Category: The Memo (Page 1 of 4)

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.

 

Is interest in startups in Iceland decreasing?

First rule of writing non-fiction online is that ending your headlines with a question mark is completely lame (and the question is usually easily answered with a “no”). However, this time around, this question is honestly something I’ve been thinking about over the last couple of weeks. I’m going to share a couple of thoughts (and data).

My (pessimistic) gut

This thinking started a while back, after we saw that most of QuizUp’s former employees started working at established companies. A large part didn’t even go to startups, but bigger corporate gigs, and only one company was founded from the remains.

At the same time, the economy in Iceland is going well. Low unemployment, low inflation, everything chugging along. Thinking that people that were otherwise inclined to entrepreneurship, find themselves in a nice job instead, could affect this as well.

Competition participation is trailing down

Last week, the Golden Egg business model competition (Gulleggið) announced ten finalists. Gulleggið has been a part of the Icelandic startup and entrepreneurship space for a long time (2017 is its tenth year). I would almost go so far as to say that organised startup community activity was nearly non-existent at that time. Why should it have started before? Everyone worked in finance and life was good.

Anyway, ten finalists were chosen out of 123 business ideas. A decent number, if you look at it in a vacuum. But if we plot the number of business ideas that entered the competition for the last five years, a trend emerges.

gulleggid-graf

The trend for Startup Reykjavik and Startup Energy Reykjavik isn’t quite as clear. Startup Reykjavik bounced back last year after a big drop, and looks to be on an upwards slope, while Energy applications are slowly declining.

accelerators

What do you think could be causing this development in participation? Send me a message.

Events are up and attendance not as much

Anecdotally, I’ve heard comments that event attendance is diminishing. Some attribute it to event fatigue – there’s so much to choose from, the average attendance goes down – but it could also be lower interest levels.

So, we scraped some data (thanks to our main engineer Kári Tristan) and got attendance data for events ranging back to 2011. These are events hosted by Icelandic Startups, Startup Iceland, Innovit, Innovation Center Iceland (NMÍ), Gulleggið, Startup Reykjavík, Startup Energy Reykjavik, Northstack, Sjávarklasinn and Innovation House. We got data for a total of 170 events covering 2011 until this moment in 2017.

Remember, I’m not a statistician and I haven’t done the prerequisite deviation and confidence interval calculations on this for it to be scientific. It’s mostly for the fun, and limited insights. If you’re interested in doing some of that number crunching, I can send you the data we have.

number-of-events

There’s a decent upwards trend in the number of events, which is something most of us that follow the ecosystem have probably noticed. There’s more people planning events, and startups in general have gotten more attention (anecdotally) than in the earlier years.

event-attendees

This graph shows the average event attendees per event by quarter. So an event in Q3 2014 had, on average, 95 attendees. There’s a trendline here, but not as strong as in the total events (and, remember, not scientifically tested).

My hypothesis is the following: Supply of startup related events has grown faster than demand / size of market, which leads to smaller groups of attendants (on average).

Sadly, we don’t have more nitty-gritty data, to see, for example, unique event attendants per quarter, or event attendance retention.

What does it all mean?

Not much, really. You made it to the end of the post, and there’s not a “No” answer to the question posed in the headline. There isn’t a “yes” answer either; it’s a total “I don’t know”.

What kind of data could we use to try to answer this? If you have ideas, let me know 🙂.

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The Technology Development Fund’s role in the Ecosystem

Everyone somewhat involved with startups in Iceland knows of TDF (Technology Development Fund). The fund gives out grants to a lot of companies, and is the lifeline of many in the early stages. While some might argue that angel investments are lacking in Iceland, the TDF definitely takes part in the early stage funding of the Icelandic startup scene.

With recent changes, the fund now offers bigger grants over a shorter period of time. Something that many had been calling for regularly. Last week the fund announced the first recipients of their new, big grant: $600k over two years ($300k per year).

TDF’s announcement:

Sprettur is a major grant, meant to support companies with good opportunity for big growth in the next five years. The companies need to show equity based funding to match the grant.

Obviously, great news for the companies. The one thing I’m puzzled about is the role of TDF in all this. As it is now, TDF and its vetting method (Business plan / excel sheet, who many will tell you is mostly made up) is the gatekeeper for government matching of investment money. Actually, this way the investors are matching the government money.

