Category: The Memo (Page 1 of 5)

Unpacking the CCP sale

This post is part of The Northstack Memo, a newsletter analysing the tech and startup scene in Iceland.

The CCP Sale

As most of you probably know, Eve Online creator CCP was sold to Pearl Abyss last week, for a $425m in total. Pearl Abyss, a seven year old South Korean gaming company, will keep CCP operating as a standalone studio (for the time being at least).

Several things to unpack here.

First off, it finally happened. There’s been sale rumours surrounding CCP for a very long time. The most recent rumours reached their peak with a hint in Bloomberg, where then VR-leader CCP (they’ve since shuttered VR development), was apparently looking at a $900m+ price tag. Whether or not those were actual talks or not, we’ll probably never know, but it’s fair to say that this lofty price tag was connected to the VR hype of the time.

Second, as the price suggests, unlike most recently acquired Icelandic companies, this acquisition is not an acquihire or tech play, but a business that’s being acquired. Other exits, like Greenqloud, Clara, Datamarket, and more, were all focused on product or people, but never business (that is, revenue). So this acquisition not only shows that we can build cool stuff and great teams in Iceland, but also that there are viable, international businesses that can come from here.

Third, all press regarding this, whether it’s from Pearl Abyss’ CEO Robin Jung or Hilmar Veigar of CCP, mentions that operations in Iceland will continue. It’s almost mentioned too much. Also, people speaking on behalf of the company mention that Pearl Abyss had looked at the government’s plan on removing the ceiling on R&D tax incentives in Iceland when considering the sale. This not-so-subtle hint-hint, nudge-nudge to the government hopefully drives the point home: Iceland needs to be competitive when it comes to tax incentives, because if not, companies leave.

Fourth: the price. $425 million is the highest price paid for an Icelandic technology company ever. The next in line would be the price Amgen paid for Decode in 2012 ($415m). And in typical Icelandic fashion, media immediately started calculating how much money each and every person involved would now be worth (spoiler alert: they’re all doing it wrong). Also, in typical Icelandic fashion, no one really mentioned that part of the price was tied to performance. A big part. A $200 million part. Which is completely understandable, as Pearl Abyss is buying into a cash-cow (Eve Online), probably hoping that the company’s connections in the far east will help Eve grow there, so earnings-related performance ties are completely normal.

The (second?) birth of a gaming sector?

Looking at the news from a higher vantage point, I would make the case that we’re experiencing a birth of a gaming sector.

I know, we’ve had gaming companies before – and when I mentioned this idea to people more experienced than me, I was reminded of a similar time not so long ago when companies like Gogogic were all the rage – but this year alone four gaming companies received their second (or later) round of funding, totaling around $13m, with most of the money coming from leading gaming investors.

Now, I’m not known to be a cheerleader, and don’t want to sound like one, but if at any time we had hope in creating an actual gaming sector, with more than one company consistently turning a profit, developing internationally acclaimed games, attracting talent and creating value for the ecosystem, I’d bet that now is that time.

The NSA Ventures report: Missing data, depth, and doesn’t address the key questions

Three weeks ago, the Ministry for Industry and Innovation (ANR) released a report on the operations and future of NSA Ventures. The report was written by a working group on the matter announced at the fund’s annual meeting last year.

I, and possibly others in the ecosystem, were looking forward to reading the report, which was originally scheduled for late September last year. The funding environment, and ecosystem as a whole, has changed massively in the last several years. (To emphasize, in a recent chat about the ecosystem with a friend who’s been doing this for a long time, he pointed out: “The fact that we’re discussing the ecosystem is a massive step forward from when I was starting out”).

Roughly a year ago at the 2017 annual meeting of NSA Ventures, the Minister for Industry and Innovation, Þórdís Kolbrún, announced a working group to review and propose “well reasoned” changes to the purpose of the fund. The working group was made up of two former board members of the fund, three ministry employees and a strategy professional from a tech company.

Sadly, the overall report was a let down, both in terms of quality of work and lack of critical questioning. Comments, analysis, and discussions in the report suggest that the working group lacked experience with both founding or operating startups and startup investments. No data, outside financial review of NSA, was used to underpin the report. Similarly, no experts or stakeholders were interviewed, and the – in my opinion – big questions around the fund weren’t raised or addressed.

The good

I think it’s important to acknowledge the good points that the report makes, which to me are mainly two points.

First, the group discovered in their work that only looking at NSA Ventures in a vacuum wouldn’t do any good, and therefore suggest a bigger review of the innovation ecosystem in Iceland. It calls for a clear strategy for the Icelandic support system for startups and a unified ecosystem, with clear goals and success metrics, which I applaud. And the Ministry has already, not only because of this report, but it probably helped, announced five project groups that will together create a holistic innovation strategy for the country.

Second, they discuss the need for the Icelandic government to attract high tech companies to the country to enrich the R&D ecosystem in Iceland, using methods such as tax incentives and rebates, as well as easy access for foreign specialists.

Both of these points are in my opinion critical. Sadly, the discussion about NSA Ventures wasn’t this good.

Some background

The future of the fund has been a topic of discussion for a long time. In fact, I wrote one of my longest posts ever on the future of the fund last year, following the minister’s announcement of a working group.

In the last several years there were two big changes in the ecosystem for NSA Ventures. Firstly, in the last five years the number of privately run early stage VC funds went from zero to four. Secondly, the fund – partly due to its evergreen nature – has up until the recent Greenqloud and Valka exits been unable to invest in new companies because it hasn’t had the capital.

