Category: The Memo (Page 1 of 4)

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.

  • Keel Investments, 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.

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.

Þórdís Kolbrún in interview with VB – several thoughts

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

A couple of weeks ago, Viðskiptablaðið published its annual Entrepreneurs magazine. The paper named Platome startup of the year (í: sproti ársins) and Mint Solutions entrepreneur of the year (í: frumkvöðull ársins). In my opinion, the most interesting part of the magazine was an interview with Þórdís Kolbrún Reykfjörð Gylfadóttir, Iceland’s minister for Industry and Innovation. I’ll highlight several quotes (translated by me).

  • Þórdís: “We’ve done many things regarding [support for the entrepreneurial ecosystem]. The innovation bill last year, the result of work done by the minister of finance and minister of innovation, greatly improved the environment. That doesn’t mean we can just mark it as done. The new law includes things like tax deduction for individuals that invest in startups and increased tax-refund for companies that invest in research and development. In my opinion the maximum refund should be increased even more. These things were a big step, but we always need to try and do even better.”

A couple of comments.

I’ve written about the innovation bill several times, and specifically discussed the tax deduction for investment in startups. There were several big issues with that change. Based on my discussions with active angel investors, a survey of similar initiatives in other countries, and the fact that only three companies have applied for the status for this deduction to be available, suggests that these laws haven’t been the great success they were set out to be. I’ve previoysly written about the bill in general, and the investment tax deduction specifically. If you’re interested in these issues I recommend you take a read.

The other, and more significant, point in this quote is the fact that the minister thinks the maximum refund should be increased more. If she’s able to move on that it’s great news for both tech companies in Iceland, and the ecosystem as a whole.

It’s public knowledge that Icelandic tech staples like CCP and Tempo have discussed that the environment for R&D is better for them in other countries like Canada or the UK. The R&D tax refund is a part of that environment. The committee that discussed the bill specifically decided not to increase the maximum refund because in their view the bill was for smaller companies. Hopefully this emphasis from the current minister will get through.

  • Þórdís: “I wonder whether we should decide what kind of entrepreneurial- and innovation country we want to be. Are we on the journey of doing everything and being good at everything, or do we perhaps need to consider being excellent at something specific? I don’t necessarily mean one specific sector, but rather that it’s not necessarily the right way to try to be best at everthing, that it could be reasonable to have a clear focus and not spread our efforts in too many places.”

A very interesting comment there, signaling that the minister has been (at least) thinking about whether to focus the governmental effort on specific sectors or technologies. Of course, there are pros and cons to decisions like that, and I will be writing more about these in the coming weeks. But if we were to decide that Iceland would focus on a specific sector or technology, it would mean broadly two things. First, Iceland would have a high-level, long-term strategy in building up innovation capacity in a specific sector, that hopefully would attract companies, specialists and investors in the space to Iceland. Second, it would require not only action on behalf of the Ministry of Industry and Innovation, but a much broader effort including education, finance and more.

All in all it’s encouraging to see that our new minister has both a good understanding of what’s happening in the world of tech and entrepreneurship, and ideas on where to go and what to do.

What do you think about here comments? Did you read the interview? Send me a message and let me know or tweet at me (@kiddiarni)

Who finances startups in Iceland? A look at LP’s

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

While some investors – most notably angel investors – invest their own money in startups, venture capital funds mostly get their money from other investors. VC funds are set up in partnerships, and it’s the LP’s – limited partners – that bring the money. So just like founders and CEO’s pitch VC’s for funding, VC’s pitch asset managers at LP’s for their money.

For most LP’s, investing in venture funds is a part of their diversification strategy, and seen as a low-risk way for outsized returns. Low risk, because the absolute amounts are small compared to their assets under management (AUM), outsized returns, because the best VC returns can be mindboggling (Seqouia Capital and their 10x return on a $400m fund is a good example).

Scott Kupor, managing partner at VC fund Andreessen-Horowitz wrote a post on VC economics, and I highly recommend it. For the purpose of this post, I’m highlighting one part, where he discusses the types of institutions that usually function as LP’s:

  • University endowmentsYale is a famous example

  • Foundations – Non profits that invest their funds to fund their charity

  • Pension funds – That receive money from workers and invest them

  • Family offices – Investment managers that work for very high net worth families

  • Sovereign Wealth Funds – Investing the economic reserves of a country, like the Norwegian Oil fund

  • Insurance Companies – Invest their customer’s premiums, to be able to pay out when something happens (and also to make money)

  • Fund-of-funds – Investment companies that have their own LP’s and allocate money on their behalf

Who invests in Icelandic VC?

