Innovation, Startups and Venture Capital in Iceland

Organise, Standardise, Attract: How Angel Investors Should Contribute to Iceland 2.0

Over the last weeks and months, a lot of talk has been around how innovation (and IP-intensive ventures) should be our focus, when building the next phase of the Icelandic economy. The government has announced and delivered some measures towards that goal – by increasing R&D tax refunds, speeding up Kría (the venture initiative), announcing a matching fund for Covid-ridden startups, and funneling more money into the Technology Development Fund. 

While we could debate forever whether the government is doing too little, too slow, too late, the fact remains that no one’s ever founded a successful business on tax refunds, and that individuals and industry will need to drive the build out of the IP-intensive export industry we require for our future. Much of the government programs aim at exactly that – providing incentives or guiding investments into certain areas –  like venture capital or corporate R&D. One area where this model hasn’t been successfully applied, is the early stage financing part. 

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Most of early stage financing in Iceland (angel & pre-seed, amounts in the several hundreds of thousands of USD) comes from the government in the form of grants from the Technology Development Fund. Private capital in that stage, has been mostly uncharted and opaque, save for several more visible funds or investors.

And this is where the angels should step up: Organise and become accessible, standardise, and attract private capital into the scene.

  • Organise and become accessible to create more visibility into the act of investing early stage in startups, to create platforms where current investors and potential investors can connect and learn from each other and provide more formal feedback on the systems in place. An example is the fact that tax incentives for early stage startup investing are optimised for people investing through their person and the tax incentive is for tax levied on salaried wages. A big chunk of professional angel investing in Iceland happens through holding companies, which are not covered by the incentive. Having an organised accessible forum for professional early stage investors to give feedback on these initiatives might be helpful; whether that’s through a standalone organisation or by being a part of something like Framís (the Icelandic Venture Capital Association).
  • Standardise approaches and termsheets to comply with local and international best practices. Become a resource for both first-time founders and first-time angel investors by providing guidance (and even training) on how to do this correctly: how to structure the deal so the cap table doesn’t deter later stage investment, for example.
  • Attract private capital into the scene by allowing (and even supporting) non-tech/startup high-networth individuals to invest into funds or co-invest into deals. Long term, we need the private capital flows to also go into the arena of startups and innovative companies, and although the local angel investment scene is growing, it can probably do with more help. And fronting less-tech saavy investors could be a good way of increasing the flow of capital from traditional areas like real estate or retail, and into startups (investments that I believe have a more net-positive impact on the economy than for example real estate).

There are of course hurdles, time probably being one of the biggest, to something like this happening. There’s been rumours and whispers on someone working on an angel network since long before I started Northstack, which haven’t materialised. Many of the more prominent angel investors here are also founders or active in their startups which demand most of their time, leading to little time available for other activities. Then there’s the fact that Iceland is tiny and once people know your an angel investor you might be getting too many calls from random strangers for your liking (the story goes that the president is listed in the phone book). 

What do you think? Is this a valuable proposition? Or am I shooting in the dark?

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