Klarna’s Revolutionary Payment System Attracts $155 Million in 2nd Round Financing

Last week, the Swedish ecommerce payments company Klarna raised a staggering $155 million from DST Global and General Atlantic. The company’s prior $9 million financing round came in May 2010 after Sequoia Capital and its high-profile partner Michael Moritz came in. Moritz also grabbed a seat on the board of directors.

Klarna’s recent round of financing follows an increasing trend for Internet businesses that develop their companies on a few million dollars, then they wait to get more money when they can do a large round. Two recent examples include Dropbox, which recently raised $250 million in round two after $7 million in the first and Airbnb with its $112 million financing.

One commonality with these two companies is that Sequoia invested early in both of them.

These companies also have in common that their financing is called shovel-in rounds. Once an investor sees the company is a winner, it will “shovel in the money.”  The investors in these “pre-public investment rounds” have also purchased IPOs and funds including General Atlantic, DST, T. Rowe Price (NASDAQ:TROW), Fidelity, Tiger and Wellington Capital.

These investors are looking for returns across the globe.

So why not go public? Freedom.

Klarna is on pace to double its revenues to about $120 million this year, according to CEO Sebastian Siemiatkowski. The 600-employee company has been profitable on a pre-tax basis since 2005. Through the company’s payment system, Klarna clears $2.5 billion in e-commerce transactions.

Moritz  said, “I think overall it is better for businesses to stay private because you have more latitude, more freedom. The inevitable mistakes made during the hurly burly of developing a business are not penalized by people who do not understand it.”

The Swedish company’s business enables for consumers to finish their e-commerce transactions by letting them pay after receiving their products instead of when they are ordered, like most businesses. By using different techniques, Klarna attempts to determine the risk of somebody not paying and basically will give credit to buyers by first paying merchants. Consumers then pay Klarna instead.

Klarna’s theory, according to Siemiatkowski, is “We want to separate buying from paying. Paying creates a lot of friction.”

What’s different about Klarna is, consumers don’t provide credit card numbers, just a name, address, and email. The company has said fraud numbers are low as they utilize different data to determine risks such as credit checks, what items are being purchased and how email addresses are entered.

Klarna faces its greatest risks at the beginning. After a consumer pays the company for one purchase, there’s a high likelihood they’ll do it again.

The Swedish company (20% of all e-commerce sales in the country are through the company), has expanded to Norway, Finland, Denmark, the Netherland and Germany. The company believes their model can work anywhere with a large potential to become a billion dollar company by expanding to more European companies. However, it may be more difficult to do in the U.S. because of state laws and regulations.

In addition, Klarna encompasses the whole payments arena as it doesn’t split its fees but only delivers services. Fees can range from 1.5-2.5%, but they’re not as important as the company’s desire to increase sales while getting rid of barriers when buying at checkout.

For the merchants who use Klarna, they see almost half of their checkouts paid through this service, as compared to the 5-10% payment services similar to PayPal (NASDAQ:EBAY).

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