Forget Klarna? Investors bet new startups will in ‘buy now, pay

With hype over the “buy now, pay later” trend fading, some investors are betting they’ve found the next big thing.

Buy now, pay later companies like Klarna and Affirm, which let shoppers defer payments to a later date or break up purchases into interest-free installments, are under immense strain as consumers become more wary about spending due to the rising cost of living, and as higher interest rates push up borrowing costs. They’re also facing increased competition, with tech giant Apple entering the ring with its own BNPL offering.

But venture capitalists are betting a new breed of startups from Europe will be the real winners in the space. Companies like Mondu, Hokodo and Billie have raked in heaps of cash from investors with a simple pitch: businesses — not consumers — are a more lucrative clientele for the buy now, pay later trend.

“There’s a big opportunity out there with regards to ‘buy now, pay later’ for the B2B [business-to-business] space,” said Malte Huffman, co-CEO of Mondu, a Berlin-based startup.

Huffman, whose firm recently raised $43 million in funding from investors including Silicon Valley billionaire Peter Thiel’s Valar Ventures, predicts the market for BNPL in B2B transactions in Europe and the U.S. will reach $200 billion over the next few years.

Whereas services like Klarna extend credit for consumer purchases — say, a new pair of jeans or a flashy speaker system — B2B BNPL firms aim to settle transactions between businesses. It’s different to some other existing forms of short-term finance like working capital loans, which cover firms’ everyday operational costs, and invoice factoring, where a company sells all, or part, of a bill to their customer for faster access to the cash they’re owed.

Patrick Norris, a general partner at private equity firm Notion Capital, said the market for B2B BNPL was “much bigger” than that of business-to-consumer, or B2C. Notion recently led a $40 million investment in Hokodo, a B2B BNPL firm based in the U.K.

“The average basket size in B2B is much larger than the average consumer basket,” Norris said, adding this makes it easier for firms to generate revenue and achieve scale.

Shares of major consumer-focused BNPL players have fallen sharply in 2022 as concerns about a potential recession weigh on the sector.

Sweden’s Klarna is in talks to raise funds at a sharp discount to its last valuation, according to a report from the Wall Street Journal  — down to $15 billion from $46 billion in 2021. A Klarna spokesperson said the…