rooms around the world.

To be able to “scale” fast, you need lots of staff. Uber was rumoured to send employment contracts to developers before even meeting them, to save time. Even in Sweden, people looked towards Silicon Valley and saw those methods as the ones leading to success, willingly financed by venture capital firms. So they started hiring lots of people and taking bigger risks. Maybe a bit too much — but now the business was going to scale up, and it needed to happen fast.

The difference between the dot-com bubble and now is precisely this. Look at Klarna, for example: they were profitable and growing up until 2019. After that, the growth rate accelerated sharply and losses grew large. A profit of around SEK 560 million over 2016–2018 flipped quickly to a loss of over SEK 9.3 billion between 2019 and 2021.

What has happened now is that venture capital no longer wants to finance this kind of strategy. The same investors who urged speed in growth are now urging speed again — this time in pivoting to profitability. Klarna recently announced it wants to cut ten percent of its roughly 7,000 employees. The online doctor service Kry is doing the same.

Turning around a business that is bleeding money is hard, and takes time. It’s therefore quite possible that ten percent in layoffs won’t be enough. And that the cuts should perhaps have been done differently.

Apple’s former chief evangelist, Guy Kawasaki, put it in the simplest possible way back in 2006:

“Cut deep, and only once.”

Kawasaki argues that companies often start with smaller cuts, believing the wind will turn. But it often doesn’t — or at least not as fast as the company’s leadership hopes. Then you have to make more cuts, which can result in low morale among the employees who remain.

If you can’t turn a company profitable in time, you either have to sell or shut it down.

The tech world doesn’t move in a vacuum — it’s very much influenced by the world economy at large. How inflation, interest rates and the broader business cycle develop will affect how deep, and how long, the industry’s crisis becomes.

But already now you can say with reasonable confidence that the startup world is facing a number of major changes because of what has happened.

To begin with, several industries will face a large consolidation wave. Having eight different e-scooter companies in Stockholm much longer is unlikely. Just this week, one of the market leaders, Voi, announced it’s cutting staff at its head office. The competitor Bird has — since its SPAC listing in November last year — lost over 93 percent of its market value. There will be acquisitions, mergers — and surely a bankruptcy or two.

The funding crisis is most visible among the biggest companies. When the stock market’s valuations set the benchmark, it’s the companies closest to a potential IPO that get hit first.

Brand-new companies that need capital probably have seven to ten years ahead of them before they reach that kind of size, and the market may well have turned again by then. The smaller you are, the less you feel this crisis.

For the somewhat larger companies, timelines get stretched. Blitzscaling is expensive to execute, but it often works in the sense that development happens fast. If the financing for that isn’t there, you have to choose an alternative, probably slower, path forward.

It may therefore take considerably longer to become a unicorn — a company valued at over a billion dollars — now than a few years ago. The next Klarna may well lie a fair distance into the future.

Look one step further back, before companies are even founded, and the sentiment may shift too. Entrepreneurship as a career choice looks different in a downturn, and probably attracts fewer people.

As company valuations fall, more option programs become worthless. The money that previously flowed to startup employees was in part invested in new, smaller companies. The total pool of money for early-stage startups is likely to shrink, and starting a new company may become harder than it was a couple of years ago.

A more positive reading is that the companies being built now will be more resilient. Founders have to choose business ideas that don’t only work in a world of low interest rates. You’re forced to chart a path to more independent financing — and to prioritise it — from day one. You know, the way ordinary companies have always had to do?

A funding crisis is hard to live through, but for the next generation of unicorns it may turn out to be the best thing that ever happened.

Just How Bad Things Are at Klarna

June 17, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on June 17th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Klarna’s valuation is reportedly collapsing in the increasingly tough climate for tech companies. But what does that actually mean for the company? SvD’s tech analyst Björn Jeffery explains.

What is going on at Klarna?

Klarna is a company that has been saddled with large losses since 2019. As growth has accelerated, losses have ballooned, because investments and an appetite for more risk have contributed to high costs. This is not unique to Klarna — it was a common strategy for tech companies until late 2021, when the market started to wobble. When the stock market — and particularly listed companies in similar businesses, like Affirm — began to fall, the world’s interest in growth quickly swapped for lower risk and profitability.

