The Story of Klarna 🩷

How do you go from working at Burger King to building the 5th most valuable private company in the world?

It’s by pioneering a new market segment.

And this is exactly what Sebastian Siemiatkowski, Niklas Adalberth, and Victor Jacobsson did when they introduced us to BNPL by building Klarna.

So let’s get into it. This is the Story of Klarna 🩷✨

It’s 2004. Sebastian Siemiatkowski and Niklas Adalberth are both studying at the Stockholm School of Economics and working at a local Burger King, where they initially met. Victor Jacobsson, Klarna’s third cofounder is a classmate at the same University.

During this time, Sebastian lives on welfare checks and food stamps and works as a salesperson for a factoring company. This company provides loans to small businesses that need cash to pay their invoices.

While working there, he noticed that merchants want customers to pay via debit card at checkout to guarantee payment.

And then it hit him…

On top of his personal experience, in the early 2000s, online shopping was also in its infancy, and it was rife with fraud and scams, leaving people feeling unsafe. This left many consumers hesitant to share their credit card or banking details online.

This problem linked with his personal experience gave him two ideas:

• What if you could make online payments easy, flexible, and safe by avoiding the need to give credit card details?

• What if there was a middleman who could pay the seller at checkout and collect payment from the consumer upon delivery?

This was a win-win for everybody:

• Customers could make safe payments in installments offering flexibility and even “try before buying”

• Merchants would still receive the full order value immediately but make consumers feel safe and increase conversion rates at checkout by 30%

The idea of a middleman came to him from the many mail-order transactions in Sweden, where trust was a large part of the culture.

But what happened next is typical when building a startup👇

Following this concept, Sebastian pitched the first idea behind Klarna to his superiors at the firm and a pitch competition but was rejected🙅‍♂️

So, Sebastian returned to school with the idea of bringing BNPL into the digital era with Kreditor (Klarna’s first name). This is the moment when he asked Niklas and Victor to join him and launch the company together.

After the Incubator, the team began cold calling merchants in 2005, offering direct payments, installment plans, and pay-after-delivery options.

Surprisingly (or maybe not), their first version had very little technology behind it. The real innovation was a business one. With three non-technical founders, their MVP took an old idea and reconfigured it for the online world.

Simply, online shoppers were mailed an invoice 30 days after they made a purchase.

Not nearly as sexy, or as Klarna likes to say, “Smoooth”, as it is today. They were even nicknamed “The Invoicing company”, but who cares, it worked really well to validate demand for BNPL on both sides of the market before ramping up the technical product.

But just because there is demand it doesn’t mean growth will come by itself…

Today’s Startup Story is brought to you by:

Looking for your next +$1m business idea?

Then you need to check out Half Baked, the world’s #1 business idea newsletter.

Join 8,000 founders, innovators, and investors who get 2 new startup business ideas straight to their inbox every Monday, Wednesday, and Friday.

Check them out here and get 5 ideas instantly!

”I come for the business ideas, stay for the memes” - Every Half Baked Subscriber.

Facing an initial lack of growth and limited access to venture capital, they decided to participate in a Shark Tank-style show in Sweden to raise capital.

The team pitched their idea as Kreditor and received 60,000€ seed funding in exchange for a 10% stake in the company and an additional 37% stake for hiring a few software developers.

Klarna’s first transaction was with a bookstore in Stockholm, and in the following years, the company expanded to the rest of the Nordics🇩🇰🇫🇮🇳🇴, Germany🇩🇪, and the Netherlands🇳🇱.

In 2010, the company rebranded as Klarna, and by 2014, Klarna had become one of Europe's fastest-growing companies and its largest FinTech startup.

In 2015, to continue their growth trajectory and to ensure they didn’t lose ground to the recently launched Affirm, they began expanding to the United States🇺🇸.

While the culture and competitive set is fundamentally different in the US from Europe, 330M Americans create enough room to find a big enough niche. Since then, the US has become Klarna’s principal focus for future growth, and they’ve seen continued adoption and increases in MAUs.

Today, Klarna boasts 150M active consumers, 550K retail partners, and facilitates 2M purchases every day across 45 countries.

In short, Klarna is a BNPL company that allows customers to split their purchases into installments for a fee or pay later for free.

Although Klarna is not currently profitable, it continues to grow and optimize for profitability. Klarna's CEO has stated that the company is well-positioned to withstand current challenges, and the company was profitable for its first 13 years.

Klarna's US business is scaling thanks to its app offerings, including the Klarna Card, which lets customers split purchases into installments, even at merchants that aren't partnered with Klarna.

However, Klarna's growth has come at a cost, as the company cut employees in 2022 to keep up with growth.

Overall, Klarna's goal was to return to profitability last year which they achieved in Q3 of 2023. The next milestone is to IPO either by the end of this year or early next year. Let’s see what happens.

Would you purchase shares of Klarna when they go public?

Thank you for taking the time to read today's story.

If you liked this one, please let me know by replying to this email. I read everything!

If you didn’t like something or have suggestions of what to include/exclude next time, please let me know as well. I appreciate any feedback.

— Mehmet Karakus