Michael Moritz On Klarna’s $155M Round: “This Is The Public Financing Of Twelve Years Ago”

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On Friday, a little-known Swedish ecommerce payments company called Klarna raised a massive $155 million round from DST and General Atlantic. Its previous round was a scant $9 million in May, 2010 when it was discovered by Sequoia Capital and superstar partner Michael Moritz took a board seat (yes, he actually flies to Sweden for the board meetings). “This is the public financing of twelve years ago,” Moritz tells me, “it is just done privately.”

Klarna’s mega-round fits into a growing trend with successful internet companies that build out a substantial business on a few million dollars, then don’t take on any more money until they do a huge round. Examples include Dropbox, which recently raised $250 million after only raising $7 million before, and Airbnb with its $112 million round (Sequoia was an early investor in both of these as well).

These are also starting to be called shovel-in rounds because investors shovel in the money once it’s clear the company is a winner. The buyers in these “pre-public investment rounds” are the same investors who would have previously bought IPOs, funds like General Atlantic, DST, T. Rowe Price, Fidelity, Tiger, and Wellington Capital. It is global capital chasing returns.

Klarna could have gone public. It is on track to double revenues to about $120 million this year, CEO Sebastian Siemiatkowski estimates. And it’s been profitable on a pre-tax basis since 2005. It has 600 employees and clears $2.5 billion worth of e-commerce transaction through its payment system.

“I think overall it is better for businesses to stay private because you have more latitude,” says Moritz, “more freedom. The inevitable mistakes made during the hurly burly of developing a business are not penalized by people who do not understand it.” Moritz is a patient guy. He knows Sequoia will get its return down the line.

The company makes it easier for consumers to complete e-commerce transactions by allowing them to pay after they receive the goods instead of when they order them. It solves the abandoned shopping cart problem. Using sophisticated machine learning and other techniques, Klarna tries to figure out the risk of somebody not paying. It essentially extends consumers credit by paying the merchants. Then the consumers pay Klarna. “We want to separate buying from paying,” says Siemiatkowski. “Paying creates a lot of friction.

The only information a consumer needs to provide are her name, address, and email—not even a credit card number. The fraud rate is very low, says the company, because they use all sorts of data—from traditional credit checks to what items you are buying to how you enter your email address—to assess risk. The key thing about Klarna’s model is that the first purchase is always the riskiest. Once a consumer has paid Klarna for a purchase there is a pretty good chance they will pay again.

The service started in Sweden (where 20 percent of all e-commerce sales already go through Klarna), then spread to Norway, Finland, Denmark, the Netherlands, and most recently Germany (where it is growing at more than 1,000 percent annually). “When we started it, people said it was a Swedish phenomenon,” recalls Siemiatkowski, “then a Nordic phenomenon, then a Nordic-German phenomenon. We think this can work in basically any geography.”

But Klarna can become a multi-billion dollar company if it just conquers the rest of Europe. “The greater European theater is obviously an enormous market,” notes Moritz. “For American companies, Europe, despite its importance, is always a second act. For Klarna, Europe is its most important market, and that flavors everything.”

And its European roots may serve as an advantage as it expands there. Moritz adds: “Weirdly enough, payments is an easier business in Europe than U.S. because of the EU. Once sanctioned in one member state, you have freedom to roam elsewhere.” Whereas in the U.S. there are state-by-state laws and regulations to contend with.

Finally, Klarna takes over the whole payments stack. Its fees are not split up between issuing banks, payment gateway providers, and the digital wallet. It delivers all of those services and keeps all the payment fees itself, which can vary between 1.5 percent and 2.5 percent. But the fees are not so important because Klarna promises to actually boost sales by removing barriers to buying at checkout. Merchants who adopt Klarna end up seeing as much as half of their checkouts paid through the service, as opposed to 5 percent to 10 percent for other “alternative” payment services like PayPal.