Innovation, Startups and Venture Capital in Iceland

Covid Response: The Startup Edition

Yesterday, the leaders of the Icelandic government announced the so-called “Package number 2” – a set of economic stimulus initiatives to support the Icelandic economy following the Covid outbreak. The package ranged from grants for companies that had to close due to bans on gatherings, to 100% backed loans (sounds similar to the Swiss loans) for small companies, to added funds to the artist salary fund (similar to the NEA in the US) and more. But what’s of most interest to my dear readers, is the startup and innovation company related response. The minister tweeted out some of the actions and I followed suit with an English version.

First off, the government announced two changes to the R&D tax incentives. They’ll increase the percentage of refunds to 25% (up from 20%) and the maximum amount to be used for the deduction increased to 900m ISK (~$6.3m at today’s exchange rate). This means that the maximum tax rebate for companies is 225 m ISK (25% of 900m). They also indicated they would expedite the payments of tax refunds for 2019.

Second, the Technology Development Fund (our version of Finland’s Tekes), a fund that provides grants to companies doing technology development projects, will receive and addition 700m ISK (~$5m) to fund projects this year. (Note, this had been previously announced).

Third, a temporary matching fund – similar to the UK’s Future Fund – will be put in place to support startups that might have lost funding during Covid. The fund will provide loans through convertible bonds to match private investor funding rounds to startups.

Fourth, Kría – the Icelandic Venture Initiative, that I’ve written extensively about – will be hurried. Instead of starting next year as plans were, it will be able to start operating in 2020.

Fifth, Icelandic pension funds – which are by far the biggest investors in Icelandic startups and innovation – will be allowed to own up to 35% in a VC fund. Before, pension funds were capped at a 20% ownership in venture funds, a fact that is made abundantly clear if you look at the ownership of Iceland’s VC funds, as several of the funds max out in 19.9% ownership. 

In addition to those five things, there were initiatives around the government participating in the cost of hiring students through the student innovation fund, and helping innovative companies hire people currently looking for employment.

Sign up for The Northstack Memo, our newsletter covering the Icelandic startup, innovation and venture capital scene.

But Kiddi, please tell us what you think about these measures!

A public policy discussion in the Memo wouldn’t be complete without me chiming in with my comments, which everyone loves (right?). Anyway, here’s my main thoughts – and full disclosure, I’ve been consulting with the minister on topics related to innovation.

First off, my biggest concerns – which I laid out in an earlier Memo, were the following:

Most startups fail, without the “help” of a pandemic or other crisis. So startups failing during a crisis like we face now doesn’t necessarily mean that they failed because of the crisis.  So the question is: Should the government do anything to save companies that might be going under? And are there circumstances where the Covid-crisis is having the type of impact on startups that would warrant some government action, but the previously discussed actions don’t help? If so, which?

None of these initiatives – bar one – are immediate “save them” initiatives. With the exception of the matching fund (I’ll get there in a bit), they seem to be aimed at increasing investment through current tools, initiatives, and processes, or at speeding up the creation of new ones, already laid out plans. That – to me – seems like a generally good approach. Why? Because building up an economy with IP driven industries is not something that’s created with a knee-jerk reaction. It takes time to build up the talent, financing environment, connections, culture, and so forth, to sustain and build those companies, and no amount of cash infusion will change that.

The actions – like a more R&D incentives, and the options for pension funds to invest higher amounts – have the added value of leveraging private money (which has the tendency to try to find the best returns) to make the investment decisions. The government isn’t a venture capitalist, and shouldn’t be one. But assisting with the creation of one, can be very valuable.

The same applies to the “save them” initiative. The matching fund, while not finalised, but sounds like it will be similar to the Future Fund – will charge the private capital available with extra firepower. That will hopefully help the startups that need funding and would’ve been able to raise without government assistance get through tough times.

All in all, these measures seem like they were made with a long-term view in mind.

Do you like Northstack?

Our coverage is made possible by the support of people who like you, through small monthly donations. Supporting Northstack will help us keep up the discussion, news, and analysis of Icelandic startups, tech, and venture capital.

%d bloggers like this: