Debt financing for startups is set for a record year in Europe. Founders have lots of choices — including Swedish startup ArK Kapital, which has in less than a year managed to raise a substantial pool of money to lend to founders. Now ArK is ready to pick up the pace even further.
Today it's announcing a follow-on raise of €15m at a valuation three times higher than it had at its seed round six months ago. In total the startup has raised €30m in equity and says it now has €300m available to lend to startups.
What does ArK Kapital do differently
ArK Kapital offers loans of €1m-10m to European startups, with terms based on future revenue projections. Unlike most debt providers, ArK’s loans can last up to seven years. Repayments also don’t start for two or three years.
Unlike revenue-based financing (RBF) startups, which predominantly lend to SaaS and ecommerce companies, offering capital in return for a percentage of future sales, ArK plans to work with all kinds of early-stage tech companies that have high growth potential but aren’t yet profitable.
Venture debt can be an attractive complement to VC funding because, unlike VC, it doesn’t require giving away ownership in the business.
How is ArK able to project future revenue among lenders?
ArK analyses potential borrowers, based on engagement data (like product usage, brand and marketing engagement, support engagement and success engagement) and relevant market data to estimate when a customer will become profitable, when it will require a capital injection and how quickly it can reasonably repay a loan. That data is then used to decide whether a loan is possible and what terms ArK should lend on.
Henrik Landgren, one of the founders of ArK, says ArK’s tech lets it flag any potential risks to a company’s growth to its clients so they can try to counteract them. And he says that ArK wants to use the data it collects to get a bird’s-eye view of how macroeconomic changes affect companies, especially during times of uncertainty like the one we're in now.
In less than a year, ArK has managed to raise funds from a number of prestigious angel investors as well as UK-based LocalGlobe and European VC Creandum — all of which participated in the latest round.
This round was led by Annika Falkengren, formerly the CEO of the Swedish bank SEB for 12 years.
Other investors include Jacob de Geer, founder of Paypal-acquired fintech iZettle; 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 Zynga-acquired mobile gaming company Small Giant Games.
The market for debt financing
According to Dealroom, startups are on track to raise €20.4bn in venture debt in 2022, up from €15.9bn last year. And with the market conditions potentially making it harder for venture capitalists to raise funds in the near future, debt may become an even hotter alternative for startups.
ArK Kapital is by no means alone. There are numerous debt funds — such as Claret Capital, which last week raised a €297m fund — lending to startups. But ArK differs in that it won't ask founders for equity further down the line. It's also built its own tech, which boosts the amount of data available to it for underwriting loans.
In this sense, it's similar to the swathe of revenue-based financing providers that have cropped up in Europe in the last couple of years. But those companies ask founders for repayments sooner.
So ArK can be viewed as a sort of hybrid model — somewhere between the two. And so far, no one else in Europe is doing it exactly like they do.
With VCs tightening their wallets and investing on less friendly terms, more startups are seeing debt as a better alternative.
However, in comparison to venture capital, debt financing needs to be paid back with interest. During uncertain times with rising interest rates, some startups who were thought to have great potential may find themselves struggling to meet their interest payments.
And ArK doesn’t have the high volume and quicker maturation of loans like revenue-based financing companies. Companies like not having to make repayments so quickly, but it makes ArK’s business riskier — hence why data tracking is so important.
Finally, even if ArK has a business model unlike anyone else in Europe at the moment, the startup lending market more widely is crowded. Lenders will be fighting to acquire customers. Compared to the competition, ArK’s differentiation is the relatively long maturity of its loans — but we’ll also see if that’s what startups are looking for, especially down the road when the tech market begins to recover and equity becomes easier to raise.