This is an important point, because the purpose of the fund has been to finance early stage startup companies, mainly due to a market failure: the lack of access to early stage financing in Iceland.

With private VC funds and an increase in early stage investments from foreign investors, the question should be whether the market failure the fund was founded to address is still there. That question was neither raised, nor answered, in the report.

Now on to the discussion of the report.

Lack of knowledge, data, and expert opinion

Overall, the discussion in the report suggests a lack of knowledge about the sector and understanding of venture capital and startup operations. In addition, use of data to support the report’s findings and discussion of financing landscape developments in the last five years is nonexistent.

The only people the group interviewed was the staff of NSA who all started working at the fund last year with no prior experience with venture investing. No data on investments in Iceland or current access to capital is referenced. No other investors, neither Icelandic VC’s, Icelandic angel investors nor foreign investors, or startup founders were interviewed.

I contacted the ministry for comment which replied with the following statement:

“The working group was composed of specialists in the fields that are connected to the operations of NSA Ventures. The ministry concluded that the group had much breadth and knowledge of the operations and operational environment of the fund, and was well equipped to analyse and assess the options available for the future of the fund.”

Furthermore, on the lack of data, analysis and interaction with the VC or startup community, the ministry commented: “The ministry hired management consultant firm Strategía to analyse how the future operations of the fund should be, both in terms of operations, and in terms of allocation of assets.”

To rearticulate my criticism: My point is not that the individuals in the group lack the ability to contribute to this discussion, but more on the overall composition of the group. The group included no investors or people with venture investment backgrounds (aside from former board members of NSA Ventures), no founders or employees of startups, or direct stakeholders in the ecosystem, nor did the group interview any professional investors, analysts, founders er startup employees or other direct stakeholders in the ecosystem (aside from NSA Ventures employees).

The funding environment

The report briefly discusses the funding environment with regards to other funds. This part is partly factually wrong and partly suggests a lack of understanding of the mechanics of VC investing.

One of the statements in the report is that “it is evidence for the need [of early stage financing funds] that three of the four funds [started since 2015] have already invested all of their capital.” (pg. 5)

This is wrong. Frumtak II, Brunnur and Crowberry all still have capital to invest. Frumtak has stopped doing fresh investments, but a big part of the business model behind VC funds is following up on the more successful companies. Brunnur and Crowberry both still have capital available for new investments.

In addition, last year was the most active in early stage investments in Iceland, ever. Which highly suggests that the market failure NSA was created to solve (i.e. lack of access to capital for early stage companies) is not relevant any more.

The report then goes on to discuss private equity funds (pg. 6), in a somewhat confusing chapter that doesn’t make much sense in the context. It acknowledges the Technology Development Fund as an active participant in the early stage funding environment, but never mentions the host of foreign VC funds that have invested in Iceland in the last years or the angel investment community.

Later in the report, the summarisation of the funding environment is depicted as follows:

“With a stronger Research fund and Technology Development Fund the environment for entrepreneurs has changed as access to funding for the first stages of innovation has increased. After the grants, there are however few options in spite of the addition of new funds. NSA is one of those funds, but it hasn’t been able to invest much over the last years, in addition to the limited capital of other funds. Thus, the gap between grants and early stage investments has grown bigger.” (pg. 7)

This analysis is, in my opinion, wrong, and suggests a lack of knowledge about the Icelandic ecosystem.

  • First of all, now that we no longer have capital controls, entrepreneurs have much more options in terms of early stage funding than before (which Northstack’s data supports).
  • Second, in spite of NSA being strapped for cash and unable to invest, the last three years have been very active in terms of early stage investing, both because of Icelandic VC’s participating, because a much more active angel community in Iceland, and because Icelandic entrepreneurs are fetching foreign seed money.
  • Third, the Technology Development Fund has recently started awarding much bigger grants for shorter time periods (eg. 50m or 70m over two years), which borders on being a seed investment. Which means the gap hasn’t grown bigger, but smaller.

Where is the discussion of the real questions?

With all the above being said, my main issue with the report is the complete lack of discussion about the future set up of the fund and fundamental questions about its purpose and contribution to the ecosystem. When our minister Þórdís announced the working group, she said that the group should make “well reasoned suggestions on the future set up of the fund.” The following questions; what I hoped would be discussed and opined on, were nowhere to be found:

  • Is the market failure the fund has been focused on fixing still an issue today?
    When the working group was started, the minister mentioned that the fund was originally created to counter a market failure in access to early stage capital. Today, we have four private VC funds focused on early stage companies, increased early stage investment activity from foreign investors, and the number of early stage investments has been steadily growing for the last years (last year was the best ever).
  • Is it the role of the government to compete with private firms, or should it support and accelerate the overall environment?
    In today’s environment, we have four VC funds investing in early stage, and one evergreen government backed fund. In the early stage startup market, funds compete – among other things – on the price of money (how much equity the fund gets in exchange for their cash). NSA Ventures is now, for the first time, an active participant in a competitive market, i.e. the government is competing with private firms. The main difference is that – unlike in private VC funds – the investors at NSA Ventures do not have skin in the game (i.e. their own money in the fund, their compensation directly linked to outcomes of the fund, or their job security connected to the performance of the fund) which makes it easier to give discounts.
  • Why does it seem to be hard for NSA to exit their investments and recycle their capital?
    The report correctly states that many of the companies have been in the fund’s portfolio for a long time (the average “lifetime” in the portfolio is nine years with seven companies having been in the portfolio for more than ten years). However, the report doesn’t raise any questions on why. For anyone with knowledge of VC mechanics, a 9 year average portfolio lifetime is very high, especially when you appreciate the fact that most VC funds operate on a 7-10 year horizon.
  • Should the way NSA Ventures appoints members of the board, which is based on lobbyist and stakeholder institutions, remain the same?
    Lastly, the fund’s board, which has a very important say in all investment decisions, is appointed – by law – by lobby groups. That means the board is usually made up of professional lobbyists or board members of lobby groups that often lack experience in technology, software, investing, or business.

