Even Stripe Isn’t Immune to Falling Valuations
Zip & Sezzle Scrap Merger, Openpay Exits US, Klarna Defends Lower Valuation, Celsius Bankruptcy, OppFi "Rent-a-Bank" Case Continues
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Even Stripe Isn’t Immune to Falling Valuations; Company Cuts “Internal” Valuation Used to Price Employee Options
Stripe, often thought of as the ultimate fintech success story, isn’t immune to the wider market and macroeconomic turmoil.
The company has reportedly cut its “internal valuation” by 28% compared to its last fundraising round, which saw the payments giant valued at $95 billion. Still, a 28% haircut pales in comparison to many public market fintechs, some of which have seen their valuations drop by more than 90%.
Paypal, a commonly used public market comp for Stripe, is off by over 60% since the start of the year.
But be cautious about reading too much into the news. The “internal valuation” refers to the results of a 409A valuation — a process run by outside consultants used to establish the price of common shares, primarily for the purpose of setting the strike price of options granted to employees.
Venture firm a16z describes the importance of the 409A process:
“In order to structure stock option grants as tax-free events to your employees, you need to prove what you calculated as the fair market value of your common stock is reasonable, otherwise known as ‘safe harbor.’
The easiest and most common way to ensure 409A safe harbor is to have a qualified, independent valuation provider conduct the 409A analysis. A good analogy here is when your mortgage lender uses an appraiser to figure out how much your house is worth: They don’t want to know what you think since you’re biased – they want the value determined by someone who can give them a dispassionate, arm’s-length assessment.”
The 409A “internal” valuation is correlated with but ultimately distinct from the price set by selling preferred shares to investors. Because the 409A is used to price employee options, it gives companies an incentive to set a lower valuation, if and when defensible.
BNPL Update: Sezzle/Zip Scrap Merger; Openpay Exits the US; Klarna CEO Defends Lower Valuation
It’s no secret that it has been hard times across the buy now, pay later landscape.
The pandemic darlings have seen some of the trends that powered customer (and investor) enthusiasm reverse: globally, the share of purchases made online, which spiked dramatically in the early days of the pandemic, has dropped (though remains elevated.) Consumer spending has swung back from goods towards services as the pandemic has ebbed.
In a quest for continued growth, BNPL providers have pursued distribution channels beyond direct merchant integrations, including browser extensions and physical payment cards that enable customers to use BNPL at any merchant, in person or online.
But BNPL providers have sacrificed unit economics as they’ve pursued new distribution models. Without a direct integration with a merchant, providers collect only the standard interchange associated with a given transaction.
The hunt for replacement sources of revenue is beginning to erode the original appeal of buy now, pay later. For instance, Klarna’s physical card offering in the US, currently in an invite-only beta, is free for the first 12 months, but then carries a ~$48 per year “membership” fee.
Not to mention the impacts of the deteriorating macro environment on the economics of BNPL. Non-bank lenders like Upstart are already feeling the effects of funding constraints. BNPL providers, particularly those that provide longer-term financing in addition to pay-in-four, are feeling the pinch as well, as funding costs rise.
Rising prices and interest rates are also likely to impact borrowers’ overall ability to repay — particularly those more inclined to use BNPL financing. It remains to be seen where BNPL will fall in borrowers’ repayment hierarchies if and when their obligations exceed their income.
Klarna Confirms $800 Million Fundraise at Sharply Lower Valuation; Will Continue Focus on US Market
After weeks of rumors about the company’s fundraising efforts, Klarna has confirmed it has raised a fresh $800 million at a $6.7 billion post-money valuation.
In the announcement and on Twitter, Klarna CEO Sebastian Siemiatkowski defended the company, pointing out the current environment is extremely challenging and Klarna’s public market comps are down as much as 90% —
Siemiatkowski also pointed out Klarna only offers common shares to investors, unlike American startups, which typically sell preferred shares to VC investors.