In Iceland, we currently have four VC funds (and one on its way) – Brunnur Ventures, Frumtak 1, Frumtak 2, and Eyrir Sprotar. Looking at the LP’s in those has some interesting points:

  • Pension funds are by far the biggest player
    Both in terms of participants (we tracked 12 pension funds that are investors in Icelandic VC funds) and proportion of capital. Around 62% of the roughly 17bn ISK that have been invested (or promised) in Icelandic venture capital since 2008 come from pension funds. While in comparison to the VC market, this is a very big portion of the market, it’s important to keep in mind the vast amount of money available to these institutions. LÍVE (Iceland’s biggest pension fund) alone has 600bn ISK under management, and even if LÍVE was the sole backer of Icelandic VC, this allocation would be way below the 5% mark many pension funds in the US allocate to VC. (It should be noted that LÍVE could of course be an investor in foreign VC funds directly or through fund-of-funds).

  • Of the pension funds, LÍVE is the most active
    This is not surprising, because the fund is the biggest in Iceland. It participated in all four of the funds, and in three of them utilized most of its 20% allowance (Pension funds are only allowed to own 20% of a company structured like a VC fund – more here). In total, the fund has a little under 3bn invested in VC funds, around 0.5% of its AUM.

  • The next biggest LP players are banks
    Which is interesting, as banks aren’t mentioned as LP’s in Scott Kupor’s discussion of LP’s. In any case, all three banks have participated in at least one venture fund. Landsbankinn has participated in three, Arion banki in two and Íslandsbanki in one. In total the banks contribute around 3.2bn ISK, just under 19% of the total money.

  • There’s a lot of LP groups missing
    There are no insurance companies, university endowments, charitable foundations, or sovereign wealth funds listed as participants in the Icelandic VC’s. There’s a couple that could count as family offices – holding companies of high-networth individuals are (small) participants in some – so we’ll call them that.

What does it all mean?

These numbers and observations suggest several things.

  • Icelandic VC’s rely a lot on pension funds, and other types of funds haven’t participated in VC (yet). This could very well be due to the fact that we don’t have a long history of returns in the VC industry, like the US one has. We’re looking at four funds over 9 years, while the US industry has decades to build on.

  • There might be fundraising opportunities for Icelandic VC’s in insurance companies. They are active in other types of investments and might be open to investing in VC. (If you’re a VC and have tried to raise from an insurance company, please let me know – just hit reply).

  • The structure of available capital in general is very different from the US. We don’t have university endowments or big charitable organisations that need to invest their money, or a long history of wealthy families that need investment managers for their family wealth. At the same time, the banks in Iceland step in and participate in these activities. This could mean that we need to find different types of backers for our VC funds.

I’d be very interested in knowing how this matches up to the Nordics and rest of Europe. It could be that this difference is mostly size-related. Iceland is so small that we don’t have massive bequeathals to charitable donations or a lot of family offices. It could also be cultural – I don’t think may European universities run investment offices for their massive endowments.

What are your thoughts? Do you work on the LP side? Can I buy you a coffee and discuss this topic (off-the-record, if you wish)? Send me a message and let me know.

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NSA Ventures’ future, structure, and role in the ecosystem

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

NSA Ventures is standing on crossroads right now. Two investment managers and the CEO left in December to start their own fund. (They’re titled “Venture advisors” on the fund’s website). A braindrain like this calls into question the fund’s long term strategy and plans. These employees have more info on where the fund is headed and chose to venture out on their own.

Late March, the board of NSA Ventures announced Huld Magnúsdóttir as the new CEO:

Huld is an experienced manager with a diverse background from both the private and the public sector. From 2009 she was the Director General of the National Institute for the Blind, Visually Impaired and Deafblind and was the acting director of the Social Insurance Administration between 2015 and 2016. Between 1993-2008 she worked at Össur in Iceland and abroad in various management positions,  …

According to Almar Guðmundsson, chairman of the board of NSA Ventures, Huld is a great catch for the fund. “Huld has extensive business knowledge and experience in innovation, strategy and international operations after working world wide. She has the experience we’re looking for now that the next steps of the fund will be formulated.

The last two lines are in my opinion the most interesting ones. Almar didn’t comment any further on what exactly that means, but I’ll dump my ideas here.