The startup ecosystem has come a long way in the last several years. At the same time, politics have become increasingly interested in innovation and the knowledge economy. This leads to a will to make things better, shown through legal acts, committees, and panels discussing meaningful changes for the ecosystem.

While we’ve come a long way, there are still opportunities for it to become better generally, and the government’s participation to be more focused and effective specifically. Especially when it comes to utilising data to drive analysis and decisions, and asking experts to participate in policy making.

Although this report was a letdown, I’m hopeful that the new Innovation Policy Committee’s will be sourced with subject matter experts, both living here and abroad (some of our best people leave the country, but that doesn’t mean we shouldn’t ask them to help).

Because if we’re investing time and money in making the startup ecosystem better, the people and companies of the ecosystem – the reason why we’re trying to make the ecosystem better – should be a part of the discussion.

[Disclaimer: Kiddi recently started working for a company where NSA Ventures is a shareholder]

This post is a part of the Memo, a regular commentary and analysis newsletter by Kiddi, founder of Northstack. You can sign up here.

“Iceland is sold out” and the competition for tech talent

“Iceland is sold out!”

That is how Skúli Mogensen, founder of WOW air described our current talent situation at Startup Iceland last week. It refers to the feeling that our talent pool is too small, and tech companies can’t fill the positions they’re trying to. (Note: it’s possibly a fact, but I don’t have the data – if you have data on access to tech talent please let me know).

When QuizUp went out of business, WOW air hit the jackpot. At the same time that a bunch of talented developers lost their job, the airline was looking to other long-haul low-cost airlines with big bets on technology. WOW hired several QuizUp developers that helped create the technical and organisational underpinnings of a new department, Wow Labs. At the same time, Icelandair was going through a similar phase, with Icelandair Labs (yes, the naming is … similar).

Now, a little under two years later, Sveinn Akerli, WOW’s CIO, announced in an interview with Viðskiptablaðið that the company was looking to hire 100 developers in Iceland, multiplying their current development team. Sveinn said in the interview that they expected to hire a mix of of Icelanders and foreigners.

In addition to WOW’s massive expansion, we have NetApp Iceland still working on their expansion – currently 9 open positions in Iceland. Bókun was recently acquired with plans to grow their operations in Iceland, Teatime Games just raised $7.5m and is hiring, and we’ve had the best fundraise quarter for a long time.

Our talent building process lacks an essential step

Although the Universities are now churning out fresh developers as never before, we’re still lacking in talent. We’re a generalist nation, and once you require deeper skills or specialities, the number of people that possess them dramatically decrease.

In my view, one of the reasons behind this is lack of international presence in the labor market, both as employers and as employees. We can have the best university system in the world, but if there aren’t employers to take the fresh graduates and train them in international collaboration, work systems and discipline, there will always be something missing. In addition, international presence wouldn’t only create a tech industry with more, and interesting employment options, but would also increase competition between workplaces, putting pressure on Icelandic companies on keeping their stuff together.

The same applies to employees. Iceland is a tiny blip in the middle of nowhere (or well, we’re actually smack between two big markets, which can be an asset). We’re extremely homogenous with similar experiences, thoughts, and viewpoints. Bringing in foreign talent that has tried working in companies with large sales forces, that face heavy regulatory scrutiny, expect professionalism in internal processes and challenge their coworkers, would be very helpful to our industry.

And what are we doing about it?

Many regions, especially those that realise that they need to move away from a completely resource based economy to a more knowledge and innovation driven economy, employ things like business development agencies to drive interest in setting up shop in their region. To my knowledge, Iceland as a nation has only done that proactively for old-world industries like aluminium and silicone plants.

We have an organisation that probably should own these projects, Íslandsstofa – Promote Iceland, but to my knowledge not much proactive business hunting is being done. Why don’t Google, Spotify, Microsoft, Netflix (and so forth) have an development office in Iceland? That’s a question someone, somewhere in the business and innovation government ecosystem should be asking themselves right now.

On the talent side, the Ministry for Innovation, Federation of Icelandic Industry and Promote Iceland are working on creating a one-stop shop for everything you need to know to relocate to Iceland. With the 2016 Innovation Bill, foreign specialists are granted a 25% tax discount for the first three years of their stay, which signals a will to increase the number of expats here. But the marketing of Iceland as a workplace, and indeed this initiative, has been lacking. In 2017, 83 people applied to use it, 54 got accepted. So, tiny numbers, but it’s something. We shouldn’t only be marketing ourselves as a tourist destination; we should be marketing ourselves as a great place to work and live.

In addition to that, Northstack is running an experiment, by creating the first international, tech sector focused job board. (sorry for self-promotion, I promise the reason for this email wasn’t to plug). Hopefully by increasing the awareness of people outside of Iceland about the availability of jobs here, we’ll attract some talent.

