Being a part of the Nordic, Sweden continues to gain popularity among Fintech companies. In fact, according to the European Commission scoreboard, the country remains Europe's innovative leader in 2020 by turning Swedish startup companies into unicorns and iconic names.
Investors and legal advisors, entrepreneurs, and academics, consultants, and managers all come to Stockholm to turn their ideas and innovative solutions to life in the global arena. If you have ever heard of Skype, Klarna, or Spotify, then you should know that all of them were launched in the heart of Sweden.
The competition among young Fintech companies in Stockholm and the country, in general, is enormous, yet it is not a rivalry. Anyone here with an idea wants to know how to start a Fintech startup or how to scale it. Swedish Fintech companies battle for investment and recognition, for acknowledgment and a word in the world.
Sweden is the starting ground for all those companies, and Sparla is not an exception. Today we talked with Sparla's CEO and co-founder Jazgul Ismailova about her experience on how to create a Fintech startup, how to understand the system, and the main challenges she faced on the way with Sparla.
What is Sparla?
Sparla is a financial fitness app, leveraging Open Banking and behavioral economics to build better financial habits. The app is still in development and they plan to launch in Q4 2020. The team aims to tackle societal problems such as overconsumption, constantly increasing debts, and climate anxiety.
The emerging Open Banking technologies and shift in regulation provide a perfect opportunity for new upcoming startups to offer world-class money management tools. The development process for Sparla began in February 2020, and by the fall, the prototype has already been validated with customers and the actual app development has started.
While Sparla can be called one of the Fintech startups in Sweden based on the description, Jazgul notes that "although we are using Open Banking and building a personal finance app, we are mostly focused on the behavior-change business than in a Fintech."
"We are not a pure Fintech company, but more of an Embedded Finance company. We are a tech company using financial technology as a core offering, and our business model is not tied to financial services."
This Swedish startup focuses on becoming a lifestyle brand that will help people to rein-in spending by selecting low-cost sustainable brands. To reach the set goal, Sparla cooperates for example, with Enkla Kassen and Karma, and has in pipeline cooperation with cloth-renting companies as well as secondhand brands.
With these collaborations, Sparla wants to educate its customers that the easiest way to get out of debt is by lowering monthly living costs; and one can do so by helping the planet as well.
Competition in the Fintech market of Sweden
Jazgul Ismailova believes that Sweden is a perfect entry point for launching a startup. Sweden has highly demanding and experienced consumers. She assumes most startups launch in Sweden to validate their concepts and then quickly expand to Europe or the USA.
So, the startup launching in Sweden should be fit to compete in the next big markets. Jazgul notes that the competition is fierce among lending platforms in Sweden. According to the Swedish financial supervisory authority (Finansinspektionen), there are 73 companies registered to provide consumer loans.
Fighting for the same customers and normalizing debt, they are putting thousands of people in a debt trap, impacting the well-being and personal finances of millions of people.
The loan referred to the Enforcement Authority in Sweden (Kronofogden) was SEK 8 billion in the first half of 2019, 38% growth vs. the same period in 2017. Jazgul wishes the lending companies aligned their business models with contributing to society in a positive way.
Challenges of launching a Fintech startup for a Swedish market
Launching a startup technically might not be the biggest challenge of all because it is market inertia that will be the greatest obstacle for a new project, even in such modern and high-tech markets as the Swedish one. Your idea is great, your app is smooth, and every single person who tried it loves it.
But as with the case of the Current Account Switch Service (CASS) (launched in the UK back in 2013 with the idea to make a simple transfer of accounts between different banks), those who tried it were delighted by the easiness of the service; yet the statistics showed that in 3 upcoming years there were less than 5% of the total possible switches.
In terms of Sparla, this step is still ahead of the startup because it has not been launched yet. However, its CEO said that it took time to investigate whether the new app needs registration with the Financial Authority.
The problem was that Sparla technically would operate within the Open Banking platforms and it wasn't clear whether a separate license was needed.
Tip: The easiest way to understand whether your startup needs a separate license and registration is to use a website and contact the FCA in the UK (until now they operate under EU banking regulations, this can change with Brexit). They can provide a detailed answer on the category your product fits and have excellent customer service.
Can VCs and accelerating programs help?
Fintech startup seed round as well as VCs do focus on the profitability of a project idea as well as a detailed business plan and product's competitiveness in the market. However, when Sparla was searching for opportunities, they found out that many of those investors were not transparent about their SDG goals.
Since Jazgul's stand is that "sustainability commitment should go both ways to build future-fit sustainable companies together" and her startup wants to be transparent towards the customers. They are also carefully selecting investors for their project.
In the end, funding will be mutually beneficial for both parties and Sparla could stay truthful to its initial idea. The team wants to collaborate with impact investors interested in building a 360-degree sustainable business: in how the company operates, what it offers, and how it generates profits.
Accelerator programs are supposed to help young startups get into development and begin their processes when the funds are short. What co-founder of Sparla says is that they "could be more inclusive and accessible" especially in the light of the COVID-19 changes happening around the world.