Although Klarna’s valuation is down substantially from its ~$46 billion peak, it remains significantly above where the company was at the end of 2018:
Michael Moritz, partner at Klarna investor Sequoia, also defended the company’s prospects (emphasis added):
“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. The irony is that Klarna’s business, its position in various markets and its popularity with consumers and merchants are all stronger than at any time since Sequoia first invested in 2010. Eventually, after investors emerge from their bunkers, the stocks of Klarna and other first-rate companies will receive the attention they deserve.”
Reports indicated a key element of debate as Klarna sought to raise funds was whether or not the company should trim costs by reining in its ambitions in the US.
It looks like the pro-US contingent won the argument, as much of the new financing is earmarked for the American market, according to the release (emphasis added):
“The financing attracted strong support from both existing and new investors and will primarily be used to expand Klarna’s leading market position in the United States.”
Openpay Retreats from US Market
Australia-based BNPL provider Openpay is quitting the US market, just eight months after going live in the country. As recently as four months ago, the company described the US as its main growth market.
But chasing that growth came at a high price. According to Reuters, investment in its American ambitions caused Openpay’s losses to grow by 65% in the first half of 2022.
Openpay had been seeking an investor to support its US growth, but, in the current climate, it seems the company had no takers. Absent an infusion of outside capital, Openpay chose to shut down the initiative.
Zip and Sezzle Scrap Merger Plans
There’s general consensus that the larger BNPL players, like Klarna and Affirm, are best positioned to survive the rapidly changing economic climate.
In an effort to ‘bulk up,’ smaller players Zip and Sezzle had planned to merge. But now the deal, announced back in February, is off.
Citing “current macroeconomic and market conditions,” the companies mutually agreed to terminate the deal.
Zip chairperson Diane Smith-Gander defended the decision, telling the Australian Securities Exchange doing so would enable Zip to focus on its “strategy and core business”:
“We believe that mutually terminating the merger agreement with Sezzle at this time is in the best interests of Zip and its shareholders, and will allow Zip to focus on its strategy and core business in the current environment.”
OppFi’s Battle with California Regulator Over “Rent-a-Bank” Continues
Last week, California’s Department for Financial Protection and Innovation (DFPI), the state’s banking regulator, made its latest filing in the ongoing dispute over OppFi’s activities in the state.
The tl;dr is that OppFi, together with Utah-based bank partner FinWise, is originating loans at APRs up to 160% in California. California is arguing that OppFi is the “true lender” and thus in violation of the state’s usury cap.
OppFi rejects that argument, instead arguing it is a service provider to its bank partner, which is legally entitled to write loans up to the interest rate cap in its home state of Utah (twist: Utah doesn’t actually specify a maximum interest rate, though it prohibits “unconscionable” terms in a consumer credit agreement.)
California DFPI’s latest filing details the agency’s opposition to OppFi’s demurrer, which asked the court to block the DFPI’s attempt to apply California usury law to the loans in question.
According to JDSupra’s analysis of the DFPI filing (emphasis added):
“[T]he DFPI cites various authorities in support of its assertion that for more than a century, ‘California law has recognized the principle of looking at substance over form in evaluating usury claims and does not permit evasion of usury laws through disguise or subterfuge.’
It also cites cases from other courts, including a California federal district court’s decision in CashCall, that have used a ‘true lender’ analysis to uphold usury challenges.”
Celsius Files for Bankruptcy; State Regulators Urge Caution, Suggest Impacted Users File Complaints
Crypto shadow bank Celsius has filed for Chapter 11 protection in a New York bankruptcy court. The filing reveals assets of $4.3 billion vs. liabilities of $5.5 billion — a shortfall of about $1.2 billion that will be primarily borne by Celsius’ retail users.
Even the claim of $4.3 billion is an optimistic one, as it includes a purported $600 million in its own (likely worthless) CEL token and $467 million worth of illiquid “staked eth,” among other questionable assets.