This post is a part of the Memo, a regular commentary and analysis newsletter by Kiddi, founder of Northstack. You can sign up here.

How a media personality’s change of jobs might influence the tech industry in Iceland

This post is from the Northstack Memo, our newsletter and commentary on recent happenings in the Icelandic startup ecosystem, written by @kiddiarni.

Yesterday, Kjarninn reported that Icelandic media personality Logi Bergmann would be barred from starting a new media job at Árvakur – publisher of Morgunblaðið and owner of K100.5 radio station – for twelve months. The reason? His former employer, 365 (owner of Stöð 2 and Fréttablaðið) is suing, because Logi had a 12 month notice period, as well as a 12 month non-compete after the termination period, barring him from working at another media company.

How does this connect to Icelandic startups? One word: Non-competes.

If this decision will be upheld by courts it could set a dangerous precedent that makes non-competes not only legal but enforceable.

Non-competes bar employees of a company from working for a company in a similar industry for a certain amount of time after their departure from the current company. And they slow down innovation. And are bad.

The claim that non-compete clauses chill innovation should not catch anyone by surprise. Think of Silicon Valley, the world’s technology center. California law forbids Silicon Valley firms from using non-competes, and employees are largely free to move. Workers’ mobility creates knowledge spillovers across firms and throughout the industry, all of which stimulate greater innovation. It was Bob Noyce, the founder of Intel, who hailed “the mobility of our personnel, which quickly diffuses knowledge of new techniques in design, production, and marketing.” (from Fortune)

The clearest example of this is between Silicon Valley in California and Route 128 in Massachusetts. Research suggests that the difference in how the two states deal with non-competes (in California they’re not enforced) had an impact on the growth of Silicon Valley and deterioration of Route 128 (relatively speaking). From the abstract:

[Professor Gilson] contends that legal rides governing employee mobility influence the dynamics of high technology industrial districts by either encouraging rapid employee movement between employers and to startups, as in Silicon Valley, or discouraging such movement, as in Route 128.

Because California does not enforce post-employment covenants not to compete high technology firms in Silicon Valley gain from knowledge spillovers between firms. These knowledge spillovers have allowed Silicon Valley firms to thrive while Route 128 firms have deteriorated. (source)

So, if this issue goes to court and the non-compete will be upheld, it might set a dangerous precedent for Icelandic industry.

Granted, there’s a difference when a company wants to stop a media personality to bounce between media outlets and when engineers move from one tech company to another. But if the findings of the court are very open, it might impact the enforcement of such contracts in Icelandic law as well.

Two notes on the funding report (from the Memo)

This post is from the Northstack Memo, our newsletter and commentary on recent happenings in the Icelandic startup ecosystem, written by @kiddiarni.

Last week we published our quarterly funding report (read it here) where we looked at investments and exits in Q3 2017. This Memo will be short and sweet.

Another top tier VC invests in Iceland

Index Ventures, arguably the top European VC firm, invested for the first time in Iceland this quarter. This adds Index to a (small but) growing list of top tier VC firms that have participated in Icelandic companies. Other’s are most notably Sequoia that invested in QuizUp and WuXi NextCODE (gray area whether it should be counted as an Icelandic investment, I didn’t in the report, but it’s one we should remember anyways), and New Enterprise Associates, that invested in CCP in 2015. This is also second time that Thor Fridriksson (co-founder Teatime Games) brings a top tier VC firm to Iceland (last time was Sequioa).

The significance is in my mind, obvious. Being in Iceland is not a barrier to international investors. Yes, teams need luck and connections, but getting international money is possible.

Also, now that there are two (kindof) investments from Sequoia in Iceland, we’re most definitely the most often Sequoia funded country in the world (per capita).

The QuizUp effect is showing

Two out of three investments this quarter were into companies founded by ex-QuizUp people. Viska Learning was founded by Vala Halldórsdóttir (ex-CRO & Editor in Chief), Stefanía B. Ólafsdóttir (ex Head of Data) and Árni Hermann Reynisson (ex VP Engineering). Note: Their first employees are also ex-QuizUp.

Teatime Games was founded by Thor Fridriksson (ex-CEO), Ýmir Örn Finnbogason (ex-CFO), Gunnar Hólmsteinn Guðmundsson (ex-COO) and Jóhann Þ. Bergþórsson (ex-CTO).

In addition to that, another ex-QuizUp founded company – Takumi – raised a Series A round earlier this year. That brings the QuizUp related rounds to 3 (out of 8 tracked) this year.

(Note: Yes, I’m obviously biased because I worked at QuizUp and they’re all my friends. However, I still find it an interesting datapoint of an effect I discussed in an earlier post).

Uber, Lyft and Iceland: Will they ever come?

This post is from the Northstack Memo, our newsletter and commentary on recent happenings in the Icelandic startup ecosystem, written by @kiddiarni.

Transportation Ministry to look into Uber & Lyft

From Vísir:

Jón Gunnarsson, minister of transport, will appoint a working group to look into the possibility of ride sharing companies like Uber and Lyft operating in Iceland to meet the growing demand of taxis. The minister has already decided to increase the number of taxi permits.

”We’re gathering data and following that, soon in the fall, we’ll create a working group which will have the task of going through the data and creating suggestions for the future of these issues in Iceland,” says Jón. He says the working group will look specifically at Uber and Lyft, because both consumers and foreign surveillance authorities have complained about the current setup.

