BNPL Startup Valuation: How Much is Your Company Worth?

Fintech Valuations and the Atlanta Tech Scene

Welcome to this week’s edition of The Exchange. Today, we’ll be analyzing recent developments in fintech valuations, specifically concerning the 'buy now, pay later' (BNPL) sector. We will also be taking a look at the growing tech landscape in Atlanta.

BNPL Acquisitions: PayPal and Square Lead the Way

The recent announcement of PayPal’s intention to acquire the Japanese startup Paidy represents the second significant acquisition of a BNPL company this year. This follows Square’s earlier, even larger, acquisition of the Australian BNPL provider, Afterpay.

These multi-billion dollar transactions demonstrate a clear market validation of the value inherent in the business models developed by BNPL startups. Established fintech giants are demonstrably willing to invest substantial capital to secure their revenue streams and potential strategic advantages.

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Comparative Analysis of BNPL Valuations

As both the Square-Afterpay and PayPal-Paidy deals occurred in 2021, they offer valuable comparative data points for assessing the valuation of BNPL companies operating at a substantial scale. Furthermore, both acquiring companies disclosed certain details regarding these transactions to their investors, enabling a more detailed analysis.

We will now perform some calculations to determine the price per unit of transaction volume that PayPal and Square investors are paying. Subsequently, we will examine Affirm’s valuation using a similar methodology. Finally, we’ll investigate Klarna’s financial figures to identify any relevant insights.

Determining Price Floors and Ceilings

Our primary objective is to ascertain the price range – the potential floor and ceiling – implied by the Paidy and Afterpay acquisitions. We will then evaluate whether other companies within the BNPL space are aligning with these figures, and explore the underlying reasons for any discrepancies. This analysis promises to be insightful.

Understanding these valuation dynamics is crucial for investors and industry observers alike. Transaction volume is a key metric in assessing the worth of these rapidly evolving fintech companies.

Looking Ahead

The BNPL market continues to evolve rapidly, and these acquisitions signal a period of consolidation. Further analysis of key financial indicators will be essential to navigate this changing landscape.

Valuing Buy Now, Pay Later (BNPL) GMV: A Comparative Analysis

Square’s acquisition of Afterpay, valued at approximately $29 billion, highlights the significant worth placed on gross merchandise volume (GMV) within the Buy Now, Pay Later (BNPL) sector. This substantial investment underscores the considerable scale Afterpay achieves in transaction volume.

According to an investor presentation, Afterpay processed $15.8 billion in GMV during its fiscal year 2021, concluding on June 30, 2021. This relatively recent data allows for a straightforward calculation: Square is paying around $1.84 for each dollar of Afterpay’s GMV. However, this figure is subject to change as the deal’s finalization is still pending, and Afterpay’s GMV is expected to increase before closure, potentially lowering the effective cost per GMV dollar.

PayPal’s acquisition of Paidy, at around $2.7 billion, represents a smaller transaction. Paidy’s GMV run rate, as of July, was $1.5 billion. This translates to an acquisition price of $1.80 per dollar of Paidy BNPL GMV.

Interestingly, this valuation is remarkably similar to the Square-Afterpay deal. It’s important to note that the Afterpay valuation utilized trailing GMV, a more conservative metric, while the Paidy figure is a run-rate projection. Adjusting the Afterpay calculation to a July run rate would likely reveal a lower cost per GMV dollar, indicating the Afterpay deal is, in fact, slightly more economical.

This difference aligns with the expectation that smaller companies generally exhibit faster percentage growth rates. Given Paidy’s potentially more rapid GMV growth compared to Afterpay, a slight premium in its acquisition price is justifiable, assuming all other factors are equal.

Considering Affirm, recent market fluctuations place its value at $29.44 billion. The company reported $2.5 billion in GMV for its calendar Q2 (fiscal Q4 2021), resulting in a $10 billion GMV run rate and a valuation of $2.94 per dollar of GMV serviced.

Affirm, similar to Afterpay, is experiencing substantial growth. Specifically:

Between June 30, 2020, and June 30, 2021, Afterpay’s GMV increased by 113.5%. This growth rate is comparable to Affirm’s, leading to Affirm being valued higher than the benchmarks established by the Afterpay and Paidy acquisitions.

Examining Klarna, the company’s latest interim report shows $20 billion in GMV during Q2 2021, a 66.67% increase from $12 billion in the same quarter of the previous year. This places Klarna on an $80 billion GMV run rate, with a valuation of $45.6 billion, equating to 57 cents per dollar of GMV run rate.

Klarna’s slower percentage GMV growth, compared to the other companies analyzed—with the exception of Paidy, for which comparable data is unavailable—may explain this lower valuation.

In summary, a range of BNPL GMV multiples exists:

• Klarna: Valued lower, potentially due to slower growth and its status as a European startup.
• Paidy & Afterpay: Represent mid-range GMV run-rate multiples, despite differing transaction volumes.
• Affirm: Commands a higher valuation, possibly influenced by its U.S. market focus and its collaboration with Amazon.

Investors may be factoring in the potential for Affirm’s Amazon partnership to significantly expand its market reach. However, BNPL companies can reasonably use the $1.80 per dollar of GMV run-rate metric from the Paidy and Afterpay deals as a benchmark for valuation, provided they demonstrate strong growth.

Affirm’s case also suggests that securing strategic partnerships capable of accelerating market penetration can justify higher multiples.

While no comparison is entirely perfect, the Paidy and Afterpay transactions provide valuable insights into the potential exit valuations for high-growth BNPL startups and the worth of their lending volume.