Innovation, Startups and Venture Capital in Iceland

What’s up with the constant “Annual Report”-reporting?

Last week, Viðskiptablaðið published a news article titled “Grid valuated at 1.7bn ISK” (or ~12m at current exchange rates). The article, which is reporting straight out of the annual report of Brunnur Ventures, states the following:

“In the fund’s books, a 1.9% share of Grid is valued at 31.4m ISK, which equals a little under 1.7 billion ISK in total valuation”

Leaving the rather humorous fact that an article about the annual report of a venture fund headlines and features the image of a single founder, where the fund only owns 1.9% aside, this is a type of reporting that has been a pet peeve of mine for some time. And I’m not saying that to throw dirt on Viðskiptablaðið – I like Viðskiptablaðið, I’ve written an article into it and they do a rather good job of covering startups, which is commendable. I’m just raising the topic of how certain things are reported when it comes to startups (and in this case, it just happens to be VB that is reporting it, I’ve seen other outlets do the same).

First off: a startup’s book value is essentially meaningless. Period. It’s paper money, not realised gains, and often goes through a similar growth curve based on the broader venture landscape, i.e. companies that have raised seed funding tend to have a similar (plus/minus) valuation, and so forth. There are rules of thumbs for these things. And everyone in the business knows it. Grid’s CEO Hjálmar Gíslason (Hjalli) discussed in a recent Facebook post:

“Although the numbers are correct based on the last funding round, this makes for a good opportunity to remind people that shares in startups are worthless until someone is ready to buy them. For that to happen usually takes a long time, a lot of work, well executed marketing, and a good dose of luck, even though everything else is done perfectly.”

Second of all, the annual reports of venture funds – at least according to Icelandic account standards – do not, in absolutely most circumstances, represent the fully diluted value of the share of the fund. Because companies and share price are complex, and startup share prices especially so. There are stock option pools that haven’t been handed out (diluting all other investors), there are liquidation preference, convertible notes, and other terms that could affect the end result. So although the number might be correct based on the share price at the last offering, there are a myriad of variables that might affect the end result. Which makes the “annual-report”-reporting a pet peeve of mine. 

It’s loosely describing a reality that’s in some ways inaccurate, and in other ways something most people that work in the industry don’t care that much about. And it’s not especially helpful for anyone.

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