To put this into perspective, we should add a couple of facts (borrowed from Hallgrímur Oddsson’s excellent piece on Uber & Iceland from last year).

  • There are 560 taxi licenses in the Reykjavik area, the same as in 2003. Since then, inhabitants have increased by 30,000, and the number of tourists has grown from 320 thousand in 2003 to around 1.8 million in 2016.
  • Reykjavik is the only capital in Scandinavia Uber hasn’t entered (they’re leaving Copenhagen and Helsinki, more on that later).
  • There’s a notorious “grab a lift” group on Facebook for the Reykjavik area, boasting ~37.000 members, and regularly mentioned as a danger to both people and taxi drivers by taxi drivers.

Also, in 2014, Reykjavik reached some minimum number of signatures for Uber to start looking into coming here, and Ryan Graves, former CEO and then SVP of Global Operations promised to bring Uber to Reykjavik. As you know, nothing has happened since (to the knowledge of consumers, that is).

Lyft, on the other hand, is even less likely to show up anytime soon. They have focused exclusively on servicing the United States, apart from partnership dealswith other ridesharing companies like Didi (China) or Grab (Southeast Asia).

Why should they bother?

The transportation market is undergoing very interesting changes. There are three major changes affecting the market at the same time, as explained by Ben Thompson of Stratechery:

  • Consumers moving to Transportation-as-a-service (as seen by Uber users)
  • Cars moving to electric (making TaaS more affordable in the long run by decreasing marginal costs on driving)
  • Cars becoming self-driving (eliminating the need for a driver, and driving marginal costs even lower).

Uber’s long term play (and gigantic valuation) is by most accounts based on becoming a leading force in this shift. Consumers are already using the service a lot, and Uber (as well as almost every other technology company out there) is investing in self driving cars. Enormous growth (in locations and users) of the last several years, has fueled the company.

Which is why I’ve been pessimistic about the possibility of Uber coming to Iceland. The cost (and risk) is too high and the benefit too low for the company to decide to come here. Reykjavik, even with the tourists, is just too small to make a difference. The smallest city on a list of the world’s 300 largest cities has 361.000 inhabitants, and if you count the metro area, it has 2.2 million.

Reykjavik, with its 123 thousand inhabitants (and 220 thousand in the metro area) doesn’t seem big enough for a company like Uber to risk litigation. Especially not now that Uber has left Finland’s Helsinki because of legal issues, and has been declared illegal by courts in Denmark.

Or well, at least until we change the rules around it.

The opportunity in pre-emptive legalising

These news are therefore very exciting. Iceland’s size and remoteness make it an unattractive market for most companies looking into international expansion. Add to that very strong labor unions, an expensive labor force, high taxes, not to mention the turbulent currency, and you have a mix of ingredients that don’t make Iceland attractive to market entrants – especially not when these entrants are directly challenging the status quo.

That’s why Iceland’s strategy in dealing with these technologies and society-changing concepts should be to legalise first, ask questions later. Not only should we legalise it, we should recruit the companies and help them set up shop here, in some cases even look into subsidizing their market entry. We’ve been doing it with huge investments before (a recent example is United Silicon), so why not the consumer serving companies that are ushering a new way of going around business? The consumer surplus provided by companies like Uber, Airbnb, Amazon Prime, Netflix and more, should at least be worth the discussion.

Greenqloud acquired by NetApp: Digging through the story

This post is from the Northstack Memo, our newsletter and commentary on recent happenings in the Icelandic startup ecosystem, written by @kiddiarni.

The long-awaited exit

It’s an understatement to say that people in the Icelandic startup scene had been waiting for a meaningful exit for a long time. The last recorded sale to a foreign company is Zymetech’s sale to Enzymatica in January 2016, and the last recorded software company exit is when Autodesk acquired Modio in March 2015.

A little backstory to Greenqloud, from Forbes:

GreenQloud was founded in Iceland in 2010, initially delivering two basic Infrastructure as a Service (IaaS) cloud offerings called Compute Qloud (roughly equivalent to Amazon’s Elastic Compute Cloud, EC2) and Storage Qloud (roughly equivalent to Amazon’s Simple Storage Service, S3). The company invested early in building upon and adding to promising software from a startup called cloud.com, which eventually became an open source Apache project, CloudStack. GreenQloud, as the company’s name hints, also made a strong play of its environmental credentials, with its Icelandic data centers entirely powered by the country’s cheap, plentiful, and 100% renewable geothermal energy. A U.S. data center followed in 2013, when the company leased space in Digital Fortress’ green-ish Seattle location. In 2014 they released their modified version of CloudStack as QStack, and actively began pushing a solution to the hybrid cloud challenges that enterprise customers increasingly appeared to face.

The pivotal moment for the company was in 2015 when they announced a shut down of their cloud operations. Under the leadership of Jónsi Stefánsson, who joined to company as CEO in 2014 (had been on the board before that), Greenqloud doubled down on hybrid cloud management software – Qstack – which led to the acquisition announced a couple of weeks ago.

Fundraising history

Greenqloud had several investors, most of them Icelandic (or Icelandic-ish, Novator Partners is run by Icelanders but located overseas), and one American that joined last year. At this years annual meeting on July 7, 2017, the following were shareholders of the company.

