Interview: from Burger King to boardroom, how Klarna became a payments giant
Hypergrowth is a word often used in a startup context. For Klarna, it’s justified: founded in 2005, this year it expects to handle more than 2 billion € in payments. It employs 800 people, and serves about 8 million end customers and 15 000 merchants in northern and western Europe. And it all started when two friends – Niklas Adalberth and Sebastian Siemiatkowsky – were flipping burgers at Burger King in Sweden.
Niklas, today the deputy CEO at Klarna, talks to Whiteboard about entrepreneurial lessons learned on the road from Burger King to boardroom.
Niklas Adalberth: “Sebastian Siemiatkowski and I met each other in 7th grade, and we became friends. Later, I got to know him even better when we worked together at Burger King. In in 2002, we decided to go on a world trip together before Sebastian would start his masters.”
“Our plan was to travel around the world without using air travel. We got all the way to Australia, but there we missed the boat across the Pacific. We either had to take a plane, or just postpone our return and go on with our trip. We chose to postpone our trip home, and when we got back to Sweden, Sebastian basically had to take a year off studying – waiting for him to enter his master’s. This was the immediately after the dotcom bubble burst – there was hardly any work. He ended up doing telesales, and that’s where the idea for Klarna was born.”
“He worked for a debt collection agency, and from e-commerces, he always heard the same thing: we’re going to stop selling on invoices, because we don’t get paid. There’s too much credit loss. They told Sebastian: if you guys can take the risk, we’ll let you handle the transactions. He took that idea to his company, but they weren’t interested.”
“Sebastian quit his job and entered the Stockholm School of Economics, together with me and Viktor (Jacobsson), the other founder. And when he presented that idea to me and Victor Jacobsson, we all thought a solution for this would be a great business idea, so we decided to try it for six months, and make a business out of it.”
Did any of you have an entrepreneurial background?
Niklas Adalberth: No, not at all. When you enter the Stockholm School of Economics, you basically expect to go working at Goldman Sachs or McKinsey (laughs), which was our plan too. But the opportunity to start a company was very enticing, especially because the school’s incubator also told us that it was very interesting. It felt stupid not to try it. We just had to give it a shot. ”
“The problem we faced was: we were three students, we had no money whatsoever, and no tech knowledge either. I mean, I did some homepages when I was younger, but no hardcore programming. We needed money and tech, which was hard to find. There was no commercial solution out there solving our need. But then at a network event we came across Jane Walerud, a famous angel investor in Sweden, who had had a bunch of successful exits. And she said: I have the perfect tech team to build your platform. Three weeks later, she gave us 60 000 € seed money for 10 % of the company and 5 techies to build our platform in exchange for 37 % of the company.”
That’s quite a stake you had to give up so early.
Niklas Adalberth: “Yes. It was a tough decision, but we realised that we wanted to build something big. And we needed to give a lot of shares to enable it. Actually we were cash flow positive before we even burned half the 60k. We were profitable from 2006 onwards. So we could actually have done it with less money.”
It sounds like it was smooth sailing from the start, which it never is, of course.
Niklas Adalberth: “No, there are challenges and failures every day. It’s all about realising your mistakes early enough – and not making the same mistakes over and over.”
Did you ever make a mistake that you thought might sink the company?
Niklas Adalberth: “Eh, there was a pretty big misunderstanding with the tech guys. We thought they would stay forever, whereas they interpreted our agreement as: “we’ll build the initial platform for you”. They left us after 9 months – with all their shares vested.”
“It wasn’t that anybody got into it with bad intentions, it was just a misunderstanding. And I don’t think it was a mistake to get them on board. They are the top in Sweden, maybe even worldwide. We were able to build stuff faster than anyone else could. And they had the good idea to build Klarna in ERLANG, a language that scales great – Facebook uses it for its chat appliction. So while I would of course prefer to have them still working here, we wouldn’t be where we are today without them.”
“Although with the benefit of hindsight, of course, I would have stipulated that differently. Fortunately, they did do a smooth handover, and we recovered from that – thanks to our cash flow, we were able to scale up our engineering department one by one. It’s now about 200 engineers strong.”
As you described it, Klarna sounds like a factoring model – did you make any fundamental changes to the business model since the start?
Niklas Adalberth: “No. It is in fact a factoring model, adapted to e-commerce. The initial idea was that people would use the service to mitigate the risk of the transaction. Both the merchant and the customer benefit from it: the customer only pays once he took delivery of the goods he bought. You place the order, get the stuff, feel it, and only 14 days later you pay.”
“It’s the absolute safest way to do a transaction online. And it increases sales like crazy: it increases conversions for e-commerce by about 20 to 25 percent, which is a huge difference for adding a payment option. It actually sells itself (laughs).”
“Later, we added the option of selling on payment plans. That’s one benefit that brick and mortar shops have over e-commerce: the payment plans that allow you to pay in 24 months, or “buy now, pay in 2013”. Online, that’s just too complex. You have to place an order, wait in the snail mail for the paperwork, sign it, get approval and only then does the product get shipped.”
“It just didn’t work for e-commerce. So now with Klarna, e-commerce merchants sell 10 percent of their goods in this way. Which is huge compared to how much they sold when they tried this with traditional banks. They can ship the products instantly, and we take care of the payments afterwards.”