A shift like that takes time, and has to be financed along the way. It’s in this process that the Wall Street Journal now reports Klarna is considering accepting a valuation of around $15 billion (roughly SEK 153 billion) — significantly lower than the $45.6 billion the last investment round valued the company at in 2021. The year before that, in 2020, the valuation was just over $10 billion, which clearly illustrates how fast things have moved up. By comparison, Affirm’s market cap has fallen more than 82 percent since the start of the year.

What does this mean for the company and its employees?

Taking in money at a lower valuation than before is complicated for several reasons. The valuation affects the staff’s option programs, and it’s possible that several of them will now be worthless. That would mean Klarna’s employees receive significantly lower compensation than originally expected. In similar situations at a company like Amazon, staff have been compensated in other ways — but that too can be costly.

Dissatisfaction can also spread among existing shareholders, who now watch their ownership stake drop in value. As part of accepting a lower valuation, tougher demands may be set on costs, which can lead to layoffs — something Klarna has already started to do.

How serious is it really?

Klarna’s formal name is “Klarna Bank AB”, and seen as a bank they have some challenges ahead. Cash flow in their latest quarter was minus SEK 7.3 billion and credit losses topped SEK 1.1 billion.

Laying off staff may be necessary to appease certain investors, but it’s not personnel costs that primarily drive the losses in the business.

Now, Klarna is a different kind of bank than, say, Handelsbanken or Swedbank, so a direct comparison isn’t entirely relevant. But the reported valuation may suggest that there are question marks around the value of the core business — even with a slimmer cost base and lower growth ambitions.

What happens now?

Klarna’s management and owners need to decide how they want the business to be financed going forward. A new investment at a lower valuation is a big decision, but may be necessary to keep the business running. Interest in investing in Klarna has historically been very high, so this is primarily about the valuation. Depending on the demands from new and existing shareholders, they may also need to cut costs further or lower growth ambitions.

If I shop at Klarna, or have my savings there, do I need to worry?

Because Klarna is a bank it’s covered by the government deposit guarantee, just like the other Swedish banks. Klarna going bankrupt is very unlikely. So there’s no reason to worry about your savings there at present.

Why Your Instagram Feed Has Changed

June 13, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on June 13th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Suddenly seeing a lot of ads in your Instagram feed? It’s no coincidence. The photo app has become Mark Zuckerberg’s main weapon to turn the bad times around — and to take the fight to TikTok.

“The current plan is for Instagram to exist outside of Facebook for a long time to come,” Kevin Systrom said from a conference stage in Paris in 2012.

Systrom was one of Instagram’s co-founders, and had recently become financially independent. The deal — in which Systrom sold his photo app to Facebook for a billion dollars — had closed less than three months earlier. But what would happen now, on the inside of the social media giant?

For Systrom himself, the model he advocated was clear. “YouTube continued to be a separate product at Google,” he said. He had worked there himself and seen how the video service got to live its own life when it came to product decisions, offices and company culture. People who work at YouTube still feel like employees there — and not of the mothership Google, later renamed Alphabet.

Ten years later, one can note that the comparison didn’t hold up particularly well. YouTube has remained independent, but Instagram is very much woven into Meta, Facebook’s parent company. Both founders, Kevin Systrom and Mike Krieger, left the company several years ago after a conflict about precisely this.

Rather than being an independent satellite in the organisation, Instagram has become one of Meta’s strongest cards to play in trying to reverse the recent trend. Meta has been under heavy pressure on the market — the stock is down more than 45 percent this year — and, for the first time in a long while, faces tough competition from Chinese ByteDance and its video service TikTok.

What does that have to do with the ads and suggested content you might suddenly see appearing all over your Instagram feed? You get the picture when you listen to Meta’s outgoing chief operating officer, Sheryl Sandberg. During the Q&A with analysts on the most recent quarterly report, she said that “monetisation of stories continues to grow on both Facebook and Instagram. And with reels growing quickly, there’s also a big opportunity as we get better at monetising short-form video.”

Better monetisation for Meta usually means more ads for you.

Especially in the more video-heavy features of Instagram, the ones called “stories” and “reels”. And the fact that video is where the bets are being placed is no accident.