Now, I’m no expert on government matching programs, but this sounds a bit strange. Most matching programs I’ve heard of – be it Yozma BIRD, or varius angel matching schemes in Singapore, Korea or elsewhere – have the government funding following the investor, not the other way around.

I haven’t found any data on any of this, so I can’t make a judgment, but just based on basic intuition it would make more sense to me that the person making the decision have skin in the game, which is something the TDF definitely doesn’t have.

What do you think of this? Send me a message with your thoughts.

Feedback Friday: Stock Options in Icelandic startups

A couple of weeks ago I sent out a Northstack Memo titled “Do startups in Iceland offer stock options?” discussing whether companies used them or not, and if not, why. I got a lot of feedback on that post, some of which is published below. If you have any thoughts, comments or questions, shoot me a message.

  • Jenný: I sit on five startup boards. One has no share option plan, two initiated a share option plan to employees during the past two years and two implemented a share option plan which I handed to them. My feeling is that this is in pretty good shape in our portfolio. The first point on founders losing stake can easily be addressed with founder vs common class of stocks.
  • Founder: We offer options at my company and have used the new laws to do it in a flexible and nice way. We think it’s a necessary as a way to give a sense of ownership, and not only for the earliest employees, but also for the ones that will come later. I don’t think Icelandic startup employees think much of the value of their options, which is reasonable because most startups fail, or never become valuable enough for the options to gain massive value. It might be that Silicon Valley employees deem the options too valuable, but there’s probably some middle ground there that is correct.
  • Sigurður: We are focused on this. We want a minimum option pool of 10-20%, depending on the company. I think all VC’s emphasize this. We want the company to have options available to make recruiting easier and make the team better. A startup should pay lower salaries and give out options.
  • Helga: We don’t have options, but we have a bonus plan instead. In general, Icelandic employees don’t value options that highly. They mostly look at what they get paid every month, and don’t focus on the long-term possible upside; which is understandable, because there are very few instances of upsides affecting employees.
  • Haukur: I am a founder and CEO and I will definitely offer stock options when it comes to hiring, which I hope I can do Q2 this year. Especially in the early stages, I believe wholeheartedly that it will benefit the company morale and increase productivity. It was one of the things we specially discussed when noting up partnership agreements between the founders.
  • Investor: I’m not sure whether the company’s I’ve invested in offer stock options, but it seems common for early employees to get equity. It’ll be interesting to see whether the new law will make stock options more common. I think your speculations are largely correct.

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Do startups in Iceland offer stock options?

Startups and employee compensation

Over the last couple of weeks I’ve had several discussions about the technical talent pool in Iceland. Some of them led to discussions about compensation schemes.

One of the topics was employee stock option plans and whether they’re frequent or not. Personally, and anectdotally, I have a feeling that they’re not, but I don’t know.

A little background. Until recently, stock options in Iceland were taxed as income at the date of exercise. That means if an early employee decided to leave a startup and wanted to exercise her options, she would have to pay the tax on gains at the time of exercise. With innovation bill this changed, and Iceland is now one of the most lenient countries in the world when it comes to stock option taxation. Even Silicon Valley has people stuck in “handcuffs” because exercising their rights would create a huge tax charge.

But I have a feeling there is something else at work here as well. Because even though taxation like this could stop people from leaving the company, it doesn’t stop top-tier companies in handing out stock options, and employees expecting them, in Silicon Valley. As an example, Facebook – now one of the world’s most valuable companies – gave stock options to the guy who sprayed graffiti on the office wall.

My hunch is that the following mix is at play (caveat: wild guesses, the point is to start a discussion):

  • Owners / founders prefer not to give options because they don’t want to lose their stake. Icelandic exits are few, far apart, and often modest, which leads to the marginal utility of each percent to be higher. That is, if a company is sold at 100m ISK, each extra percent of ownership for the founder has more value to the founder than if it is sold at 10.000m ISK.
  • Employees aren’t used to options. Iceland is a heavily regulated labor market. Theoretically, people could go through their whole working lives without ever negotiating compensation. A labor union has done it for them at some point. Perks and benefits are often also pre-negotiated (like the May and December “bonuses”, vacation days, and random stuff like eyeglass- and fertilization grants). Basically: Employees don’t ask for options. Which leads to them not getting them.
  • VC’s not focused on this. In fundraising rounds, VC’s can affect the option pool available to employees both in nice and not-nice ways. Not blaming VC’s for anything (remember, I don’t have any real confirmation that this is an issue) but I’d guess that VC’s would want their companies’ employees to have a stake in the upside.
  • Maybe people are using other forms of bonus or compensation schemes tied to outcomes. The Icelandic gray market for startup stocks has probably not been very liquid, so stock options could often end up being just worthless paper. Some founders might be using bonuses or similar instead.

