Until early 2021, loose monetary policy prevailed for more than a decade as the central bank battled deflationary forces. Like any central bank or government action, it incentivized certain behavior in financial markets.

These policies (and the combination of weak economic growth) led to severe overvaluations in technology and growth stocks. Bull markets also breed complacency and lead to incorrect assumptions about risk. Currently, many investors and funds are learning about the risks of inflation and sharp rate increases to combat it.

Another consequence of loose monetary policy and the sky-high valuations it helped foster, was more investing in private tech markets where there was less regulation, more opaqueness, and increased uncertainty about future prospects.

Many fund managers with large AUM (like Tiger Global) eagerly dived into private tech investing and drove up valuations even higher. For these managers, another benefit of these types of investments is that since markets are less liquid, they have more latitude when it comes to valuing them. Compare this to public companies whose values can be found by anyone and are constantly changing.

However, reality can only be evaded for so long as these private tech companies are reliant on outside capital even as many look to cut costs and prioritize boosting cash flow at the expense of growth. This means they must face some sort of market discipline.

Klarna Down Round

We are starting to see this in the latest round of fundraising. For example, Klarna raised more than $1 billion at a valuation of $45 billion last year. It recently raised a few hundred million at a valuation of $6.5 billion. This is an extreme example, but Klarna is following the same path as other 'buy now pay later' (BNPL) stocks like Affirm (AFRM  ) which are down by a similar magnitude.

Most other private tech companies are seeing valuation cuts between 30% and 60%. This isn't as significant, but it still speaks to the same issues. BNPL was always a shaky proposition, and it's likely only to get worse in an inflationary, potentially recessionary environment.