Easing capital controls: Effects on the startup scene

This post is was originally published in the Northstack Memo, our weekly newsletter. You can sign up here.

Last week parliament finally passed a bill easing the capital controls:

Individuals’ and companies’ freedom to transfer funds to and from Iceland and to carry out foreign exchange transactions will increase greatly, according to the bill of legislation that the Minister of Finance and Economic Affairs will present before Parliament tomorrow. The bill is part of the authorities’ capital account liberalisation strategy, introduced on 8 June 2015. With it, important steps are being taken to lift the capital controls in full. The bill has been prepared in accordance with recommendations from the International Monetary Fund (IMF), with economic stability and the public interest as guiding principles. (Finance Minstry)

This is obviously a huge step for Iceland, and could mean big changes for the startup scene. Just for kicks, I dug up an old tweet from investor Chris Dixon at Andreesen-Horowitz:

Investors that wanted to put money into Iceland were able to choose between two exchange rates for the Icelandic krona. Offshore rates which were cheaper for the investors (i.e. got more kronas for each dollar) and onshore rates, which were more expensive. However if you picked the offshore rate, your money was “stuck” in Iceland. Investors that chose the onshore rate could move the money around.

Note: This was a surprise to me. I believed that foreign investors were not able to get money out of the country after they invested. However, I wonder whether that possibility was advertised enough.

Although the possibility was there, to use the onshore exchange rate and invest “normally” in Iceland, some startups chose to go the dual-structure route. Those startups incorporate overseas (Delaware or London, for instance) and keep all intellectual property there. Then they found a subsidiary in Iceland (hence the dual structure) that bills the parent company for development.

This means that the main benefit for the Icelandic scene is making foreign direct investment possible for Icelandic investors. Both individuals and institutions.

Therefore, Icelandic VC’s can now invest in non-Icelandic startups. And Icelandic angel investors can invest in non-Icelandic startups as well. This is great news.

Let’s dive into why.

  • Diversification: Maybe not a major issue, because most startups that receive investment are on an international level. But betting on companies from more locations than one (i.e. Reykjavik) might be a way to diversify the portfolio.
  • Specialisation: Icelandic VC’s and investors could use this opportunity to specialise in a vertical. Instead of specialising in companies that are in Iceland, a fund could decide to focus on VR and AI companies. If that kind of decision is made, it’s obviously better to have access to a bigger pool of startups.
  • Larger funds: Iceland specific VC’s don’t warrant the size of fund that would be optimal. A bigger fund means higher management fees which means the fund can invest more in staff (like analysts) and promotion (office in Silicon Valley, travel more, building bridges, etc.). I think it will be hard to make the case for a big (10-15bn ISK) fund, if it’s supposed to only invest in companies in Iceland, especially since we haven’t seen a VC backed exit from Iceland since Datamarket.
  • Better funds: In the longterm, the Icelandic scene should absolutely want their VC’s to invest all over the world. Just like we want our startups to think big and go global, we should want our VC’s to do the same. One or two globally successful VC funds with headquarters in Iceland would raise the quality of the Icelandic scene quite a bit.

How do you think the easing of capital controls will affect the Icelandic startup scene? Shoot me a message with your thoughts.


Ringing the Nasdaq bell – Helga Valfells’ speech

On Tuesday, a Nordic delegation of startups, investors and ecosystem organisations, rang the Nasdaq bell in New York City. This was part of the second #NordicMade delegation to New York. Helga Valfess, CEO of NSA Ventures gave a speech for the occation, and announced Rising North – a €1.5m fund to finance projects that work towards the internationalisation of the Nordic Startup Scene.


I would like to begin by thanking NASDAQ for hosting us here today.

We are here as delegation from the Nordic startup scene and we are truly excited to be here at NASDAQ and in New York City, one of the most vibrant and successful startup ecosystems in the world. 

In the Nordics we work hard, we are extremely loyal to our company and our cause and we love technology. It is therefore no surprise that the Nordics have produced a string of very successful technology companies.  Spotify, Skype, Supercell, Zendesk and Unity have all come from the Nordics.  

In fact over the last five years, the Nordics, which account for only 4% of the European population, have produced over 25% of all European exits.  If we look at this past decade, 1 in 10 technology companies globally valued at 1 billion dollars or more have come from the Nordics. 

In the Nordics, collaboration is an important part of our culture. The five Nordic countries not only share the midnight sun, but we work together, across countries and across organizations to support entrepreneurs building the next generation of billion dollar companies. 

