Building an excellent company takes at least ten years. We often see successful companies that we perceive became superstars overnight. Founders of companies like Uber, Lyft and AirBnB had all worked on their current business ideas in some shape or form for over ten years before they became household names. Nothing happens by itself, and it’s usually founders’ tenacity and perseverance mixed with good luck that places excellent companies at the top, where they deserve to be.
The first Startup Reykjavik (SR) program was in 2012. When we started, we didn’t necessarily quite understand what we were getting into. We at Arion Bank knew three things at the outset. Firstly, we wanted to use a model that had worked in other geographies, to support Icelandic founders. That’s why we sought membership to GAN (Global Accelerator Network) and were amongst the first ten accelerators to do so internationally. Through GAN (which in 2012 was called Techstars International), we gained access to a playbook based on Techstars’ approach. Over time, we adjusted our operations based on what worked and what didn’t. I know for a fact that SR’s operations are at least on par with what other GAN accelerators are doing. This work has been led by the fabulous people at Icelandic Startups, whose cooperation and relationship with I hold dear.
Secondly, we knew that establishing an accelerator program could not be regarded as a PR project, which so easily it can be viewed upon by others. Our approach would require unconditional and real support to founders and startups. I can’t tell you how many time in the first 2-3 years I looked into eyes of skeptics on this philosophy. By no means can one take for granted private company’s extensive financial support of a program like Startup Reykjavik. Arion Bank’s total investment (via its daughter company Startup Reykjavik Invest) in the portfolio so far is ISK 176 million (~USDM 1.5), an amount so high for a private company operating in the Icelandic market of 350,000 inhabitants, that taking on such a commitment would never be possible without a clear vision and support of the bank’s top management team. It should also be noted that in addition to the investment, Arion Bank pays Icelandic Startups for operating and developing the accelerator program. The vision is to provide real support to startups and improve the infrastructure for innovation in Iceland. Although I’m probably biased, I clearly see the benefit Startup Reykjavik has provided to the local startup ecosystem in Iceland. Thirdly, we knew that the investment would be long term. We invest in each company that participates in SR. In other words, we sit on the same boat as the founders and share the ride, both in good and bad times. One can expect the journey to last for 10 years with each and every startup, somewhat similar to what VC funds experience.
How have the startups performed to date?
The short answer is: Up and down. As could be expected. In total, 68 startups from various industries have participated so far. Let’s look at some data. These startups have received around ISK 3.8 billion (~USDM 33) in funding, equity and grants post accelerations. The amount per cohort or vintage varies since it makes perfect sense that older cohorts have raised more funding than the more recent ones.
It’s also interesting to see which companies are still active today and which have quit or failed. I use three categories. Active companies are, well, active. Inactive companies are dormant and are deemed unlikely to continue. Sold companies are no longer in Startup Reykjavik Invest’s (SRI) portfolio, usually because the founders quit or the idea failed. In such a case, it is of no value to anyone to keep a startup in the portfolio. In almost all instances, SRI’s share has been sold back to the founders, which then fully own the company and have it at their disposal for potential future business opportunities.
Today’s valuation of SRI portfolio is ISK 278 million (USDM 2.42). The valuation is based on the price paid by investors in the last round of financing. Other companies are valued on likelihood of success based on their activity and communication with SRI. All in all, we see that just over half of the SR companies since 2012 are still active.
Over the long term, one can expect that 5-10% of the portfolio will return the most of the value in the portfolio. It means that each investment will give a return of 5-30x. Some other 5-15% of the portfolio are likely to give a return of 1-5x. Others will probably be lost. Only time will tell. I have stated that Arion Bank’s goal is that the total investment in SR companies will be returned, not necessarily with profit. At the same time, shareholders (founders and investors), consumers in the form of purchased products or services and government in the form of increased tax revenue have benefitted from activities of the SR companies. Unaccounted for is the broadened experience the founders have gained and the multiplier effect on their lives and people around them. In short, this is what innovation is about.