  • The comments signal something that has been on the horizon for some time. From our notes from last year’s annual meeting:

    There will be a full re-evaluation of the funds’ legal structure this year. This is not new, and is mentioned in the Ministry for Industry and Innovation’s plan for entrepreneurship. According to the plan, NSA will focus on investing in funds, rather than individual investments.

  • These statements fit well with Huld’s CV, which doesn’t look like a classic VC hire. Her experience doesn’t come from founding or operating a startup or the finance industry. Rather, her last jobs have been administrative and management roles in institutions, which would be useful if the fund is aiming towards major changes in its strategy and operations.

These two things suggest to me, that the plan is to continue on the road to a fund of funds. This would focus the fund’s capital into investment funds, instead of NSA Ventures funding individual companies.

NSA’s structure (and legacy?)

NSA is an official institution, but not a governmental agency. It’s not part of the governmental budget but its existence is defined in law (nr 61 / 1997). This means that operational details like how directors are appointed to the board is law.

The initial capital used to start the fund is from several funds of the time (including the Fisheries Fund and Industry Development fund). That, in part at least, has led to some interesting rules (when we look at it now) in regards to who sits on the board. It’s a five person board, nominated by the Minister for Industry and Innovation as follows:

  • one without nomination (at the minister’s discretion)
  • one based on suggestions from a coalition of industry (I’m guessing that’s the Federation of Icelandic Industries, SI)
  • one based on nomination from the minister in charge of innovation and development in fishing (The Minister for Fisheries and Agriculture)
  • one based on suggestions from the coalition of companies in the fishing industry (I’m guessing SFS)
  • one based on a nomination from ASÍ (Icelandic Confederation of Labour)

Let’s break this down a bit. Two of five are discretionary picks from two ministers – innovation and fishing. Two are suggestions from the business community – general industry and fishing. One is from the labor organisations.

The discretionary picks make sense to me. While NSA Ventures is an independent institution, it’s built on official money. It’s understandable that the government wants influence in that case. Whether it should be on or two discretionary picks is up for debate.

The suggestions from the business community also make sense when you look at the history of the fund. Some of the initial capital came from industry specific investment- and loan funds. The financing for those came at least in part from the industries, and the law discusses this. The appendix to the law from 1997 discusses the reasoning for this.

The fifth board member comes out of the blue from the labor organisations. Reasoning for why the labor organisations should have a representative are completely absent in documents accompanying the initial bill.

It’s notable that one of the committee members reviewing the initial bill objected to this arrangement. “Nominations to the board show that the authors of the bill are still stuck in the old division by industry. Fisheries and industry have a nominee each, but the service industry has none.” The review further comments that there were suggestions of different arrangements, including nominations from the universities and engineering societies.

Any review of the laws about NSA should definitely look into how board nominations work. In today’s world, it’s worrying that technology industries are not explicitly represented, but the labor organisation is.

This arrangement was debated in 1997, and should absolutely be scrutinized now, twenty years later, in 2017. This is especially worrying now, that the funds most interesting investments are in software and health- or bio technologies. Also, just clearing up why ASÍ should be there would be nice (if you can make sense of it, please let me know).

NSA’s role in the ecosystem

An interesting part of the initial laws that founded NSA Ventures is the discussion about where in the funding stage the fund should operate. The memo that accompanies the law identifies three stages of startup funding: seed, start-up and expansion, and then states:

“The main role NSA will take in investment projects will be … funding expansion.”

It’s likely that this has been changed since the fund’s inception, especially because most of the fund’s fresh investments are in the earlier stages.

But it opens up the discussion about what the role of the fund is, and what it should be. Which leads to the bigger discussion of how the government should support investment in startups and innovation, which initiatives suit best for each challenge, and so forth.

With the new hire, a new minister, and obvious changes in operations at NSA Ventures, a holistic review is in order. Stakeholders – including officials and representatives of the ecosystem – should look at the fund’s role in the bigger picture, diagnose where the challenges are, and apply tried and tested initiatives to address those challenges.

What are your thoughts on this issue? Send me a message with your thoughts.

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Are we looking at a startup downswing in Iceland?

The last two Memo’s discussed the general interest in startups. A month ago, I wrote a post titled “Is interest in startups in Iceland decreasing?”. The main point there was to bring forward data about the declining participation in cornerstone events like Gulleggið – business plan competition, and some accelerators.

And yes, I’m completely aware that I’m starting to sound like a negative tech-journalist-type that wants clicks. But well, I’m neither (not a journalist, don’t care about clicks), and I’m only looking at some numbers. Please, if you have insights or comments, let me know (email). I’m easily persuaded.