Today, it is my honor to launch an initiative called the Rising North. The Rising North is a €1.5 million fund to support the internationalization of the Nordic startup ecosystem, to be allocated over the next three years to joint Nordic projects to accelerate the region.

Finally I would like to thank NASDAQ for building a bridge between the Nordics and America.  This truly Iinternational exchange has provided the capital to bring so many great Nordic companies to the global market.


Iceland has a tech-sector strategy problem

For the last 18 months, as I’ve been writing for Northstack, one thing has become clear. Iceland desperately needs a coherent strategy for its approach to the technology sector. The most recent plans and actions include a wishlist with lots of ideas but lacking strategy, and focused financial reform for startup companies. But I don’t see a long-term strategy, or focused attempts in moving Iceland in a particular direction. What is missing is an analysis of the challenges Iceland faces, a decision on where to steer the country, and a plan that makes sense.

One big challenge, or a symptom of a challenge, is brain drain. That includes individuals deciding where to lead their professional lives and companies deciding to build their operations elsewhere.

While this may sound overly pessimistic, I think it’s important. The world is getting smaller. Future generations will not let arbitrary concepts like borders or nations interfere with where they work and live. Due to it’s small size and location, Iceland might lack in big, exciting opportunities. That is, outside of servicing tourists, fisheries, and energy production, there needs to be a reason for the generations of the future to stay here. This sentiment is (somewhat) echoed in an interview with Hilmar Veigar (CEO of CCP) on Kjarninn:

The brain-drain is different now than before. Young, talented people are bolder than before. I see a lot of our smartest people going straight to work, for example at Google, rather than starting a company in Iceland. When I was young, that wasn’t an option, because there was no Google. Working at Microsoft or NASA was maybe a distant dream and there were maybe three Icelanders that went there. It’s completely different now and the multinational companies are so hungry for talent that they find them wherever in the world they are. And the talent looks for those companies as well.

I’ve witnessed this first hand through the winding down of QuizUp. People have asked themselves “Why should I stay in Iceland?” and there really is no clear answer.

For a long time, the lingering thought has been that Icelander’s always come back. They might go abroad to study or work for some time, but in the end, they want to come back. I’m not sure that will continue. There need to be opportunities for people to work at a global scale for Iceland to be competitive.

In the interview, Hilmar mentions how few companies have reached real scale in Iceland:

This means that we have two international companies in the technology sector that have turnover between $500-1000m. Those are Össur, founded 40 years ago, and Marel, founded 30 years ago. Then we have CCP, a 20 year old company, with around $100m yearly turnover, and Meniga and Nox Medical, both with around $10m in turnover. This might be good per capita, but it’s not groundbreaking.

While Hilmar forgot Tempo (on track for about $12-15m in revenue for 2016) he mentions a very important point. Number of successful companies in Iceland may be impressive per capita. But the global talent market doesn’t care about per capita.

As Hilmar mentions, Iceland has shown resourcefulness when it decides to do something. The national soccer team is a good example. In the case of technology, I think we need to do a similar thing. Officials need to analyse the situation and decide where to focus. Invest resources in making Iceland a great place for a specific technology. That doesn’t mean shun other types, it’s just a given that to create a competetive ecosystem we need to focus.

And I think we can do it. Singapore did it with biotech, Isreal did it with high-tech, Montreal is doing it with IT. We just need someone to pull the trigger and decide where to go.


Q3 2016 Funding & Exit report

This quarter’s funding report is the fourth we do, which means we now have a full year to compare to. This is exciting news, because we can now start plotting trends and reading more into the data and where we’re heading. That, in addition to our data gathering project, will help the Icelandic startup community and stakeholders back up (or refute) their opinions with data. You can find older reports here.

  • 6 investments, $20.4m total (disclosed)
  • Average round was $4.08m, four times the Q2/’16 average round, and the highest average since we started doing these reports
  • Iceland accounted for 4% of deployed capital in the Nordics
  • 81% of the capital was from foreign sources
  • 3 of 4 Icelandic VC’s invested in the quarter
  • No exits, which means two quarters in a row without an exit.


This quarter we recorded six investments, and no exits. The biggest investment was Meniga’s $8.2m round, which we record in Q3 because that’s when it was announced (although it closed in Q1).

Funding rounds

(millions of US dollars)

An interesting development is that all the investments were at least $1m. Four investments were into fairly old companies (Meniga, Mint, Greenqloud, Oculis Pharma), and two into younger companies (Datadwell, Takumi). We didn’t pick up any angel or early seed stage investments.