So essentially, Klarna offers a quick and thorough credit assessment?
Niklas Adalberth: “Yes, that’s the core and the heart of our company. We use about 140 variables to determine the risk of non-payment.”
“There’s a big difference in risk between a sale at 3 in the morning versus at 3 in the afternoon. A big advantage for us versus other payment solutions: we can see what you are buying – Paypal and American Express can’t. But the product that you’re buying does have big impact on the risk. For instance, we found that if you buy the latest book from the Nobel Peace Prize winner, there is no credit risk at all. Books about beer: high risk (laughs).”
Do you also offer payments in bricks and mortar shops?
Niklas Adalberth: “A few, but it doesn’t make much sense. It’s really made to make you feel safe to buy online. Offline, you already feel safe making the purchase, because you’re holding the products. Also, for any credit or payment plan, you can just sign a paper. Klarna doesn’t offer the same benefits online as offline.”
Klarna grew explosively the last 6 years. What would you say were your biggest mistakes along the way?
Niklas Adalberth: “Probably, like most European startups: expanding to the countries closest to you. We expanded in Norway first, and Finland and Denmark. We should have gone to Germany directly. Expansion is always complicated – but in Germany, the potential is about 100 times bigger than in small markets.”
“And, since we are in tech, I do wish some of us had learned programming. It makes it so much easier to talk to the engineers. We really should have done that.”
“Also, when we started, we only hired for attitude. We thought: well, we’re 23 and we can do this, so we’ll hire other 23 year-olds and they’ll manage too. I think we might have hired people who were too junior. Nowadays, we hire for attitude and experience.”
You said you were cash flow positive from the first year, but you did do additional financing rounds later on.
Niklas Adalberth: “Correct. Our last round was with DST and General Atlantic, and we raised 155 million $. That was a Series C, before that we had done rounds of 1,5 million with Oresund and 15 million with Sequoia.”
Why not grow organically?
Niklas Adalberth: “Oh, maybe because the Klarna founders have low self esteem and really wanted to conquer the world – we wanted to do something big (laughs).”
“Also, when we started offering a payment plan product, we had to loan out money for 14 months. That has a bigger implication on the balance sheet.”
What’s next for Klarna?
Niklas Adalberth: “Now, we’re expanding to more countries. If you want to become attractive to very large merchants, you have to be active in more markets. We’ll probably focus on Europe, however. In the US, people feel very safe paying with their credit card. In the US, our unique selling proposition can be that we’re easier and faster. In Europe, we can add “safer” to that. That makes our solution easier to sell in Europe.
Would you say that consumers feeling safer with online shopping can become a strategic threat to Klarna?
Niklas Adalberth: “No, I don’t think so. If you’re able to choose, you’ll always prefer to get the goods first, before you send the money. That’s a behavior that will increase when people do more cross border shopping. Our vision is that one day, you can buy direct from a small manufacturer in India selling carpets online, safe in the knowledge that you’ll receive your goods. We can help erase barriers across the world.”
“And it’s so much simpeler to buy from us: you just supply a name, address, date of birth. That’s it. Your shipping address and consumer data, we already have. That’s where we see potential in the US: we can offer an even simpler checkout process than one click buying. The advantage with Klarna is that we own the entire payment stack – we’re not based on Visa or MasterCard. We are our own standard, and not a fraction of the payment process. If you look at Square: they’re basically just a simplified onboarding option to existing payment solutions. They can do only that much change.”
Their valuation is based on a pretty interface?
Niklas Adalberth: “Kind of. Since they do only a fraction of the payment, they can only charge that much, because they have to split the revenue with Visa. That’s also why they communicate so much about the data and the other services that they will offer: because there’s not enough money in their initial business idea.
Square is obviously working towards an IPO – how about Klarna?
Niklas Adalberth: “No, not at all. We’re in 7 markets now. I want to be in 70 markets before I’m done with Klarna. The growth is very challenging, of course, but it’s also very fun. There’s no reason to do an IPO. We’re just getting started.”
You’ve gone from Burger King to the boardroom: have you changed much?
Niklas Adalberth: “Oh, I’ve realised my weaknesses better. You become more humble, and you realise that you should spend time on hiring people that are better. But I’d say that I’m also a lot more efficient than I was back then. But I’m still the same me – the same person who was flipping hamburgers.
“Once you’ve tasted caviar, you’re screwed”: watch the Klarna founders in this video.
Klarna facts and figures:
Klarna offers safe and easy-to-use payment solutions to e-stores in Europe and was founded in 2005 with the ambition to make e-commerce safer, simpler and more fun.
At the core of Klarna’s services is the concept of payment after delivery, which lets buyers receive ordered goods before any payment is due. At the same time, Klarna assumes all credit and fraud risk for e-stores so that sellers can rest assured that they will always receive their money.
Today, Klarna’s payment solutions are integrated by more than 15,000 online shops in Sweden, Norway, Denmark, Finland, Germany, Austria and the Netherlands. For more information, please visit www.klarna.com
|Total end-customers:||8 000 000|
|Offices||8 countires Sweden, Norway,Denmark, Finland, Germany, Austria; Israel and the Netherlands|
|Total number of active merchants:||15 000|
|Total transactions from start:||48 000 000|
|Estimated transaction volume for 2012:||2.3 billion Euro|
|Number of employees:||800|
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