  • Kjölur fjárfestingarfélag, 38.8%

  • NSA Ventures, 15.8%

  • Omega Iceland, s.á.r.l (Novator), 13.4%

  • KP ehf. (Birkir Kristinsson), 11.6%

  • Kelly Ireland, 7.5%

  • Meson Holding (Vilhjálmur Þorsteinsson), 1.1%

This totals to a little under 90% of the company. The rest is owned by founders, employees and minority shareholders, as well as a stock option pool for employees.

Keel Investments invested in the company in 2010, NSA Ventures followed in 2011, Novator led a round in 2014, and Kelly Ireland joined last year. Most of these funding rounds were undisclosed (and at the time no one was really tracking investments like these). The only disclosed round was Kelly Ireland’s $4m investment.

Based on public filings, we can see that in January this year, the company issued just under 480 million new shares when a convertible bond, totalling roughly 1.5bn ISK (roughly $14.3 million in today’s exchange). The filings also show that the price per share for the holders of the convertible bond was 3.2 ISK / share. With a total of roughly 950 millon shares after the conversion, that suggests a valuation of roughly 3 billion isk (~$28.5m).

The final piece in this puzzle is obviously the price paid for the company, which hasn’t been announced. Whether it ever will be remains to be seen. NetApp is a public company, and there’s always some confidentiality clauses because of that, but I expect at least a mention of the acquisition in NetApps Q2/18 results due later this year. If something interesting comes out of it, we’ll report.

Update, Nov 30 2017: NetApp has released information regarding the acquisition: They paid $51m in cash for Greenqloud.

What happens next?

Jónsi Stefánsson, CEO of now NetApp Iceland, did an interview with Viðskiptablaðið recently. There he announced that the company had plans of doubling its operations in Iceland before the end of the year. The company currently has around 35 staff, which means hiring 35 people in four months, in a market with very low unemployment (1% in July) and fast-rising pay for tech talent. That’s a similar growth trajectory in terms of company size, as when QuizUp went from 15 to 85 in one year.

That’s absolutely great news for everyone involved (well, except those that might have wanted to move to the US). It’ll definitely be an upgrade to the Icelandic tech ecosystem to have a R&D department of a Fortune 500 company operating in Iceland, it increases the possible workplaces for Icelandic tech people, and increases the weight of Greenqloud as a stakeholder in the Icelandic ecosystem.

Which leads to an interesting point: Jón fires hard at the Icelandic environment: “If I was starting a startup today, I’d never found it in Iceland.” The reason: subpar support for R&D operations, and just like Finnur Oddsson of Nýherji, he compares it to Montreal, where according to Jón, “the R&D refund would’ve been ten times [what we got in Iceland].” While harsh, it adds Greenqloud to a growing list of companies that pressure the Icelandic government for more R&D refunds (others include CCP, Nox Medical and Tempo). I’d also question the reasoning behind not starting a startup in Iceland because of tax breaks; I doubt many founders pick a place to found a company because of that. What do you think?

The exit also means one very interesting thing for the environment: NSA Ventures might have some cash to invest. The exit should not, however, have an impact on the overall direction of the fund (currently being worked on a by a working group), which I’m very interested in seeing.

Please share the Memo with people you think might enjoy it. Also, if you have any questions or comments, just send me a message.

Crowberry Capital and what it means for the Icelandic Ecosystem

This post is from the Northstack Memo, our newsletter and commentary on recent happenings in the Icelandic startup ecosystem, written by @kiddiarni.

One more VC fund in the mix, one step closer to an industry

With the announcement last week we have four private venture capital firms in Iceland. These are Eyrir Sprotar, Frumtak, Brunnur, and Crowberry. In addition, we have NSA Ventures, the evergreen, government owned venture fund.

More importantly, this addition doubles the number of VC funds actively investing in new opportunities. As many already know, Frumtak and Eyrir Sprotar are fully deployed. NSA Ventures need exits, and cash, to invest in more companies.

With the addition of Crowberry, we’re one step closer to a VC “industry” in Iceland. (A side-question: when does a group of people doing similar thing constitute an industry?). Maybe we’ll see some sort of VC association formed in the coming quarters (IVCA does have a nice ring to it).

First women-only fund in Iceland

It’s hard to write about the founding of Crowberry without mentioning the obvious. The fund is the first female-only VC fund in Iceland, which makes the Icelandic VC industry probably the most gender diverse in the world. (Haven’t researched that, tell me if I’m wrong). Out of the four funds, two have only male GP’s, one is a mix and one is only female. In addition, NSA’s CEO is female. That means the gender ratio in Icelandic private VC management firms, 44% ( are women and 56% are men. A tiny sample, but good news nonetheless.

The fundraising landscape sounds ripe

Aside from the news itself, there are two interesting facts about Crowberry Capital.

First, half of the fund’s shareholders, and 20% of the total capital in the fund, is from individuals. That’s new in Icelandic VC. (Sidenote: Eyrir Sprotar is 1/3rd owned by Eyrir Invest which is owned by individuals, but the owners of Eyrir are active in its management). Apart from that it’s mostly pension funds. (I’ll do a detailed, updated LP analysis later when all documents have become public). This suggests that the LP market is growing, at least somewhat. Maybe we see an insurance company investing in VC next (as I discussed in my previous analysis of the LP environment).

Second, the founding trio of Crowberry left their posts at NSA Ventures in December 2016. They closed the fund mid July – just over half a year later. That is a (very) quick turnaround time. It suggests that Iceland’s main LP’s – the pension funds – still see at least some glimmer of hope in this asset class. I hope that glimmer will stay alive for the next quarters, because there are two management firms (Frumtak and Eyrir) that will need to raise a new fund if they plan to continue and grow.

