The Memo: Iceland might be running into a VC problem, part 2

​Good morning everyone – hope you had a great, long weekend. This memo is going out on a Tuesday because we want you to start the workweek with a Memo 🙂

A couple of Memo’s back, I promised to revisit my prediction about Iceland’s VC troubles. I’ve had time to research it better, as well as discussing it with several people in the industry.

Current status: two of three funds are almost fully deployed in regards to fresh investments. Eyrir has a couple hundred million available (and not sure about fresh investments). Frumtak is closing two investments and is unsure if they’ll make more. Brunnur aims at 10-15 total. They’re at three announced investments now. In total we’re looking at 9-13 fresh investments left from the new funds.

This means that we need a new fund to start raising soon (it’ll take some time to close a new fund). Otherwise we might end up with a period of little or no available capital for new companies. As we saw last year, raising VC funds in Iceland is possible. But it might be tricky.

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Several (gloomy) points about the outlook for Icelandic VC:

The Icelandic LP market is tiny in a sense that almost all the LP’s are pension funds. Changes in pension fund regulation allow the funds to own only 15% of any slhf. Most VC funds use the slhf. corporate form. This means that to raise a fund, a GP needs at least seven participating pension funds (that is, if all the capital comes from pension funds). Banks have been participating as well, but as I said, the pension funds are the main LP’s. With a lot of money. A lot.

Our funds are small. Most VC funds operate on a 2/20 model. The numbers are interchangeable, but the model is the same. Funds charge a percentage (2%) in annual management fees, and a carry bonus (20%) on gains made. Iceland’s biggest VC fund, Frumtak, is 5bn ISK. A 5bn ISK fund charges 100m ISK (based on 2%) per year in management fee, a little under 8.5m ISK per month. The carry bonus comes into play once the fund has returned a profit to its investors, and therefore not a part of regular operation income or expenses. It’s more so the GP’s have skin in the game.

A VC fund would want to employ investors, analysts, and operators. They need staff to source and vet investments, market their portfolio and build connections. It’s obvious that such operations are hard on a 8.5 million ISK monthly budget. Hence, the three funds all have three or fewer employees.

We also need our funds to be active in collaboration with non-Icelandic funds, building connections and bridges to Silicon Valley and other hubs. That also costs money. We need our VC’s to do a lot, with not very much.

Our VC industry is young, and our VC’s need to have the resources to build these networks and connections. I’m not saying that our funds aren’t doing this, just pointing out that our funds are, well, bootstrapped.

We haven’t had a success story. We’ve had great companies, sure. But we’ve yet to see a financial success story for a VC backed company. We’ve had a couple of moderate exits in the last years (Zymetech was <$10, Datamarket $11-14m, Clara <$12m, Modio was undisclosed), but no home-runs. A success story (or few) would make raising a fund easier.

And then there’s the capital controls. A total no-brainer. It’s essentially illegal to transfer funds out of Iceland without special exemptions. It’s given, that such measures make growing an industry that allocates capital harder.

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But wait, it’s not all bad 🙂

Now let’s take a break from all the gloom. What’s been happening in Iceland in the last years is encouraging. The VC environment isn’t perfect, but there were still 12.5 bn ISK announced last year in VC money. That’s more than the last ~20 years before (at least. I think. I’m not that old so I wouldn’t know, and I haven’t researched it a lot).

But, building a powerful and experienced investor ecosystem takes time. Startup guru Paul Graham recently discussed this in a talk he gave in Pittsburgh. The topic was How to make Pittsburgh a Startup Hub.

There is one more thing you need to be a startup hub, and Pittsburgh hasn’t got it: investors. Silicon Valley has a big investor community because it’s had 50 years to grow one. […]

If an investor community grows up here, it will happen the same way it did in Silicon Valley: slowly and organically. So I would not bet on having a big investor community in the short term. But fortunately there are three trends that make that less necessary than it used to be. One is that startups are increasingly cheap to start, so you just don’t need as much outside money as you used to. The second is that thanks to things like Kickstarter, a startup can get to revenue faster. You can put something on Kickstarter from anywhere. The third is programs like Y Combinator. A startup from anywhere in the world can go to YC for 3 months, pick up funding, and then return home if they want.

