Betware was awarded the Entrepreneur of the year 2010 award (Frumkvöðlaverðlaun) by the Icelandic Financial News (Viðskiptablaðið), a weekly business newspaper. Award ceremony was held at Hotel Saga in Reykjavík on the 30th December where Stefán Hrafnkelsson, CEO of Betware, received the award.
The newspaper has published a yearly special edition call Áramót and has included coverage about Betware. An extensive interview with Stefán Hrafnkelsson, CEO of Betware, is one of the highlights of this issue that covers most of the major business events in the Icelandic business of 2010.
The English version of the interview can be found below and to access the original article in Icelandic please click HERE.
The bet that was won
Software company Betware has achieved considerable success since it was founded. The company survived the burst of the dot-com bubble, when investors avoided the software sector like the plague, and it now has solid income sources, exciting future prospects and a productive group of over 100 employees.
Stefán Hrafnkelsson, CEO and Managing Director and the largest shareholder of software company Betware, has endured much during the lifetime of the firm. It now stands on solid foundations, is debt-free and has plenty of reserves to meet unexpected setbacks should circumstances change for the worse.
The history of Betware, which currently has 107 staff, is remarkable in many ways. This is an example of a pioneering company that has been well managed, even though the external environment was often difficult. The wager—an appropriate term in Betware’s case—has paid off. The company was founded in 1998 as a spin-off within the Margmidlun media organisation. The conceptual formulation for the company, however, can be traced back to 1996.
Until now, Betware has worked exclusively with state-operated lotteries and sweepstakes that channel all their profits into social projects. Betware’s largest clients at present include Íslenskar getraunir, Íslensk getspá, Danske spil (the Danish State Lottery), British Columbia Lottery Corporation and Sistema Tecnico de Loterias del Estado (Spanish State Lottery). The largest of these, Danske spil, is also a Betware shareholder, with a holding of approximately 6%. Betware additionally sells over 200 games of various types.
The dot-com bubble and Kópavogur
Betware is a pioneer in the development and manufacture of software and network solutions for state-run lotteries and sweepstakes in Iceland and abroad. Margmidlun, which Stefán also founded, developed network solutions in co-operation with Íslenskar getraunir in 1996. This was the first solution that made it possible to operate sweepstakes on the Internet. It attracted a lot of corporate attention all around the world. Since those early times, Betware has been a leader in its field, growing steadily and securely. The company’s headquarters are in Kópavogur, with branch offices in Denmark, Canada, Spain and Poland. Corporate profits in 2009 amounted to ISK 181m after taxes from a total income of over ISK 1.2bn.
“The company has steadily grown and flourished throughout its lifetime. The external environment, however, has not always been to the company’s advantage. The first few years of our operation were during a period of rapid development in the software sector, but then there were setbacks when the dot-com bubble burst. The problem with the dot-com bubble was that the entire focus was on the sale of shares instead of on building sound business models and selling products. This had a huge effect on the software sector, and you could say that many of those trying to establish themselves in this industry, either as investors or as software producers, had a very rude awakening in the end. As a result, funds invested in Internet companies all over the world were in many cases wasted,” says Stefán. The dot-com phenomenon contracted rapidly between 2000 and 2002. The Nasdaq Index fell by 80% during this period, not least as a result of investor over-confidence in the Internet. “In retrospect, I think we could say that we were lucky to be properly focused right from the time when we created our first Internet solutions. When the Icelandic currency was at its strongest, during the boom period, our income in króna was less than we would have liked. The fall of the króna strengthened our position considerably, even though the costs of some of our overseas operations are also in foreign currencies. This position has now weakened somewhat due to the recent strengthening of the króna.”
Steady growth for Betware
As a small start-up company, Betware survived the upheaval in the software sector and then some. The company’s growth was steady during that period. “Betware’s focus has always been on revenues. The basis for operating a company, whatever field it may be in, is obviously tied to a secure source of income and based on a realistic income model. When we were searching for funding in the early days, I described the venture as a risk investment where investors could either win or lose. I said that the likelihood that investors would lose everything was around 1/3, the chances that they would not make any make any money but would break even were around 1/3 and then there was a 1/3 possibility that the investment would provide good returns. When the dot-com bubble was at its peak, we received no funding because business plans in general assumed unrealistic goals, making Betware’s business plans seem unattractive. Just before the market collapsed, sometime around the year 2000, we managed to attract extra investment into the company. A total of [ISK] 240m of new share capital has been put into the company since it was established,” says Stefán. This corresponds to approximately [ISK] 500m at present value. According to experts interviewed by the business newspaper Vidskiptabladid, the company’s current value is said to be at least three to four billion króna, and may even be considerably higher. Stefán says, however, that it is impossible to say what the market value is because the current shareholders have not been selling their shares. From the very beginning, the focus has been on presenting realistic plans and systematically bringing them to fruition.