We can expect 20-25 fresh investments in total

Based on what we know now, we can expect somewhere between 20 and 25 fresh investments, just from the two active funds (Brunnur and Crowberry).

Brunnur aims at investing in 10-15 companies, and has invested in four. Crowberry sets their sights at 15. That means that these two funds will invest in 20-25 companies during their active years, which will be the next 3-5 years.

What do you think about the newest addition to our VC landscape? What effect will it have on the startup scene, & the VC industry? Message me with your thoughts.

NSA as a fund of funds, pros and cons & the big picture

This post is from the Northstack Memo, our newsletter and commentary on recent happenings in the Icelandic startup ecosystem, written by @kiddiarni.

NSA Ventures as a fund of funds

Last week I wrote about the upcoming changes at NSA Ventures. Since then, the Minister for Innovation announced the working group tasked with proposing the changes.

For some time, the idea of NSA Ventures becoming a fund of funds has been discussed, both in public and private. The Ministry of Innovation made a point of it in its action plan Frumkvæði og Framfarir (e. Entrepreneurship and progress) – point 1.4 to be exact:

  • 1.4 NSA Ventures will focus on investing in funds.In the coming years, NSA Ventures will focus on investing in private equity funds (í. samlagssjóðum) alongside other institutional investors. With this action it’s possible to increase investment in innovation in the early stages of commercial activity and at the same time lower the operational costs of NSA Ventures. (translation is mine)  

This echoed in speeches at NSA Ventures’ annual meeting. Individuals have discussed this as well. Most recently, Helga Valfells, former CEO of NSA Ventures and co-founder of Crowberry Capital suggested this in a panel at the Technology Development Fund’s annual meeting (where I was a panelist alongside her).

What is a fund of funds?

A “fund of funds” (FOF) is an investment strategy of holding a portfolio of other investment funds rather than investing directly in stocks, bonds or other securities. This type of investing is often referred to as multi-manager investment. (wikipedia)

NSA Ventures as a fund of funds would invest in investment managers or GP’s that then invest in companies. NSA would become an LP and have a role like the pension funds when it comes to investments. Instead of sitting on the board of individual startups, the fund would outsource those operations to GP’s. That would require fewer staff – maybe only a CEO?

A fund of funds is not a stockpicker (or startup-picker, in the case of NSA), but an investor picker. NSA’s investments in companies would be in the hands of (most likely) private investors. Those would not only invest NSA’s money, but the money of other LP’s (we recently looked at Icelandic LP’s here), and their own. In fact – NSA is already an investor in three funds. Frumtak 1, which invested in companies like DataMarket and Meniga. Auður I, which started as a startup investor but ended up as a classic private equity player, and Brú II, a fund operated by Thule Investments.

This kind of change would mean that the fund’s staff would need new skills. Assessing investors is a different job from assessing startups. There’s definitely some overlap, but you’re looking at different things when you’re picking an investor than when you’re picking an individual company.

Pros and cons of this structure

The possible highlights of NSA Ventures operating as a fund-of-funds are several.

  • It would help regulate the major swings we’ve seen in access to capital. Over the last couple of decades, access to early stage capital has been very volatile. For the last two years there’s been a lot of available funds. The years before that were dry. These excessive swings mean that we don’t have regular dealflow and our VC industry doesn’t develop in a normal sense. And we sometimes forget that our VC industry is also a startup in its sense. The funds need time for successes and failures and to build up connections and rapport.

  • It would mean that direct investment decisions were made by people with skin in the game. The government would be one step away from direct investment in companies. In most VC funds, the General Partners (the people making investment decisions) have their own money invested in the fund. On top of that, they’re compensated with carried interest – a bonus based on the performance of their investments. This means that the outcome of investments has a direct monetary impact on the GP’s, something that’s not a part of the equation when government employees make those kinds of decisions. The government is already handing out money to startups through initiatives and processes without skin in the game (TDF the most relevant example), and there’s no specific reason for many such initiatives.

  • NSA could compare the outcomes of the VC funds. If NSA were an active investor in VC funds, it would likely be a partner in most of the active funds in Iceland. That would give it access to data, and a specialisation in evaluating VC funds and investors. I doubt that Icelandic LP’s (mostly pension funds) have the resources or interest to create that kinds of specialisation. Remember that their share in the Icelnadic VC funds is a drop in the sea when compared to their total assets. NSA could become a vetting mechanism of sorts.

That last point is also something that could become the fund’s drawbacks. Iceland is small and various positions can become  politicized or clique-y. If NSA Ventures would become a stamp of approval for venture capitalists, nepotism and politics could get mixed into it. Especially when you look at the strange set-up of how the board is picked (the Icelandic Confederation of Labor gets to pick one board member, just because). Any changes in the direction of Fund of Funds should include some much needed governance changes.

Other cons that I think of (and please, send me a message with your thoughts on this) are ideology and opportunity costs.

  • Ideology, in the sense that changing how the fund operates doesn’t “start with why“. It’s not taking a step back and discussing whether the government should take part in the venture capital and startup funding environment alltogether.

  • Opportunity costs in the sense that we could miss out on other ways of utilising the government’s will to take part at this funding stage. We could do something completely different. For example a matching scheme, where government matches individual investors who invest in startups. Or a tax break scheme for angel investors like the EIS. The working group’s task is to look at alternatives, and I trust they will look at many and evaluate.