My advice is to make Pittsburgh a great place for startups, and gradually more of them will stick. Some of those will succeed; some of their founders will become investors; and still more startups will stick. (emphasis mine. Link)

I think we can exchange “Pittsburgh” for “Reykjavik” in Paul’s text, and much of it still holds true.

We’re a young ecosystem, and the most important thing we can do is to show perseverance and tenacity. Grow what we can grow. Make things better, slowly but surely.

This emil is part of our weekly Memo: Commentary on the Icelandic Startup Scene. You can sign up here. If you have comments, thoughts or tips, tweet at me directly at @kiddiarni or send me an email.

Brunnur – one year later: $3.2 million in two investments

Last week we dug into Frumtak 2’s investment and funds and this time around we’re looking at Brunnur. Brunnur is a 4 bn ISK (~$31 million) fund, focused mainly on various technology sectors as well as food production. We covered the fund in more detail last year.


To this date, Brunnur has invested in two companies – ARK Technology and ATMO Select. Both investments were in the fourth quarter of last year. The investments total 425m ISK.

Company Year / Quarter Amount ISK / ~$
ARK Technology 2015 / Q4 225m ISK / $1.7m
ATMO Select 2015 / Q4 200m ISK / $1.5m
Total: 6 425m ISK / $3.2m

According to Sigurður Arnljótsson, GP at Brunnur, the fund foresees at least three investments in the first two quarters of 2016.

Available Funds

Based on public information and comments from Sigurður Arnljótsson, GP at Brunnur, we mapped out the available funds for Brunnur.


Note: We estimated the fees based on general practice in the VC industry, where funds take 2% of the total size per year in management fees. Frumtak has a operating lifetime of 10 years.

Dry Powder is the cash reserves the funds’ GP’s have allocated to followup rounds to their portfolio, which is at the minimum 30%, according to Sigurður. The fund could decide to hold up to 50% for followup cash, but Norðurskautið uses the lower number in our calculations.

Based on this, we can calculate how much of their capital Brunnur has invested. This number ends at around 21%, leaving a little under 80% ready for deployment.

image (2)

Having allocated 21% of its capital on two investments rhymes closely with their stated goal of investing in 10-15 companies over their investment period of 3-5 years.

Comparing Brunnur’s activity to Frumtak 2 over the last year shows that Frumtak 2 has been more active, both in terms of number of investments and deployed capital. Frumtak’s investments have been on a wider scale in terms of size and verticals – ranging from consumer tech to hardware to automobiles – while Brunnur’s investments have been B2B tech products – ARK focused on optimizing energy consumption of marine vehicles, and ATMO Select developing a music management software solution for retail spaces.

Norðurskautið covers the Icelandic Startup and Tech scene. Follow us on Twitter or sign up for our mailing list to keep up to date. You can also join our Slack community –

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Frumtak 2 – one year later: $10.85 million in six investments

Roughly one year ago, GP’s at Frumtak announced the closing of their second fund, Frumtak 2. The fund is a 5 billion ISK ($38.5 million) fund focused on investing in companies that are past their seed stage and show promise of growth and expansion. For more info about the fund, you can read Nordurskautid’s detailed report on the fund last spring (Icelandic).


So far, Frumtak 2 has made six investments, of which four are fresh investments for the fund and two are followups. The investments total 1410 million ISK (around $10.85 M).

The fund was announced in Q1 2015, but understandably didn’t make its first investment until Q4 2015. We don’t have enough data yet to see a quarterly trend.

Company Year / Quarter Amount ISK / ~$
Arctic Trucks 2015 / Q4 400m ISK / $3.1m
Controlant* 2015 / Q4 260m ISK / $2m
Activity Stream 2015 / Q4 116m ISK / $900k
Apollo X (Watchbox) 2015 / Q4 50m ISK / $380k
Unannounced 2016 / Q1 284m ISK / $2.2m
Unannounced 2016 / Q1 300m ISK / $2.3m
 * followup investment Total: 6 1410m ISK / $10.85m

The average investment over the time period is 235 million ISK ($1.8m) and the median is 272 million ($2.1 million ISK). These numbers are right in the middle of their estimated investment span, which is between 100-500 million.

