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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.