What do you think?

  • Are you a founder / executive? Do you offer options to your employees? Why / Why not?
  • Are you a startup employee? Do you have options? How do you feel about that?
  • Both: would you participate in a study / survey about compensation in startups?

As usual, just shoot me a message and tell me what you think!

Update: I got a lot of responses to the Memo when I initally sent it out, some of which I’ll feature in next week’s Memo – sign up here so you don’t miss it.

This post was originally sent out as part of The Northstack Memo – our weekly newsletter with commentary and updates on the Icelandic startup and tech scene. You can sign up here.

The outlook for the Icelandic startup ecosystem in 2017

A record year in startup investments in Iceland

Late last week, we published our annual funding report, summarizing the highlights in Icelandic startup and tech dealflow and funding. The highlights are the following:

  • Record in number of investments, 19 investments recorded.
  • Huge drop in total capital deployed, due to three megarounds in 2015.
  • Distribution across round sizes is very close to the distributions in the Nordics as a whole.

While our data gets more accurate every year, I think there’s a number of investments that goes below the radar, especially angel investments. Did you angel invest, or receive angel investment in 2016? Please let me know.

Overall, a great year for Iceland? Yes …

But there are some warning signs

Here are the main issues I’m currently worried about. Please let me know what you think (agree, disagree etc.) Just hit reply.

  • Fewer active Icelandic VC’s: While the Icelandic VC funds are still active, two of them are mostly depleted (Eyrir Sprotar and Frumtak 2). News from late last year of a new fund (Crowberry Capital) are promising, but they haven’t finished raising. Frumtak will probably raise their third fund as well, not sure about Eyrir. While NSA participated in follow-on rounds, they didn’t make any fresh investments – they’re basically fully deployed. In any case, if nothing changes, the only active VC fund that has money available for fresh investments will be Brunnur. (If you’re interested in a more detailed analysis of the investment funds in Iceland, reach out).
  • Few exits: 2016 had only one exit (Zymetech) which was right at the start of the year. That’s a part of a bigger trend: Iceland is lacking in success stories. A good ecosystem needs recycling of talent and capital (people to exit to start new businesses or invest in others) to thrive. NSA Ventures didn’t announce any exits last year, which further hinders them in investing in new opportunities. Frumtak I, is also due for exiting some of their companies soon.
  • I have a hunch / theory that one of Iceland’s bigger drawbacks as a startup location is the difficulty of exit. In bigger countries you have more corporations and conglomorates that have the capital and power to do acquisitions and acqui-hires. Startups that aren’t on a superstar or high-growth trajectory might opt for a soft landing or graceful exit to pay back investors, get some cash and get back in the game. Icelandic companies generally have to be interesting enough for foreign companies to buy them, because secondary market or PE activity generally hasn’t been active in the startup sphere.
  • There was only one investment in Q4 and no Icelandic investor participated. Most of the activity came in the first three quarters of the year. This may be seasonal – although in 2015 Q4 was the most active by far – but we don’t have enough data yet to confirm that.

VC investments is not the only metric that tells us whether a startup ecosystem is in good or bad health. But it is a measurement, that can be compared to measurement other places and time periods, which in turn helps in analysing the environment.

Northstack is gathering data on other metrics as well, and hopefully we’ll be able to do more analyses in the future.

Is investment in Iceland lacking in some stages of a startup’s lifecycle?

There’s regularly talk and discussion about whether Iceland is lacking in VC funding. Some suggest we lack in early stage – that’s the thesis of the Crowberry Capital founding team. Their rhetoric implies that they have interesting early stage investment options lined up, which supports that idea. To be fair, if I were raising an early stage fund, I’d probably use the same rhetoric.

Others say we lack in late stage; that companies hit a roadblock when they reach the growth stage.

We don’t know. Maybe both is true. To visualise it in some way, we decided to map rounds by sizes and compare to Nordics overall, and try answer the question with data. (Nordics data graciously provided by The Nordic Web)

q3-2016-funding-memo-001

Iceland looks similar to the Nordics, except for the drop in $0.5-1m rounds (typically early stage) and jump in $5-10m rounds (typically growth stage). Remember that this is a small data set, so take with a grain of salt. The question of where funding is most needed is still an open one.

