Avanza was founded in the end of 1997 by Per Nordlander, Sven Chetkovich and Urban Stärner. It was then the 9th online-broker to start in Sweden. The founders had previously, working for Öhman Fondkommision, started Sweden’s first online-broker, Nordnet. The initial funding was put up by Björn Braathen, a Norwegian venture capitalist.

The idea to internationalize the company was awoken rather early, even if they do not consider themselves to be Born Globals. During the summer of 1997, before they started Avanza, discussions where held with E*Trade1) about acquiring a license for all of the Nordic countries. The founders decided to turn this offer down, because that they felt it would take too much time to get up and running. Instead they decided to start their own online-broker in Sweden, and at this time there were no immediate plans to internationalize.

The company was launched with a very successful and aggressive marketing campaign. The main selling point was being the first broker in Sweden to offer a flat rate on transactions (99 SEK per transaction on the Stockholm Stock Exchange). In the end of 1998 Avanza had 5000 clients with trading-accounts.

Until this point, Avanza was more or less just offering very cheap transaction possibilities via Internet or telephone. During the latter part of 1998 the market conditions were changing rapidly. The customers demanded access to much more financial content, such as news, analyses etc. Therefore, Avanza acquired Inside Finans from Scandinavia Online in the first half of 1999. Inside Finans was at that time one of Sweden’s most popular financial information portals. This resulted in the creation of a fully-fledged financial service that has received several awards. It was evident that Sweden was quite far ahead of more or less all of the other European countries in the development of advanced online-brokerage services. This fact brought the idea of internationalization back on the table again.

In the middle of 1999 Avanza started the process of securing the capital that was needed if an international expansion should become reality. Later that year Avanza raised 135 MSEK through a capital injection from Catalyst, a British based venture capital firm. This new funding was meant to cover the initial part of the internationalization process. To raise capital for later parts of the expansion was not considered as a problem, since the reserves of available venture capital seemed endless at the time. During the discussions with different venture capitalists the concept of risk more or less never came up on the agenda. Nobody realized or thought about the risks involved if the internationalization process failed.

At this time, online-brokerage was one of the most hyped industries in most European countries and in the USA. More or less all of the mayor players had expansion plans that stretched over Europe. It was one of the favorite businesses for the venture capitalists to invest in, so funding of these expansion plans was for most participants not a problem. The enormous hype lead to very highly valued companies. The most commonly used parameter to value these companies at the time was the number of accounts (customers) that each online broker had. In Sweden, companies was at the peak valued at 30 000 SEK per account. In Germany the number was 190 000 SEK per account. This valuation method was one of the main drivers behind the extreme growth (compared to profitability) focus in the business.

During the extremely bullish year of 1999 the company grew to 13 000 clients. The portal became one of Sweden’s most popular websites and had over 300 000 unique users per month in the beginning of 2000. At this time the hype also reached its peak (Björnelid, 2001). Avanza was “courted” by many venture capitalists behaving in a way that almost can be described as desperate. They wanted to invest in this industry since it was believed to grow enormously over the next few years. “You are too slow!” was said by many of the venture capitalists at the investor meetings. Avanza’s international expansion had started and they were already growing very fast, but the venture capitalists wanted to see even more and faster growth. This, of course, even more convinced Avanza that internationalization was the right thing to do.

International expansion

The aim with Avanza’s international expansion was to become one of the major pan-European online-brokers. This would take advantage of the general internationalization of the capital markets and the large economies of scale that exist in the online-brokerage environment.

The preparation for Avanza’s international expansion started in the latter half of 1999. The initial target was set to Germany. The reasons for choosing Germany were:

It is the biggest market in Europe;
Besides Sweden it had the highest penetration of online-brokerage accounts;
It experienced a tremendous growth at the time.

Other countries were also considered, but both management and investors agreed that Germany was the best choice of market to enter first. There was a significant pressure from the investors to expand quickly. As mentioned before, the focus was on growth and not profitability.

There was more or less no research done prior to the expansion concerning specific regulations and fundamentals on the German financial markets. The company did not have a correct picture of the cost structures of the financial markets in Germany. This resulted in quite a few problems along the road. Furthermore, there was no real budget or project plan in place before starting the expansion. All this was first set in place after entering Germany.