Investments, by size and quarter

We also see a small increase in investments quarter-over-quarter, up to six investments. This implies that the low of four investments last quarter was a seasonal thing (although we won’t assert that, yet).

In regards to the smaller rounds, it’s important to remember that Icelandic angel investors are secretive (or just don’t proactively share their investment data). The fact we didn’t track any doesn’t mean no investments happened.

Number of investments per quarter

This next chart reveals a big positive: We haven’t seen this amount of capital deployed in the Icelandic startup scene for three quarters, and if you don’t count CCP’s $30m round, even longer. The average round is almost double the size of the highest average we’ve had. This is obviously impacted by the age of the companies that were raising funds – maybe we should start tracking that as well.

Capital deployed and average round sizes

(millions of US dollars)

*The average for Q4/2015 doesn’t include the $30m CCP investment

Comparison with the Nordics

As we saw in the last report, recorded investments in the Nordics have grown steadily quarter over quarter. The dataset behind investments in Iceland, and the timeframe we’re looking at, is too small to plot any real trend, but it’s positive to see the number rising.

Number of investments compared to the Nordics

This quarter, Iceland’s $20.4m accounted for ~4% of deployed capital (total $516.2m) in the Nordics, as per The Nordic Web’s funding report.

Funding sources

Bigger rounds, older companies, higher averages. This all leads up to a (fairly) obvious assumption: The money is coming from outside of Iceland. And, it is. Around 81% of deployed (and disclosed) capital in the quarter is from outside of Iceland.

Funding sources

However, three of the four VC funds were active. Brunnur invested in Oculis Pharma, Frumtak in Datadwell, and NSA Ventures participated in Mint‘s round.


Important legal changes happening for Icelandic VC’s, and notes on Slush PLAY

This post was originally part of the Northstack Memo, our weekly commentary newsletter. You can sign up here.

Iceland doesn’t have venture capital association to lobby on behalf of Icelandic VC’s, which might be one of the reasons an important exemption wasn’t extended. I wrote about this back in April:

Raising funds became harder this year

On January 1st 2016, special exemptions for pension funds that allowed them to own up to 20% in a SLHF ran its course. Without the exemption, they can only own 15% of a given fund. That small drop means GP’s need more pension funds on board than before to raise a fund. That’s bad, because in Iceland, pension funds are the biggest pool of investors in venture capital.

One of the VC’s I’ve discussed the issue with, said it would be “very hard, if not impossible” to raise a new fund.

Six months later, the Ministry of Finance includes a provision in a new bill on pension funds to increase this limit to 20%. The change would fix this number at 20%, and not require parliament to extend exemptions every year, like it did the 10 or so years before.

This is obviously great news for Iceland and Icelandic VC. GP’s raising a fund won’t need seven participating pension funds (which is hard), so raising should be easier. That said, I believe asset managers at pension funds will want to see some successes (that is exits) before they pour more money into the VC market.

Slush PLAY and the future of VR in Iceland

Yesterday I wrote about Slush PLAY and its future:

Slush Play, second edition, showed that it’s possible to bring VR and gaming professionals from all over to Iceland. The schedule was full, interesting, and diverse. In addition to bringing people to Iceland, the event brought together the local industry for a two-day extravaganza. I foresee two important functions for the event going forward.

Firstly, as speakers mentioned, we might very well enter a desert walk in the next years. Fewer investments and less general interest. It’s part of the classic hype cycle, and the Icelandic community should be prepared for it. Continuing the event and growing it all the way through the desert is important. That way, when VR is closer to mainstream, one of the most relevant events will be in Iceland. Because when VR gets closer to mainstream, VR events will pop-up all over. Having a 5 year-old proven event happening in Iceland competing for attention will be a great asset for the Icelandic community.

Sorry for the long quote, but I think this is an important point. For an area to become a relevant place in any technology in the long run, it has to achieve competitive advantage. That requires a lot of factors, which I think can generally happen in two ways:

a) Naturally: The area’s industry has the necessary factors to have achieve competitive advantage. This can be gauged using tools like Porter’s five forcesIf the requisites arise naturally, like has happened in Iceland’s seafood industry, the area has a good chance of reaching competitive advantage.

b) With focus: The area’s stakeholders decide to focus on that technology, putting resources into building local expertise, infrastructure, and opportunities (like Singapore did with biotech). In the case of VR in Iceland I think this will be necessary. The reason is that we won’t be able to build a competitive advantage the natural way. That would require us to have forces like hardware producers and demanding consumers, neither of which we have (at the moment).

So – until we’re there, I guess we’ll have to continue putting effort into it, and fake it till we make it 🙂

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