Tag: commentary

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)

Nortstack – Reporting and analysis of the Icelandic startup scene