Swedish households not net borrowing for first time in 21 years

I don’t know what the impact of higher interest rates will be, but according to Nordea one impact is that Swedish households have gone from net borrowing 15 billion SEK per month to actually amortizing more than they are borrowing. For the first time in 21 years. On an annual basis this means ca 180 billion SEK less in consumption/investments. In addition higher interest rates will take another few hundred billion SEK away from consumption/investments, in an economy with ca 6000 billion SEK. That Swedish GDP shrank 0.9 % in Q4’22 is no surprise, even if filled lunch restaurants around Stureplan is a bit surprising.

US growth driving Klarna

Sebastian Siemakowski, Klarna CEO and co-founder, has expanded in an interview with TechCrunch on his earlier tweet that the US has passed Germany as Klarna’s largest individual market. In Q4’22 Klarna’s gross merchandise value (the value of products purchased with Klarna) in the US grew 71 % and it has 34 million users. Credit loss rates in the US should be down 37 %.

The combination of fast growth (with lower credit losses) in its largest market and the cost-cutting including layoffs Klarna did in 2022 should lead to improved operational profitability. The unknown factor, until Klarna reports its full numbers for Q4 2022, is how it grew (and with what credit losses) in European markets year-over-year.

Klarna returning to full profitability would be a good thing for #sthlmtech.

Being boring

Today Warren Buffett’s Berkshire Hathaway released its full year report for 2022. His letters to shareholders are classics among a group of investing nerds, but I found this year’s a bit underwhelming.

What is not underwhelming is Berkshire Hathaway’s annual returns of 19.8%. Especially on the very large sums of money he invests (easier to make 20% when investing $1 million than when investing $100 billion).

While Warren Buffett have done a lot of active investing that is not generally available to individual investors, a large chunk of the value of Berkshire Hathaway has come from buying common shares in public companies like Coca Cola, Apple and American Express. The same can be said about Swedish investors like the Wallenberg family (Investor) and Fredrik Lundberg (Lundbergföretagen).

Copying their approach and buy shares in good and great companies, re-invest dividends and have the value of shares grow become very profitable over decades. Boring but effective.

Ecosystems are good

In world where many people can work from anywhere, there is still a lot of value in being based in a geographic ecosystem like Silicon Valley or on a smaller scale Stockholm. Physical proximity to employees, peers, partners, experts, universities and investors increase access to knowledge, capital and talent. Which all are very valuable.

Somewhat related, it is easy to think that it is a bad thing that a high share of Swedish venture investments go to companies based in Stockholm. But given the value of ecosystems there are good reasons for promising Swedish startups to establish their offices in central(‘ish) Stockholm (and it is not the weather).

Employee equity pt 2

The fact that employee ownership is not a straightforward thing, even if it should be, can be seen that only 17 % of European employees at late-stage startups have employee ownership this year. A caveat that I haven’t checked if that is both options and shares or only shares, but regardless 17 % is a dismal number. It should be closer to a 100 %.

Every type of investor has its pros and cons, but one thing venture capital does better than most others (family owned firms, public market investors etc), even if the European numbers don’t prove it, is a belief in broad employee ownership via options.

Founder pay

Sifted has an article about founder pay, based on data from the UK, France and Germany. According to the article pre-seed and seed founders’ median pay is €88,000. It is higher than the Nordics, as shown in the report by Creandum/Slush. The striking thing in the pay data from Creandum/Slush is the significant difference in pay between female and male founders that work for companies that have raised the same amount of money. The difference is so large that it looks like there is something wrong with the data.

Employee equity

A core part of building a company with venture capital and in the Silicon Valley tradition is employee stock ownership. Most often employee ownership in private startups happens via stock options (in Sweden most often QESO, ESOP or warrants). But using options is not straightforward way to get the results you want, as Carta’s latest research shows (thanks Arne for the link). In the US only 46.1 % of options that were in-the-money (i.e. have value) were exercised (i.e. bought) by the options holders.

There are good reasons for employees to not exercise options if they will not be able to sell the shares to pay for the exercise and taxes (see Stripe’s fundraising of $2.5 billion that seems to be initiated due to the need to pay taxes). However, companies can and should make it easier to exercise options by allowing cashless exercise when it makes sense (i.e. for QESO and warrants as then the exercise doesn’t trigger social fees payments for the company, disclaimer: I’m not a tax expert, talk with legal counsel).

Investor coherence

There are many type of individuals and organisations that invest into startups. They share the same label, “investors”, but the way they think about how a startup should be financed, growth vs profit, acceptable levels of risk, if the startup should be aiming for a small or large outcome etcetera can differ a lot.

I.e. a typical early-stage venture capital fund will think differently about those things than a typical family office will and both will likely think differently from a private equity fund.

While beggars can’t be choosers, it is highly valuable to have investors that think the same way as the founders and the other investors about fundamental aspects of company-building on the cap table. Coherence will allow the founders to focus their time on building the company instead of managing investors.

Pay for convenience

Twitter has decided to remove the text message option for two-factor authentication for non-paying users, who will have to use an authentication app or a security key (like YubiKey by Yubico). The big difference to Twitter is that it costs money to send SMS, while the use of apps or keys are free to Twitter. Twitter says that it has been paying $60 million per year for bot/fake/fraudulent usage of SMS two-factor authentication. (Paying users will still be able to use SMS, likely due to lower fraud rate and for Twitter to offer convenience).

Lowering costs is very urgent for a company that is the object of a highly leveraged buyout and seems to have lost a large chunk of sales in the first quarter as a private company. But it is never good management practice to spend about 1 % of revenue on fraudulent SMS fees to begin with.

I expect most public technology companies, especially as they are laying off staff, to be looking to lower non-staff costs like SMS costs. It has a quick impact on profitability and saving, say, $60 million should increase Twitter’s (or a public technology company’s) valuation with about $ 1 billion. And with a billion here, and a billion there, soon you are talking about real money.