Products and development
Stefán says that Betware is at a crossroads in many respects. Work on policy changes is underway within the company, and Stefán believes this will strengthen the company for the future. The changes involve shifting the company’s income base so that it becomes driven more by product sales rather than the current situation where most income comes from contract work. Stefán says that this transition is progressing at a better rate than hoped in the beginning and that there is every indication that the company will have achieved it goals sooner than anticipated. “At a presentation held for the company’s Board of Directors, I said that it would take about two years to change the company if we were allowed additional funds and five years if we did not receive further investment. A year has since passed, and we already have the number of finished products we projected would be ready if we had increased investment, even though we have not actually sought additional funding. On the other hand, profits have fallen due to higher-than-expected product development costs. The management team is still of the opinion that increased funds for product development over the next year would strengthen the company for the future and substantially reduce risks resulting from changes in the market. There are two main reasons for these changes. First, our customers are demanding ready-to-use products rather than paying us for customised solutions. Second, income from products (licence fees and services which are often called subscription income) is much more valuable to the operation than contract work. In this connection, we should mention that when the value of the company is examined, a multiple of EBIDTA is often used. That multiple is many times higher when the income comes from licence fees and services compared with what we receive from contract work. This change to the company’s business model is therefore important.”
Research and development
The development of new software is a large cost item for Betware, just as it is for most other software companies. Deciding how much money should be spent on the development of new software or on changes to existing software can be difficult. Stefán says that a large proportion of Betware’s costs goes into research and development. Approximately ISK 300m has been earmarked for this item in 2010. This is pure development work in which three or four teams work solely on new development, without customers participating in the cost of creating these new products. Six additional teams work on customisations for clients. “As a matter of fact, we spend most of our income on research and development. It is extremely important in the software sector to have highly active operations in the field of research and development. Otherwise, companies simply fall behind. The very basis for existence could evaporate if companies are unable to keep up with the development speed that characterises the software sector,” says Stefán.
He says that the company’s work on research and development is progressing well, although uncertainty relating to how the market will develop is always present. “We have fantastic staff, and it is mostly thanks to them that we have been able to keep knowledge and know-how within the company at the level we need. In addition, after the collapse of the banks, we embarked on an extensive recruitment campaign, with the vision that while others were firing, we should be hiring in order to recruit good employees while the market was in a slump. A year after the collapse, we were able to hire a team of 20 dynamic employees who were available, allowing us to further strengthen the excellent group of people already in place.
However, there is a great deal of instability in the sector related to software programming for all kinds of betting. On the one hand, there is the traditional lottery sector with public ownership in which the profits are channelled to charities, while on the other hand, the private sector (often called the “grey” market, where organisations market their solutions in countries that consider themselves to have patents for betting games) has grown enormously in recent years. These two sectors, state lotteries and the private sector, have seen increased overlapping in recent years. Betware began to compare itself with the private sector four years ago, with the goal of being able to compete when these two sectors finally unite into one. We believe that we are in an excellent position, despite the fact that our “niche” is at present first and foremost state lotteries. I believed that these markets would merge to a greater extent, i.e. the target groups and access to them, and therefore we would need to be able to adapt to these developments. We have been quite successful in this respect. It is relatively difficult to get established in the market in which we operate. We have four substantial clients and a number of other opportunities to look at. The private sector has developed extremely fast—it’s an exciting market. Poker, sports-related betting and various other options are some of the things that people are starting to get involved in and are familiar with on the Internet. This sector has a huge turnover, and it’s continuing to grow at a fast rate. Betware plans to be a participant in this market, but we will only work with companies who have permits from the authorities to operate in the country in question.”
Policy change
Stefán says that this speedy entrance of private parties into the gambling market has meant that many are preoccupied with the manner in which things will develop in the future. For a long time, the general view has been that profits from gambling and betting should be spent on charities. “I have always been of the opinion that it should be good causes that enjoy the profits when I look to the future. This may not be the case in the short term while the private sector is establishing itself in the market. However, I believe that sometime in the future the market will re-impose the criteria that used to apply. Actually, the European Union has been examining these issues regarding state-operated lotteries, in particular whether they should be run by separate companies that tender out the operation for several years at a time. Betware is operating in a market that is changing and evolving rapidly, not least due to the rate at which that market is expanding. Operating in this market in the future will be extremely demanding. I believe that the company is well prepared to tackle the opportunities ahead by entering new market areas and by grasping the opportunities resulting from the opening up of the private sector.”
Exciting future
Sigurdur Jón Björnsson, Chairman of the Board of Betware, says that the company is very strong and that the vibrant team spirit is unique. “The company’s employees are fantastic and highly qualified. They are the company’s most valuable asset,” says Sigurdur Jón. He says that the future of the company is “exciting” and bright. “I look to the future with optimism and believe that Betware can achieve great success in the coming years. The market in which the company operates is growing fast and changing. There is a great deal of knowledge within the company which will undoubtedly prove to be an advantage for the company in the coming years.”
