Analysing Iceland's venture capital landscape

Editor's note: We very rarely repost on The Nordic Web unless we feel that an insight is particularly valuable to our readership. This is one of those occasions, as Kristinn Árni Lár Hróbjartsson, the Founding Editor of Nordurskautid analyses the VC landscape in Iceland.

The post that follows is an edited version, the original can be found on Nordurskautid, the #1 resource for following the Icelandic startup scene, we highly recommend it.

By Kristinn Árni Lár Hróbjartsson


The Current status

* This discussion doesn't include NSA Ventures or their investments. NSA is an evergreen fund founded with an initial endowment from the government. It's not structured like classic VC funds, which is what the analysis is about.

Two of the three new funds established over the last year or so are now almost fully deployed in regards to fresh investments.

Eyrir only has a couple hundred million ISK available and Frumtak is currently closing two investments and is unsure if they’ll make any more. Brunnur, however, is aiming at 10-15 total investments and they’ve only announced three until now, meaning, in total we’re looking at 9-13 fresh investments left from the new funds.

This means that we need a new fund to start raising soon, otherwise we might end up with a period of little or no available capital for new companies. As we saw last year, raising VC funds in Iceland is possible, but it might be tricky.


The issues

The Icelandic LP market is tiny

In a sense that almost all the LP’s are pension funds. Changes in pension fund regulation allow the funds to own only 15% of any slhf. Most VC funds use the slhf. corporate form. This means that to raise a fund, a GP needs at least seven participating pension funds (that is, if all the capital comes from pension funds). Banks have been participating as well, but as I said, the pension funds are the main LP’s.

Our funds are small

Most VC funds operate on a 2/20 model. The numbers are interchangeable, but the model is the same. Funds charge a percentage (2%) in annual management fees, and a carry bonus (20%) on gains made.

Iceland’s biggest VC fund, Frumtak, is 5 billion ISK. A 5 billion ISK fund charges 100 million ISK (based on 2%) per year in management fees, a little under 8.5 million ISK per month. The carry bonus comes into play once the fund has returned a profit to its investors, and is therefore not a part of regular operation income or expenses. It’s more so the GP’s have skin in the game.

A VC fund would want to employ investors, analysts, and operators. They need staff to source and vet investments, market their portfolio and build connections. It’s obvious that such operations are hard on a 8.5 million ISK monthly budget. Hence, the three funds all have three or fewer employees.

We also need our funds to be active in collaboration with non-Icelandic funds, building connections and bridges to Silicon Valley and other hubs. That also costs money. We need our VC’s to do a lot, with not very much.

Our VC industry is young, and our VC’s need to have the resources to build these networks and connections. I’m not saying that our funds aren’t doing this, just pointing out that our funds are, well, bootstrapped.

We haven’t had a success story 

We’ve had great companies, sure. But we’ve yet to see a financial success story for a VC backed company. We’ve had a couple of moderate exits in the last years (Zymetech was <$10, Datamarket $11-14m, Clara <$12m, Modio was undisclosed), but no home-runs. A success story (or a few) would make raising a fund easier.

And then there’s the capital controls

A total no-brainer. It’s essentially illegal to transfer funds out of Iceland without special exemptions. It’s a given then, that such measures make growing an industry that allocates capital harder.


The positives

Now let’s take a break from all the gloom. What’s been happening in Iceland in the last years is encouraging. The VC environment isn’t perfect, but there was still 12.5 billion ISK announced last year in VC money. That’s more than the last ~20 years before (At least I think. I’m not that old so I wouldn’t know, and I haven’t researched extensively).

But, building a powerful and experienced investor ecosystem takes time. Startup guru Paul Graham recently discussed this in a talk he gave in Pittsburgh. The topic was “How to make Pittsburgh a Startup Hub

There is one more thing you need to be a startup hub, and Pittsburgh hasn’t got it: investors. Silicon Valley has a big investor community because it’s had 50 years to grow one. […]

If an investor community grows up here, it will happen the same way it did in Silicon Valley: slowly and organically. So I would not bet on having a big investor community in the short term. But fortunately there are three trends that make that less necessary than it used to be. One is that startups are increasingly cheap to start, so you just don’t need as much outside money as you used to. The second is that thanks to things like Kickstarter, a startup can get to revenue faster. You can put something on Kickstarter from anywhere. The third is programs like Y Combinator. A startup from anywhere in the world can go to YC for 3 months, pick up funding, and then return home if they want.

My advice is to make Pittsburgh a great place for startups, and gradually more of them will stick. Some of those will succeed; some of their founders will become investors; and still more startups will stick
— Paul Graham, Y Combinator

I think we can exchange “Pittsburgh” for “Reykjavik” in Paul’s text, and much of it still holds true.

We’re a young ecosystem, and the most important thing we can do is to show perseverance and tenacity. Grow what we can grow. Make things better, slowly but surely.


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