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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.
Crowberry Capital – the new early stage VC fund founded by former NSA Ventures veterans Helga Valfells, Hekla Arnardóttir and Jenný Ruth Hrafnsdóttir – just announced they had raised $38m (4bn ISK) for the funds first close. Final close is at $48m (5bn ISK).
“We’ve been working on preparing and raising the fund since December 2016, and are grateful for the trust our investors have shown us,” says Crowberry Capital cofounder and GP Helga Valfells, former CEO of NSA Ventures. “Our investors are both individuals and pension funds, with individuals contributing around 20% of the fund, and pension funds 80%.”
The fund has a lifetime of 7-10 years and will invest in up to 15 startup companies during its investment period. According to the press release, the founders see much potential in investing in startup companies in Iceland and will focus on tech companies – foodtech, fintech, B2B enterprise solutions, videogames, and more. According to Helga, they foresee their first investment to take place this fall. “We’ve already started getting pitches,” she added.
Jenný Ruth Hrafnsdóttir, previously an investment manager at NSA Ventures and cofounder of Crowberry said: “We look forward to creating value and participating in the growth and development of the companies of the future, by investing in Icelandic innovators. Our hope is that Icelanders will not only use technology, but participate in creating the technologies of the future.”
The fund will become part of a growing ecosystem of private investors in the Icelandic startup scene. It will most likely be a welcome addition to the four funds that have been active in the past years, as three of them are mostly unable to participate in new investment opportunities.
“The cooperation between entrepreneurs and investors is important to success, and the benefit can be great for all participants, not least the society as a whole,” said Hekla Arnardóttir, cofunder of Crowberry and former investment manager at NSA Ventures.
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The second quarter of the year brings the first funding report we do in 2017. The reason: we only recorded one investment in Q1, so there’s no need for a special report on that. This report also is the first one since we started our big Icelandic startups scene data project which means that the data we’re using now is augmented with data from Crunchbase.
Four funding rounds, $14m
This quarter was much more active than the one before (which only had one investment – Goodlifeme / SidekickHealth), and has the same amount of investments as the year before (Q2/2016).
The main difference between the years is the amount invested; the amount invested increased by over 240%, mainly due to two rather big rounds; Meniga and Takumi.
This leads to a (rather obvious) next chart: the majority of capital invested came from outside the country; around 70%.
The bigger picture
In 2015 we had a big influx of capital; three funds that started and were very active in the first quarters. Those rounds were in general fairly small (never above 500m ISK or between $4-5m) and early stage. As we’ve talked about for some time now, two of those funds have stopped investing in new companies, which leaves only one active Icelandic fund at the moment.
Naturally, the rate of investment will slow down. Hopefully for the ecosystem, the sizes of rounds will increase (because the companies that raised before are raising follow-on rounds). In fact, three of the four companies that raised money in Q2 2017 had at least 2 funding rounds before the one they announced this quarter.
There are also some interesting takeaways in regards of the capital coming in. It’s mostly foreign – when our startup companies need growth money they venture abroad to get it. Which makes complete sense; the Icelandic funds aren’t big enough to be able to go as big as the bigger foreign funds.
Sign up for the Memo – commentary and important news about the Icelandic startup scene.
The annual Nordic Startup Awards have opened for votes by the public. The first round of votes will be between local – Icelandic – finalists. The winner of each category will then compete against their counterparts in the other nordic countries.
This year, awards will be granted in the following categories:
- Startup of the year
- Best newcomer
- Best bootstrapped
- Best fintech startup
- Best health / lifestyle tech startup
- Best IoT startup
- Best social impact startup
- Founder of the year
- Best accelerator program
- Best coworking space
- Investor of the year
- Best startup ecosystem initiative
Iceland is surrounded by some of the richest and most prolific fishing grounds in the North Atlantic Ocean and fisheries have long been the mainstay of the Icelandic economy. Healthier oceans and environment is therefore a matter of fundamental importance for the country.
I am very pleased to see how companies and startups in the Ocean Cluster in Iceland are emphasising more and more on saving the environment by introducing better and greener technology:
New bottom trawls that do not touch the seabed. These are controllable doors that float above the seabed, saving the seabed and drastically reduce energy consumption. (Like Polar Doors)
With new fish processing technology comes more yield and higher seafood quality – hopefully we can do more with less in the fishing industry with these technologies. (Like Héðinn, Marel, Skaginn3x, and Valka)
Engineering firms in the field of naval design are introducing energy saving ships; electrical boats with no CO2 emissions. (Like Navis)
Electric winches on board ships yield the same results as traditional hydraulic winches but use much less energy.
Cleaning and disinfecting technology for fish processing plants use only environmentally safe material. (Like Naustmarine)
All fishery nations have learned that they need to be responsible when using their resources. Environmentally friendly technology can improve our lives in coastal communities, increase efficiency and reduce waste and is therefore good business.
Image by Johnny Chen.
NSA Ventures as a fund of funds
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.