Reels — which exist on both Instagram and Facebook — is a feature with video in vertical format, where you scroll video by video. Sound familiar? It’s a near-identical clone of TikTok. At first glance it’s almost impossible to tell which service is which. And that, of course, is the point. Why switch to TikTok when Meta can bring a similar service to you — directly inside Instagram?

But changing Instagram’s user experience hasn’t been popular with everyone. On social media, complaints are spreading about the sheer volume of ads and how the photo app people once loved has been turned into something else entirely.

The question is what other choice Meta’s CEO, Mark Zuckerberg, has. There’s a straight line from your experience inside the app to Meta’s ad revenue.

Logical, but maybe not always desirable for every user.

The risk Meta now runs is annoying and losing the users it had to begin with. Even before its TikTok problems, Instagram was a huge traffic driver and an ad machine. It also solved Meta’s demographic problem, by being a separate product aimed more at younger users than the traditional blue app.

Messing with something this successful is risky. More than anything, it says something about the seriousness of the situation Meta finds itself in.

Apple Pay Later — The Last Thing Klarna Needed Right Now

June 7, 2022
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on June 7th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

The advantage of being a tech giant is on full display now that Apple, in a single move, risks turning all of Klarna’s business into just one feature among many.

Every year in June, Apple holds its conference for software developers. It’s called WWDC — Worldwide Developers Conference — and it’s meant for everyone building applications for Apple’s various platforms.

It’s usually a festive occasion at which the otherwise secretive company opens up and talks to the outside world. But there’s always a certain fear that Apple will do what it has done so many times before — take an idea from developers and make it its own. Which usually means your project is doomed.

The process is known as getting “sherlocked”. It’s named after Apple expanding its then-search tool, Sherlock, to include essentially everything the developer Dan Wood had built in his own search product “Watson”. Wood’s app was now worthless. Who would buy software that did the same thing as what Apple was giving away for free?

That was 2002. Exactly 20 years later, it’s Klarna’s turn to be sherlocked. Or at least to get a taste of what it might feel like.

During the keynote on Monday, Apple launched a new product called “Apple Pay Later”. A clear nod to the phenomenon known as BNPL, short for “buy now, pay later”. The launch was expected, but the listed BNPL company Affirm still dropped 5 percent immediately after the news.

But the hit probably landed hardest on Klarna — the market leader in the segment.

Apple Pay Later is launching this autumn, and only in the US to begin with. The service isn’t an immediate threat to Klarna. It will take time for Apple to build both customer awareness and usage, and the market is large and probably far from saturated. Klarna, meanwhile, is available in twenty countries and has an established customer base among both consumers and merchants. The Swedish BNPL giant isn’t about to lose all its customers overnight to Apple — not by a long shot.

The problems are on another level. Klarna has already been squeezed by tougher market conditions, and has been forced to lay off up to ten percent of its staff. The company is also in the process of raising more money from investors, and media reports indicate the valuation is down around 30 percent.

All of this happened before Klarna had to compete with one of the world’s largest and most cash-rich companies. Apple’s definitive entry into this market will make tough conversations with investors even tougher.

Competing with the biggest tech companies is notoriously hard. Their core businesses are so strong they can afford to make bets that lose money for many years. Or simply to keep the existing business intact. Amazon, for instance, has spent billions on its video service Prime Video, which is an add-on to its popular subscription service Prime. But they compete directly with Netflix, whose video service is its only business. Amazon can afford to do things Netflix can’t. And that’s the risk Klarna now faces.

Apple doesn’t need to take Klarna’s customers to become a problem. It’s enough for Apple to subsidise with better terms for a few years to erode margins across the industry. Apple can afford to buy market share for a long time while it builds up its service. And it can roll the service out to all partners that already support its existing payments service, Apple Pay. And who has been one of Apple Pay’s partners? Klarna itself. But biting the hand that feeds you is less of a problem when you’re Apple’s size and wield Apple’s influence.

The BNPL trend is probably here to stay, and Apple’s entry will accelerate it. That can actually benefit Klarna. But history shows that when your core business becomes just one feature among many at the big tech companies, competing gets much harder. And the looming threat was the last thing Klarna needed right now.