Two persons were sent from the Swedish office to lead the German venture until local management was in place. The Swedish management was involved in some part of the work. A supervisory board was appointed which contained people from the management in Sweden and the responsible persons in Germany. Due to Avanza’s general high growth, it was not considered possible to dedicate more resources from the Swedish organization. Since speed was of essence, Avanza decided to use German management consultants as a temporary substitute for the local management. This turned out to be a bad and expensive choice. The company experienced that the consultants almost made more harm than good. Avanza used different headhunters for the recruiting process. At this time it was relatively tough to find qualified personnel in the finance sector. The boom made recruitment a hard process, which resulted in that it took quite long time to fill the key management positions.

As mentioned, the German market was relatively advanced and was experiencing a spectacular growth at this time. In the first half of 2000 the total number of clients more than doubled. The market was totally dominated by four players; Bank 24, Direkt Anlagen Bank, Comdirect and Consors. These were all spin-offs from major German banks. Besides Avanza there were several other online-brokers trying to enter the German market at the same time, both domestic and foreign ones.2))

The initial plan was to launch the German service in middle of 2000. The major hurdle to get the service online was to get the systems up and running. The systems for an online-broker are complex. The idea was to build a system from scratch and not to reuse the systems that were operational in Sweden. The reason for this was that the company wanted to build a state-of-the-art and highly scalable solution that later would form the base for Avanza’s further expansion in Europe. This system consisted of two main parts; a broker and back-office system and an information system. For the first part of the system two German and one Swedish supplier was considered. The Swedish supplier was chosen, mainly because they fitted better with Avanza’s further expansion plans throughout Europe. The second part of the system was supplied and developed by a German company. Due to major delays, especially by the Swedish supplier, the service was not up and running on time. The delay by the Swedish supplier was mainly due to lack of knowledge of how to adjust their existing system to the requirements necessary on the German market and the fact that the supplier used external consultants with limited internal know-how for the project.

In the latter part of 2000 the market came to a complete standstill. The sharp decline in the stock markets lead to drastically lower trading volumes on the exchanges and the interest in opening online-trading accounts more or less disappeared.

Outcome

In the end of 2000 the German operation had grown to about 40 people and the full-scale service had become as good as ready to be launched. Avanza had during the last 6 months tried to get the additional funding that was necessary to continue its international expansion. At this time initial expansion steps had also been taken in U.K. and the Netherlands. The sharp decline in the financial markets during 2000 made it very difficult to raise more capital. In the beginning of 2001 Avanza decided to terminate all international operations since no new funds were received.

The main reason for the failure is considered to be the collapse of the financial markets. This made it practically impossible to succeed. The delay of getting the systems online also played an important role, since this meant that Avanza missed out on being operational when the market still grew considerably. A different timing of the expansion had probably meant a totally different outcome, but not necessarily a better one.

Lessons

If Avanza would try to expand internationally again they would be more cautious - take it slower. In retrospect the internationalization should probably not have taken place at all. The risks connected with the chosen expansion were too high compared to the relatively small company of Avanza. It jeopardized the survival of the entire company.

An alternative would have been to choose a different strategy. By finding a specific niche, instead of targeting the entire market, the company believes that they might have been more successful and most importantly taken a more reasonable risk compared to the company’s size. One option would have been to partner up with some local player, and thereby sharing the risk. This would also have solved some of the problems that arose due to the lack of detailed knowledge of local market conditions.

Another lesson is that the company should have decided to cut the losses earlier than they did. When the market started to drop in the middle of 2000 they company was affected doubly. The growth on the online brokerage market stopped and at the same time the supply of venture capital disappeared quickly. It would have been wiser, and cheaper, to terminate the international expansion at this time instead of waiting more or less a year to do so.

A more specific lesson is that consultants would have been used in much lesser degree and instead in-house general branch expertise would have been used to a larger extent. In retrospect it might also have been wiser to choose a German supplier for the back-office system. Considering the complexity of these systems a supplier with local knowledge would have diminished the risk of being delayed significantly. As it was know the advantages with the Swedish supplier did not compensate for the extra risk involved.

Today

During the summer of 2001 Avanza was bought by one of its Swedish competitors, HQ.se. The new company kept the Avanza name. The company recently received the award as best Swedish online broker of the year and are today with its close to 100 000 clients the largest online-broker in Scandinavia. Avanza has no international presence at the moment.

It should be mentioned that more or less all online-brokers that entered the German market at the same time as Avanza have closed down their operations in Germany. Furthermore, the four main players on the German market are experiencing severe problems today. The main cause for this is that they, just as Avanza, failed in their attempts to expand throughout Europe. This has resulted in huge losses and many of their foreign operations have been closed down.

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