There’s just a little under two weeks left of Q1 2017, and if nothing changes – if no investment is announced, that is – it is the first time for a long time that there have been fewer than two investments in a quarter, two quarters in a row. A picture explains this better. The sad block in the lower right corner is us right now. (Also, this means that there’s very little point in doing a quarterly funding analysis for Q1, which makes me sad 😞 )

rounds-per-quarter-001

In fact, the last time we had two quarters in a row with only one investments each was Q3 and Q4 2013. At that time the only active fund investing in startup was NSA Ventures, I believe. Frumtak 1 had closed a year earlier (it was active until Dec 31, 2012) and no other VC fund had started investing.

In some ways, we’re in a similar situation now; there’s only one fund – Brunnur Ventures – that’s effectively active right now. NSA Ventures is capped, Frumtak 2 probably won’t invest in many new companies (they need capital to follow up on their investments), and Eyrir Sprotar is in a similar place, based on the most recent information I have.

Outlook

While it surely doesn’t look good right now, there are (some) positive signs up ahead.

First: the board of NSA Ventures will announce who will be hired as CEO of NSA Ventures this week. Almar Guðmundsson, chairman of the board, confirmed this in an email earlier. That means we should start seeing some movement there. (note: it seems the board did in fact not announce who would be hired as CEO)

Second: Crowberry Capital is raising, and hopefully they’ll close (soon). We could definitely use an early stage fund to keep the momentum going.

Third: I’ve heard rumours about an business angel network initiative. It’s something that has been on the horizon for some time, but apparently there’s some movement getting into that work now. That might spur some angel investment – although I have a feeling that there’s way more of that already going on than the numbers suggest.

Obviously, these three points are only enablers, not drivers, of startups. The main ingredient is founding teams and business ideas, and without them, any amount of VC money won’t help.

What do you think? Are we in for a downswing? Is the golden age of startups in Iceland over, or yet to come?

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Feedback Monday: Is interest in startups in Iceland decreasing?

A couple of weeks ago we looked at some data regarding activity in the startup scene. We received some very good feedback, and are posting it here:

On the gut feeling based on QuizUp and that not many startups spun out from there.

Helga:

  • 1. When evaluating the spinoff effects of a company, you have to have a more long-term view. Many of those that go off and create a new company do so when the former company moves out of the “initial” stage into a more “more of the same” stage. Ie. you have to look at people that have left Quizup since the very early days, esp people that were part of the initial team or the first round of hires.2. It is also too early to tell. The initial response for many employees is to seek a “safer” employment after a startup closes up and then after a short or long stint in the security of a larger employer they decide to venture out again.

On the economic upswing:

Hjálmar:

  • The economic upswing is definitely a factor as well. We saw a clear trend in 2004-2008 when hardly a single startup was created as “everyone” could get a well paid and (allegedly) safe job in finance. And while it’s the logical conclusion for each person individually, it’s not good for society collectively.

Egill:

  • I think it’s obvious that the economic upswing affects the entrepreneurial drive – the same happened in 2004-2007. This also applies, I think, to the interest of angel investors in this asset class. It has decreased somewhat, because there is a lot of other investment opportunities available.

On the basic premise of the article:

Salóme:

  • I think one of the reasons for the development you seen in the data is more options. For example, applications to Startup Tourism increased this year. There’s more available for people interested in startups than before: three accelerators, more focus on innovation and entrepreneurship within the universities, and a specific Entrepreneurship Master’s programme at University of Iceland. In general, I think the activity has held steady, in spite of the economic upswing.

Eggert: 

  • Regarding your thoughts on less startup interest, I think you’re right in many ways. However, my hope is that the startups that are active are becoming better, so that in the end its quality, and not quantity, that decide how well we do in this space.

Hrafn:

  • I’m a computer scientist, and up until recently worked at a startup. The company was going well, but not well enough for salary development to follow the cost development in Iceland. At the same time, expenses grew, and the idea of investing in my own real estate became less attainable.
    Therefore, I decided early this year to move, to a well established company that could offer better salaries and benefits. This is a theme I hear from other people.I think the reason behind this is a mix of many things. But when it comes down to it, I think the main reason is less exciting than many others: people just need to be able to pay there bills. While the bills are growing every month, it’s hard to work at bootstrapped startups.

 

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Nortstack – Reporting and analysis of the Icelandic startup scene