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The Klarna drama reveals a governance gap

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Every start-up would love to have a Michael Moritz on their board. As one of the world’s shrewdest and best-connected venture capital investors, Moritz has been around the investment block so many times he probably turns corners in his sleep.

But last year Moritz retired from Sequoia Capital after a 38-year career at the VC firm and relinquished most of his board seats at its portfolio companies. One post he kept, however, was as an independent director at Klarna, the Swedish digital payments company, which he joined in 2010 and has chaired since 2020. Klarna, which provides “buy now, pay later” services, is used by 150mn digital consumers in 45 countries.

Moritz’s reluctance to quit Klarna clearly provoked the ire of some of his former colleagues at Sequoia, who attempted to oust him as chair in an extraordinary battle that has captivated the VC world. The charge was led by Matthew Miller, who became the Sequoia-appointed director at Klarna earlier this year. But last week, the VC firm was forced into a humiliating climbdown, replacing Miller with Andrew Reed, a Moritz protégé, and renewing its support for the chair. All parties were tight-lipped about the trigger for the turmoil. “It’s a complete fiasco,” according to one person following the saga.

The Klarna drama reflects the imbalance of power that sometimes emerges between start-up founders and their funders — even those as mighty as Sequoia — and the governance gap that affects many late-stage private companies still waiting to go public.

Klarna is hardly alone in experiencing a boardroom bust-up, especially in the run-up to a public listing. VC investors are often actively involved in the early stages of a start-up’s life but lack the clout to supervise bigger companies. The recent trend for start-ups to stay private for longer means that they are only exposed to public market disciplines at a later stage. Sequoia, in particular, has previously overindulged some big-talking entrepreneurs, such as Sam Bankman-Fried, the now-jailed crypto tycoon, and is now more focused on governance issues.

Sequoia certainly has a lot riding on Klarna as the company’s biggest investor, with a 22 per cent stake. The board dispute is understood partially to reflect tensions over the company’s plans to seek an IPO this year or next. In particular, differences emerged over Klarna’s plans to redomicile in the UK ahead of the public listing and the veto powers retained by co-founder Victor Jacobsson, even though he has left the company.

When I interviewed Klarna’s co-founder and chief executive Sebastian Siemiatkowski in Stockholm last year, he spoke about Moritz with near-veneration. During his career at Sequoia, Moritz had made his company (and himself) a fortune by backing some of the hottest start-ups in history, including Google, Yahoo and PayPal. 

Still, the Moritz magic has not fully rubbed off on Klarna yet, even after 14 years. Valued at a peak of $45.6bn in 2021, Klarna was forced to raise money in 2022 at $6.7bn. The company was swimming in a sea of losses after expanding aggressively in the US.But Klarna is now turning round: its 2023 financial results, posted this week, showed its first quarter of profit in four years after solid revenue growth and cost-cutting.

Governance problems have erupted at other late-stage private companies, including Theranos, Uber and WeWork, where over-mighty chief executives ran amok. Traditional VC investors would put much of the blame on “venture tourist” investors, such as SoftBank and Tiger Global, who flooded the market in the late 2010s and encouraged founders to go for growth at all costs.

Klarna cannot be compared with any of those troubled companies. Its governance gap is also narrower because it is heavily regulated as a Swedish financial institution. But, as shown by his ability to face down Sequoia, Siemiatkowski still appears to exercise an out-sized influence. “He is energetic and open-minded. And his ability to move metrics compares with the best CEOs,” says one Klarna investor in his defence. 

Even so, Klarna will have to convince institutional investors before it goes public that it is a robust enough financial company to thrive after Siemiatkowski, and Moritz, have left the company, whenever that might be. VCs are often happy to bet everything on mercurial founders. Public market investors are more allergic to the idea. The governance gap between the private and public markets will have to be closed.

john.thornhill@ft.com

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