Most of the modern conferences, workshops, and other events including major people gathering have gone into the online format (up 1000% since COVID hit the world).
For example, there are programs like Y-Combinator which run free batches for anyone interested and then pick the best ideas. Such major events help to understand the trends, the potential competition, and also find new partners on the way.
Nevertheless, such gatherings can help a lot for the struggling entrepreneurs and development teams who lack some money for project finalization.
So the tip is simple: participate in every way you can (online or offline) because accelerator programs as well as VCs can be just the magic wand you need.
Funding from the local Angel Investors and their criteria
Angel Investors are the Holy Grail for many startups. They come with money, they believe in one's idea, they fund it, and the idea continues to live. Of course, Angels get paid with a share or equity ownership in the upcoming startup, however, very often Angel Investors make the day for the young projects aiming high.
Note that if you are looking for an Angel investor in Sweden, you can check this website to get the missing funds faster.
So what criteria do Angel Investors have when it comes to selecting a startup? According to Richard Sudek, Angel Investors mostly seek:
- Passion for their product or idea
- Trustworthiness that stems from the truthful answers an entrepreneur gives to the set questions
- Management team (whether already existing, a planned one, or the one that needs enforcement)
- Exit or liquidity event that an entrepreneur plans (since it signifies the actual profit an Angel can make)
Sparla is still in the process of finding the right fit for long-term cooperation and Jazgul says that they are reaching out to angel investors in the impact investment and fintech domain. At the same time, bootstrapping to prove resilience and building the first metrics are the priority.
The difficulty of building a core team
It is sufficient to say that startups are built on trust, passion, and self-determination. Always. "If team-building is difficult, then something is fundamentally wrong and should be addressed directly," says Sparla's CEO. A team needs to breathe the same air and share the same values for a startup to work. Diversity of a core team matters as well.
For example, in Sparla, Carolina Westin is the project's CMO and a perfect door-opener to their target audience – she is a business student at Stockholm School of Economics so can offer the project to an ample of opportunities in terms of gaining the key segment that loves and promotes the product further.
Jazgul says that building a core team "should not be challenging since everybody is self-motivated, driven, and skilled in their areas. Working together brings joy because everyone is passionate and eager to share their progress and support each other."
Finding the right partners: Sparla and Tink
Collaboration and partnering can be groundbreaking for a startup. At the Lendit conference, it was said: "Amazon can do it all; all others must partner" which is exactly what Sparla did.
Partnering offers startups a pace for testing, trying, expanding, and working with actual data in the actual market while also giving the partners the greatness of innovation and potential advantage over the competition.
Finding partners is not an easy process because it is not a formal one. There is no single listing where all offers, solutions, and prices are compared like in a retail store. What a startup needs to seek in partnering is a long-term mutual commitment. For example, Sparla took an agreement with Tink Fintech company in Sweden in particular.
Tink offers open banking to anyone interested and they have exactly the line of services Sparla needed. In the upcoming times, it should get easier to find and sign a partnership agreement according to Jazgul Ismailova because "many PFM Fintechs are pivoting to catch B2B opportunities."
The most important tip from Sparla
Remember, says Jazgul, "early-adopters in Sweden are demanding customers" this is why the book will always be judged by its cover and there is very little chance of changing your first impression in the market.
The financial market has never been among the most-trusted ones (especially due to its lack of transparency). This means that trust relationships should always be set up right from the first website visit and app download.
"Therefore, being open and truly on customers' side is the key to win the hearts of the customers."
What are the future trends in Fintech?
The global Fintech competition in Sweden as well as in-country has already started feeling the upcoming trends – B2B. This is why partnering with bigger companies or traditional banking solutions becomes much easier these days.
B2B is "a safe choice both for investors who prefer B2B SaaS business models and thousands of banks looking for partnerships as a recipe for innovation."
Jazgul also sees new startups owning customer relationships and using banks as a white-label back-end providers (Banking-as-a-Service) as another trend.
Startups building a great brand experience and strong communities by laser-focusing on niche segments can break the barriers of an untrusted and boring financial industry. This is a huge white space for new entrepreneurs with the game definitely worth the candle.
The bottom line
The greatest challenge for a Fintech startup in Sweden is to differentiate among numerous B2B, B2C, lending, investing startups.
In Sweden of 2020, the startups need to fight for funding from VCs and Angel Investors while accelerator programs remain not-COVID-friendly in many instances. The tricks of bureaucracy (understanding what and where to file) will probably stay in the arena for many years to come.
Keeping traction and getting like-minded partners is always a challenge as well. However, as Jazgul Ismailova said when "everyone is eager to share their progress and support each other", the challenges get surmountable.
And to help you a bit with overcoming the challenges, here are a couple of resources that can come in handy for a Fintech startup in Sweden:
- StartUp Stockholm – largest Swedish advisory center for startups (free)
- Tips from Business Sweden on starting a company in the country
- Verksamt.se – tips and step-by-step guides on setting up a business in Sweden (coming from Swedish governmental agencies)
- List of business incubators and funding opportunities from Invest Stockholm
- StartUp jobs – a place to find yourself a team member, a partner, or just a contingency worker