A Swedish take on "buy now, pay later" ©Kristina Sahlen Risk thesis: Sebastian Semiatkowski's company Klarna uses consumer behaviour to predict fraudulent purchasing Sebastian Siemiatkowski rem­em­bers the sting of disappointment. In 2004, some of Sweden's leading business figures - including the chairman of H&M, and a scion of the mighty Wallenberg clan - rejected his idea for an online payments venture during a Stockholm School of Economics version of Dragons" Den, the television show based on funding pitches. Self-doubt set in. But now, nine years later, the feeling is much sweeter because Klarna, the company that 31-year-old Mr Siemiatkowski co-founded anyway, is sponsoring the business school. "It is hard to say "I don't care," he recalls of Sweden's two most senior business people deciding his plan would not work. "But I think there was also a feeling of: "We will show you that you're wrong."" IN Entrepreneurship Privately owned Klarna has certainly succeeded in that - more than 9m people have now used its services and a recent fundraising valued it at close to $1bn, a huge amount for a European tech company. Currently, it operates in the Nordic region, Germany, Austria and the Netherlands. However, it has ambitions to go further afield, including the US, as - like a growing number of Nordic tech companies - its founders are inspired by the more famous Skype and Spotify. Indeed Klarna is typical, if unusually well-funded, of the many tech start-ups emerging in Stockholm. Klarna, which means "clear" in Swedish, is based on an apparently old-fashioned idea in that it allows ecommerce customers to pay via invoice after receiving the goods. In return for a fee from the retailer, Klarna assumes the credit risk and collects the money from customers. Because they enter just a few personal details, Klarna can shorten the often complicated online payments pro­cedures and so lift sales by 15-25 per cent as fewer shoppers abandon purchases through frustration. But the real heart of Klarna is a complex system for analysing customers" behaviour in an attempt to detect fraud, thanks to Mr Siemiatkowski's masters thesis while at SSE. At first, the company had used normal credit data, but it stead­ily adopted some of the ideas he had worked out on risk assessment using behavioural scoring. Thus a purchase made at 3am is inherently more risky than one made at 3pm; someone buying three iPhones is more suspicious than someone buying one; a Nobel Prize-winning book is more secure as a purchase than beer. Mr Siemiatkowski says: "People of­ten ask, "How can you issue credit instantly where you don't see the face of the person applying?"" His reply is: "How can you sit in an environment where somebody comes into your bank, provides you with their ID and fills in a piece of paper?" Because what you're lacking in that situation is the ability to record, monitor and collect all the behavioural data that is the background of that situation. Fraud is still a big issue but credit losses have fallen significantly and Mr Siemiatkowski says they are lower than for credit cards. One breakthrough came when Klarna realised the police were not interested in the relatively small fraud cases it was presenting them with. So it hired private security guards who would challenge suspect customers when they collected the packages from their local post offices. It meant that the cost skyrocketed for the fraudsters. And suddenly we got control of that issue. Today, the chief executive is wearing a grey suit and open-necked shirt, but at other times he wears hi-tops and a hoody around the company's anonymous offices just outside central Stockholm. His manner is very much that of a confident young tech entrepreneur. Big ambitions for Sweden's start-ups One of European business's Achilles heels is its inability to produce new big companies. Only two of Sweden's 100 biggest companies were founded after 1970. That makes start-ups such as Klarna interesting for how they will develop: will they break into that list and bump the number up to three, or will they take the route that many others do and sell out to a foreign competitor? Stockholm is starting to rival other European capitals such as London, Berlin or Paris as a centre for budding tech entrepreneurs after decades of being put off by high taxes. Now a younger generation is seeking to become the next Spotify or Skype - although the latter counts as one of the sell-outs after being sold to Ebay and then Microsoft. Klarna is one of the most high-profile names because it grabbed the attention of some of the biggest names in Silicon Valley venture capital. Michael Moritz, a partner at Sequoia Capital, known for investing in the likes of Google and PayPal early on, and Anton Levy, a director at General Atlantic, which has invested in Facebook and Alibaba, both sit on Klarna's board. The idea for the business came after he and co-founder Niklas Adalberthan took a break from their business school studies to travel the world without flying. A missed embarkation in Australia meant that one sabbatical year turned into two and on his return to Uppsala in 2003, Mr Siemiatkowski took a job at a factoring company, to which businesses sold their invoices as a discount. We [Mr Siemiatkowski, Mr Adalberthan and third founder Victor Jacobsson] realised that making payments in ecommerce had a lot of flaws to it. Sending money to an online merchant, hoping to receive a product that resembles what you saw in the picture is actually a risky undertaking for the consumer," says Mr Siemiatkowski. Jane Walerud, an angel investor, offered $100,000 for a 10 per cent stake. After spending just $50,000 on the software Klarna was profitable, as it has been ever since - unlike many tech start-ups. Yet Mr Siemiatkowski says he might never have started up had he known the difficulties of running a business that as far as the regulators are concerned is more like a bank than a tech company. Challenges include dealing with Basel III capital and liquidity rules to having to operate a substantial balance sheet - again, very unlike the rest of the tech sector. Then there were the funding challenges. Mr Siemiatkowski can remember exactly where he was standing in Malmo's railway station, feeling happy after a successful pitch to a big retailer, when he got a call from Mr Jacobsson, then finance director. The backer for Klarna's latest product had pulled out. "We had absolutely no alternatives, and we were supposed to launch within two to three months," Mr Siemiatkowski says. He contacted another bank and with a bit of bluffing about lots of people offering fin­ance got a new deal in the nick of time. But it is his strategic thinking rather than an ability to hold a poker face that is prized by backers. Anton Levy, head of the internet practice at General Atlantic, a private equity firm that took part in Klarna's latest fundraising, says Mr Siemiatkowski "has seen around corners in terms of where the [online payments] industry is going." He may need that vision. The next challenge is to gauge the company's ability for tackling markets outside Europe. PayPal bought a similar service to Klarna's in 2008, called BillMeLater, in the US. Klarna, which has about 800 employees including 120 engineers, has so far stuck to Europe as its Swedish version of a banking licence is transferable across the EU. A quarter of online sales in Sweden are now made through Klarna. In the long term, Mr Siemiatkowski wants his start-up to compete with, say, MasterCard, Visa or PayPal - hence the search for backing and that $1bn valuation. But for now Klarna must plan how it will establish itself in the US before bigger rivals get a toehold. If you fast forward five years you are going to see [services like Klarna's] all around the world. The question is whether it's Klarna or not" Mr Levy adds.