Remember the big picture

The topic of this post is NSA Ventures and the future of the fund. (off topic: I think it’s the longest Memo I’ve ever written. Feedback on the length appreciated!)

It’s important to remember two important points when analysing this.

First, NSA Ventures don’t have money to invest. The biggest part of their AUM is in equity stakes in startup companies. The fund will need to exit those to have cash available to invest in new venture funds. Granted, NSA could promise participation in a new fund without the cash on hand on the hope that they would exit enough to pay up when the time would come, but that doesn’t sound like a sound business plan.

Their portfolio consists of 29 companies. To be able to reinvest in a fund, NSA would need to exit a big part of the companies. That’ll be hard – Iceland doesn’t have an active secondary market for tech companies. The average time since NSA invested in a company is around nine years – which is the typical lifespan of a VC fund. But, NSA Ventures is a governmental institution, and the government has deep pockets, right?

The government has twice put in money; first the 3bn ISK at the beginning, and more recently 1.5bn ISK after the sale of Síminn. There’s always the possibility they would add more money. However, if you look at the financial plan for 2018-2022, there’s no real increase in this policy area. Item 7, Innovation, research and knowledge industries are 14bn per year (the same as in 2017). NSA and the Technology Development Fund are part of item 7 in the financial plan. (Please correct me if I’m misunderstanding).

That brings us to the second point. The future of NSA Ventures should be analysed in the big picture. NSA Ventures is one of many initiatives by the government to increase startup activity, new venture formation, innovation and commercialisation of technologies. It should be thought of as that – one of many – and its future discussed in that capacity.

Where does NSA Ventures fit in now that the Technology Development Fund is handing out grants of up to $70,000? How do the newly passed laws affect the funding cycle and availability of early stage funds? The TDF has 2.3bn ISK ($23m) per year to hand out to innovative projects. should all that be in the same institution, or could part of it be better utilised in some other scheme? How important is it for us to get foreign investors to the table, and should NSA Ventures be a key player in making that happen?

What do you think?

Note: the post has been corrected based on feedback. It previously said that “NSA Ventures values its shares at the price they got when entering the company” which true in some cases wasn’t fully representing reality. NSA does ongoing valuations and their AUM number is conservative (based on their feedback.) Sorry about that.

NSA Ventures is changing: Highlights from the annual meeting

This post is from the Northstack Memo, our newsletter and commentary on recent happenings in the Icelandic startup ecosystem, written by @kiddiarni.

The numbers: $3.6m in losses due to writedowns

It shouldn’t surprise anyone that NSA Ventures was quiet last year. No fresh investments, and just over 200m ISK (~$1.6m) in follow ons. These are normally not announced or specifically listed.

The fund sold its share in three companies – Gogogic, Andrea Maack Perfums, and Transmit. At least two of them, Gogogic and Transmit, have been defunkt for some time, so the sale is more about housecleaning than realising gains. The fund’s portfolio now holds 29 companies. In addition, the fund wrote down 433m ISK (~$3.6m).

Obviously, judging the fund by a its annual report is pointless – profits of a fund like this can vary wildly between one year and the next.

Major changes in personnel

The most interesting story about NSA Ventures these days is the changes in personnel. First of all, three (of four) investment managers left late last year to found their own VC fund. Now it’s also public that the fourth investment manager, Egill Másson, will leave NSA Ventures at the beginning of next month. On top of that, Smári, the CFO, is on leave of absence.

That leaves Huld – the new CEO – and Svala the office manager to oversee NSA Ventures, one of Iceland’s main investors in early stage companies.

And wait, there’s more.

Almar Guðmundsson, chairman of the board, who’s discussed changes in the operations of the fund for some time now, was let go from the Federation of Icelandic Industries (in a chaotic, strangely handled debacle). He’s been chairman of the board for the last three years, and was there when Huld was hired. Whether or not he remains on the board is unclear, but I would say unlikely, as he sits there as a representative of the FII.

Problems and solutions

Almar’s notes in the annual report, as then-chairman of the board, notes several main issues (that I’ve detailed several times in the Memo).

The investments are too old (three companies are older than 20 years old, and seven companies have been in the portfolio for more than ten years), exits have been sluggish (three sales last year but no real returns) and fresh investments have been lacking (no fresh investments in 2016 and only one in 2015). He then discusses the need to reevaluate the legal framework around NSA Ventures, and suggests that the new minister is indeed inclined to do so.

At the annual meeting, Þórdís Kolbrún R. Gylfadóttir, the minister of industry and innovation made a speech. In broad strokes, she discussed the history of the fund, and more importantly, its purpose: to support innovative new companies at their earliest stages, to combat market failure that historically has made it difficult to raise money for new ideas and companies. She mentioned that representatives of the fund have suggested the fund partner with private operators of an early stage fund (General Partners), which could provide positive returns and lower operating costs. She closed the speech by announcing a four person working group that will work on suggestions. She didn’t disclose who was in the group.

In reality, not much new here. Those who have followed this story for the past year(s) have figured it out:

Everything points to NSA becoming a fund of funds.

I’ll discuss what that could mean for the ecosystem later (sign up for the Memo to get all of this straight into your inbox), would love your thoughts and feedback until then. 

What do you think will happen? What do you think should happen?

Send me an email with your thoughts.

Page 1 of 5

Nortstack – Reporting and analysis of the Icelandic startup scene