Debt financing for startups is set for a record year in Europe. Founders have plenty to choose from, including Swedish startup ArK Kapital, which managed in less than a year to raise a substantial sum to lend to founders. ArK is now ready to pick up the pace even more.
Today, he announces a further increase of 15 million euros at a valuation three times higher than that which he had during his round of funding six months ago. In total, the startup has raised 30 million euros in equity and says it now has 300 million euros to lend to startups.
What ArK Kapital does differently
ArK Kapital offers loans of 1 to 10 million euros to European startups, with terms based on future revenue projections. Unlike most lenders, loans from ArK can last up to seven years. Repayments also do not start for two or three years.
Unlike revenue-based financing (RBF) startups, which primarily lend to SaaS and e-commerce businesses, offering capital in exchange for a percentage of future sales, ArK plans to work with all kinds of tech startups which have high growth potential but which are not. is not yet profitable.
Venture capital debt can be an attractive complement to venture capital financing because, unlike venture capital, it does not require ceding ownership of the business.
How is ArK able to project future revenues among lenders?
ArK analyzes potential borrowers, based on engagement data (such as product usage, brand and marketing engagement, support engagement, and success engagement) and relevant market data to estimate when a client will become profitable, when they will require a capital injection, and how quickly they can reasonably repay a loan. This data is then used to decide whether a loan is possible and under what conditions ArK should lend.
Henrik Landgren, one of ArK’s founders, says ArK’s technology allows him to flag any potential risks to a company’s growth to his clients so they can try to counter them. And he says ArK wants to use the data he collects to get a big picture of how macroeconomic changes are affecting businesses, especially during times of uncertainty like the one we’re going through now.
In less than a year, ArK has managed to raise funds from a number of high-profile angel investors as well as UK-based LocalGlobe and European VC Creandum – all of which participated in the latest round.
This funding round was led by Annika Falkengren, former CEO of the Swedish bank SEB for 12 years.
Other investors include Jacob de Geer, founder of fintech iZettle acquired by Paypal; Ilkka Paananen, CEO of gaming company Supercell; former founding partner of EQT Ventures Hjalmar Winbladh; Patrick Söderlund, founder of Embark Studios, and new investor Timo Soininen of mobile game company Small Giant Games acquired by Zynga.
The debt financing market
According to Dealroom, startups are on track to raise €20.4 billion in risky debt in 2022, up from €15.9 billion last year. And with market conditions potentially making it harder for venture capitalists to raise funds in the near future, debt could become an even more attractive alternative for startups.
ArK Kapital is by no means alone. There are plenty of debt funds — like Claret Capital, which raised a €297 million fund last week — lending to startups. But ArK differs in that it won’t ask founders for equity later. It has also built its own technology, which increases the amount of data available to it for loan underwriting.
In that sense, it resembles the panoply of revenue-based finance providers that have sprung up in Europe over the past couple of years. But these companies are asking founders to repay earlier.
ArK can therefore be considered as a kind of hybrid model, somewhere in between. And so far no one else in Europe does it exactly like them.
The taking of sieved
As VCs tighten their portfolio and invest on less favorable terms, more startups are looking to debt as a better alternative.
However, unlike venture capital, debt financing must be repaid with interest. In times of uncertainty with rising interest rates, some startups considered to have great potential may struggle to meet their interest payments.
And ArK doesn’t have the high volume and faster maturing of loans like revenue-based finance companies. Companies like not having to repay so quickly, but this makes Ark’s business more risky, hence the importance of data tracking.
Finally, even though ArK has a unique business model in Europe at the moment, the startup loan market is more largely crowded. Lenders will fight to acquire customers. ArK’s differentiation from the competition is the relatively long maturity of its loans – but we’ll also see if that’s what startups are looking for, especially when the tech market starts to recover and funds clean will become easier to lift.
Mimi Billing is Sifted’s Nordic correspondent. She also covers health tech and tweets from @MimiBilling