What do you think? What do these numbers say about the state of startups in Iceland? Message me your thoughts.

This post was originally sent out as part of The Northstack Memo – our weekly newsletter with commentary and updates on the Icelandic startup and tech scene. You can sign up here.

Crowberry Capital, and the funding environment report

Innovation ministry releases report on startup financing

From the ministry’s website:

On the basis of the action plan for entrepreneurship and innovation, Initative and Progress, announced by Ragnheiður Elín Árnadóttir, minister of Industry and Commerce, in December 2015, a detailed mapping of the startup funding environment has been made. The aim is to gather information about financing options for entrepreneurs and startups, from the initial stages through growth, identify needs for improvement, and diversifying the funding resources and options offered.

First off, calling the report a “detailed mapping of the startup funding environment” is a stretch. The report gives a brief introduction to the various funds and institutions that directly support startups financially, but includes no empirical data on the funding environment (in my opinion the most important part of mapping a funding environment). The reason is simple: the data doesn’t exist. The ministry knows it – Northstack met with the minister several months ago on this exact issue. While this may sound bitter, it’s not supposed to. We’ve funded the project (thanks to our awesome sponsors) and are working on gathering the data, so that an empirical mapping of funding in Iceland can take place.

This comment is not made to disparage the work of KPMG or belittle the report. The point is simply that doing a “detailed mapping of the funding environment” absolutely has to include empirical data. It’s a disservice to the ecosystem to suggest that we can have enlightened discussions about the problems of the ecosystem without any numbers backing up our hypotheses. I applaud the effort: diagnosing the situation is critical for the creation of strategy (strategy is sadly lacking in much of government). I’m just pointing out that we should have higher demands, and expect our diagnoses to include quantitative data. In this case, it’s mostly unavailable, and hard to come by. Next time, it’ll be more easily available, which can help in defining, evaluating, and choosing actions.

The suggestions are an interesting list of ideas that could, or could not, help. The main problem is that nobody can point to the thing that needs help. Just like a doctor has a hard time suggesting treatment when the only info provided is “I’m sick”, a consultant or government agency can hardly address any ecosystem issues based on a (possibly non-existent) “funding environment” problem.

What do you think? Have you read the report? What are your initial reactions? Shoot me a message with your thoughts.

Crowberry Capital: Iceland’s first female only VC fund announced

Late last week, news broke (Northstack of course broke it) that Helga Valfells, CEO of NSA Ventures, and two of her colleagues, investment managers Hekla Arnardóttir and Jenný Ruth Hrafnsdóttir, are leaving NSA to found their own fund. Their aim is a 5bn ISK / $42m fund, focusing on early stage companies.

Some thoughts:

The move leaves Egill Másson as the only investor at NSA Ventures – other staff are the CFO and the office manager.

According to the press release, the move is in part due to the Ministry for Industry and Inovation’s aim to turn NSA Ventures into a fund of funds. That suggests that the three women are more interested in investing directly in companies than funds.

They aim to raise 5bn ISK, and according to Helga have some commitments. If they succeed in raising that amount (which is probably the bare minimum they could raise to make this work in terms of operating costs) it would mean 17.5 bn ISK (between $140-$150m) in Iceland-focused VC funds in a couple of years.

The trio is betting their livelyhoods (they’re leaving the jobs without having raised the fund) on the interest of LP’s to participate in another VC fund in the short term, and the hypotheses that Iceland has a funding funnel problem that can be solved with more cash in the long term. That it’s the lack of cash, not lack of startups with potential, that is the source of most current problems.

As far as I know, Eyrir Sprotar wasn’t planning on raising another VC fund. Frumtak, however, is likely to take a run at the third fund. Both of their funds are mostly deployed. Frumtak 1 has been completely deployed for some time (and we’ll hopefully start to see some exits soon), and Frumtak 2 has little left for fresh investments. That would mean we have two VC funds competing for capital.

Of the four classic structure VC funds in Iceland, two are all-male, one is mixed, and one will be all female. That has to be some sort of par-capita world record. Most all-female VC funds per capita in the world?

I wholeheartedly wish the trio the best of luck!

What are your thoughts on this? How do you think the LP market will respond? Will they finish raising? (I know way too little about the Icelandic LP market, sadly). Send me a message with your thoughts.

This post was originally sent out as part of The Northstack Memo – our weekly newsletter with commentary and updates on the Icelandic startup and tech scene. You can sign up here.

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