The platform economy requires strong expertise

The platform economy has become a phenomenon. While the space is currently dominated by companies from the United States and Asia, the opportunities presented by the platform economy are also starting to be widely recognised in Europe. The Finnish company Zadaa aims to launch its fashion marketplace in 100 countries within five years according to its CEO Iiro Kormi.

Various forecasts suggest that the platform economy will grow to represent a quarter of all business in less than a decade. The surge is being led by giants such as Google, Alibaba and Airbnb, whose platforms attract millions of users every day.

The Finnish company Zadaa has already reached the milestone of 150,000 users, in spite of only releasing the beta version of its service two years ago. This year, consumers will use Zadaa’s platform to buy and sell clothing worth more than EUR 10 million. The service also includes product delivery.

“The idea for Zadaa was conceived when I saw a Facebook post by a friend of mine. The photo showed a pile of clothes my friend was selling. I wondered why someone would choose to sell their clothes on Facebook,” recalls Iiro Kormi, Founder & CEO of Zadaa.

The product development stage of the service took more than a year but, following the launch of its service, Zadaa has grown at a monthly rate of 10–15 per cent. In addition to Finland, the company currently operates in Sweden and Denmark. Germany is next, in April.

“The size of the market is EUR 18 billion, but everything comes down to timing. Online shopping has revolutionised the way people buy fashion, and consumers don’t always want to return the clothes they buy. Consumers are also prepared to reveal their clothing size and they want to buy clothes across borders,” Kormi explains.

Quick entry into the international markets and sorting out financing

Managing the big picture is essential. The idea and the need or, in other words, the community and timing, are key to success. A company like Zadaa also needs a team with expertise in the network business as well as funding.

“We systematically built everything to be internationally scalable and in English. You have to start somewhere, but you also need to enter the international markets quickly. We are a very data-driven company. All of our forecasts and decisions are based on data. I know a lot of startups that haven’t used this approach in building their business model,” Kormi says.

According to Kormi, data and money go hand in hand. Zadaa is currently wrapping up a financing round of EUR 3–4 million.

“We have four founding partners and we are in our third round of financing. We also have a credit limit loan from Finnvera. It is an important part of our financing,” Kormi explains.

Zadaa’s strong potential has also been recognised internationally. The US-based financial media Forbes included Kormi in its latest list of young innovators and influencers in the e-commerce category.

Focusing on growing scaleup companies in addition to startups

Zadaa is one of only a few Finnish success stories in the platform economy. According to Jukka Viitanen, an expert on the development of growth enterprises and innovation platforms, there are only a few dozen companies in Finland that are purely focused on the platform economy. Viitanen is the Chief Executive Officer of Resolute HQ.

“You have to tip your hat to those riding the first wave. Very few startups make it. It is typical of the space that new entrants get widespread attention,” Viitanen explains.

He says the biggest obstacle to growth for Finnish enterprises is the lack of experts in the network business.

Titta Mantila, Vice President and head of the growth and internationalisation team at Finnvera, also expects to see the emergence of more companies specialising in the platform economy.

“The platform economy is currently not a particularly visible phenomenon in our work. Studies also indicate that we are still in the nascent stages of this development in Finland and companies are building platforms that are semi-open at most,” Mantila says.

She goes on to point out that the enterprises in the platform economy are funded by founders and investors in the early stages. In the product development stage, Business Finland has various options at its disposal. Debt-based financing enters the picture when the company has sufficient equity as well as evidence of its ability to repay its liabilities.

“The optimal financing path needs to be built on a case-specific basis. When seeking debt financing, it is important to forecast the development of profitability and cash flow financing. In the worst case, utilising debt financing too early can become an obstacle to subsequent investment. When the company has a finished product or service, or it is already generating turnover, we can participate by providing collateral for bank financing."

According to Mantila, a phased financing package is a good model to follow. It involves negotiating a sufficient amount of money from investors and providers of financing. The withdrawal of the funds is divided into multiple phases. The withdrawal of the capital is tied to the development of the company’s business.

“There is a lot of buzz around startups right now. Still, it is also important to pay attention to companies that are in the scaleup stage. Their needs are very different compared to startups with regard to financing and expertise, for example,” Mantila says.

FACTS: Financing exports by hundreds of millions of euros

• Last year, Finnvera granted more than EUR 960 million in financing for SMEs and midcaps in response to nearly 19,000 financing applications.
• Financing granted to growing and internationalising enterprises was approximately 40 per cent of the total, or EUR 385 million.
• Some 80 per cent of the applicants received a positive decision. In spite of their potential, not all companies seeking robust growth have a long history of financial profitability, in which case their rating might not be adequate. Rating affects the cost and availability of capital.
• The rule of thumb is that the company must have adequate equity in addition to debt-based financing. The level that is generally considered adequate is 30 per cent.
• Private investors and venture capital firms invested a total of EUR 383 million in early stage growth companies the year before last. This represented a year-on-year increase of 42 per cent.