While Celsius owes money to institutional creditors, including $12.8 million to Sam Bankman-Fried’s Alameda Research, $4.7 billion of its liabilities are attributable to Celsius’ retail users.
Celsius founder and CEO Alex Mashinsky blamed the losses and resulting insolvency on “unanticipated” losses (aren’t they all?) and “poor” investments. In the filing, Mashinksy says:
“The amount of digital assets on [Celsius’s] platform grew faster than the company was prepared to deploy. As a result, the company made what, in hindsight, proved to be certain poor asset deployment decisions.”
While the ongoing chaos has revealed how the crypto ecosystem, which many tout as “decentralized,” has deep and often opaque interlinkages, the fallout, so far, hasn’t spread to the traditional financial system.
Regulators around the world have stepped up calls for increased oversight of the sector, as the collapse of Terra metastasized and contributed to the failure of hedge fund Three Arrows Capital (whose founders have now vanished) and led to numerous shadow crypto banks freezing user withdrawals or collapsing altogether, including Celsius, Voyager, Babel, Vauld, CoinFLEX, and others.
While it’s easy to look at the collapse of hedge funds like Three Arrows or platforms like Celsius and assume it’s only VCs and crypto billionaires getting hurt, there are plenty of retail users who are likely to be wiped out. Many of them had no idea what they were investing in and thought their funds were safe.
Celsius, for instance, offered retail users a 17% yield, while claiming it was “better” than banks. Its CEO famously said, “We are actually safer than most banks,” in a 2020 interview.
The fallout for Celsius’ customers, however, is real, with one even posting on Reddit that they had lost their entire life savings and were contemplating suicide:
State Regulators Weigh In
Multiple state regulators have weighed in as the crypto crisis has deepened.
The California DFPI, which has been investigating multiple companies that offer “crypto interest accounts,” posted a statement, which reads in part (emphasis added):
“Due to market conditions, some of these companies are preventing customers from withdrawing from and transferring between their accounts.
The Department warns California consumers and investors that many crypto-interest account providers may not have adequately disclosed risks customers face when they deposit crypto assets onto these platforms. Crypto-interest account providers are not governed by the same rules and protections as banks and credit unions, which are required to have deposit insurance…
The Department is investigating whether other crypto-interest account providers are violating laws under the Department’s jurisdiction.
Consumers are encouraged to exercise extreme caution before responding to any solicitation offering investment or financial services. California customers of crypto-interest account providers that have slowed or paused withdrawals or transfers of crypto assets should contact the Department for questions or inquiries…”
Vermont’s Department of Financial Regulation called out Celsius by name, speculating that it is ‘deeply insolvent’ (emphasis added):
“The Department believes Celsius is deeply insolvent and lacks the assets and liquidity to honor its obligations to account holders and other creditors. Celsius deployed customer assets in a variety of risky and illiquid investments, trading, and lending activities.
Celsius compounded these risks by using customer assets as collateral for additional borrowing to pursue leveraged investment strategies. Additionally, some of the assets held by Celsius are illiquid, meaning they may be difficult to sell, and a sale may result in financial losses. The company’s assets and investments are probably inadequate to cover its outstanding obligations.”
CB Insights: State of Venture Report
Last week, CB Insights dropped its State of Venture report, with some 329 pages of detailed analysis of the global VC environment. According to the company:
“Global venture funding saw $108.5B raised across 7,651 deals last quarter — marking the biggest quarterly percentage drop in deals (and the second-largest drop in funding) in a decade. Despite this eye-opening decline, funding and deal totals remain above levels last seen in 2020.”
Fintech, which famously accounted for one of every five VC dollars at one point last year, hasn’t been immune, though the size of its correction varies by region:
Other Good Reads
Embedded Finance Misses the Point (Fintech Takes)
The Great Unwind (Net Interest)
Listen: What the F— is the Metaverse? (Offline)
Listen: The strategy behind Revolut's merchant acquiring and paytech growth (Fintech Blueprint with Simon Taylor)
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