Smaller investments

Frumtak’s GP’s proposed to the fund’s board of directors to invest, lower amounts than the general rule, in several companies. According to Eggert Claessen, GP at Frumtak 2, the fund sees this as an experiment and will invest in two companies in that experiment. Eggert noted that even though the investment amounts are lower than in general, the companies fulfill all the requirements set by Frumtaks investment policy.

According to Eggert, this is based on their experience from Frumtak (their former fund), where they had instances of entrepreneurs they wanted to fund, but weren’t ready for the bigger investments the fund set out to make.

Frumtak’s Available Funds

Based on public information, we mapped out the capital available to Frumtak 2.

image (2)

Note: We estimated the fees based on general practice in the VC industry, where funds take 2% of the total size per year in management fees. Frumtak has a operating lifetime of 7-10 years, so we took the median, 8.5 years and multiplied by its yearly, estimated management fee which totals at 850 million.

As a percentage, we can see that Frumtak has deployed just under 34% of its total capital.

image (3)

The fund’s investment period is four years. Based on the fact that the fund has allocated ~34% of its capital in about a year, the fund is well on its way to finish its investments for the fund – given that the fund keeps investing at the same pace until now.

It should be noted, however, that the funds operating period is 7-10 years, where the fund is able to follow up on previous investments. That means, the fund doesn’t need to deplete itself in the four year investment period.

That would also be in line with the current activity in the Icelandic Startup scene, which has been growing fast.

Updated on March 3, 16:30 to better represent the funds available funds.

Norðurskautið covers the Icelandic Startup and Tech scene. Follow us on Twitter or sign up for our mailing list to keep up to date. You can also join our Slack community –

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Iceland: VR Valley?

In a popular blogpost from earlier this year the investor, tweeter and entrepreneur Marc Andreessen discussed a politician’s pipe-dream: what it would take to create the next Silicon Valley.

In essence his argument is simple: Don’t even try. Trying to mimic an organically grown, entrepreneurial community with governmental stimuli won’t work.

But policymakers shouldn’t be trying to copy Silicon Valley. Instead, they should be figuring out what domain is (or could be) specific to their region — and then removing the regulatory hurdles for that particular domain. Because we don’t want 50 Silicon Valleys; we want 50 different variations of Silicon Valley, all unique from each other and all focusing on different domains.

Why am I quoting this almost year-old blogpost?

Two weeks ago, two Icelandic tech companies, CCP and Sólfar, announced funding rounds, $30 million and €2 million respectively. In both cases, Icelandic investors participated in the funding rounds. In addition to this, Eyrir Sprotar announced an investment in Mure VR, makers of Breakroom VR, a little under a year ago (December 30, to be exact). This amounts to 3 VC investments in Icelandic VR efforts in under 12 months.

This, by my accounts, is a lot. Especially for a small fledgling ecosystem like Iceland’s.

Foundations for a cluster?

For an industry cluster to become possible, and more importantly, globally competitive, many factors are needed. It might be hard, but it is definitely possible. We’ve already seen the rise of the Icelandic Seafood Industry which is now one of the most competitive and best run seafood industries in the world. Maybe the next cluster is the VR cluster?

Even though the recent VR investments are focused on one industry (i.e. Virtual Reality), the companies and their products are fairly diverse. CCP is pure gaming, launching two games in 2016 – Eve Valkyrie and Eve Gunjack. Sólfar just announced Everest, which by accounts seems more of an experience, or attraction. Mure VR is developing Breakroom – a VR product for the workplace. This means that we have 3 funded VR companies that are experimenting with three different aspects of the VR platform.

Facebook's Mark Zuckerberg playing Eve: Gunjack on the Samsung Gear VR
Facebook’s Mark Zuckerberg playing Eve: Gunjack on the Samsung Gear VR

We might have the beginning of a VR industry in Iceland, where Iceland is one of the places where talent interested in VR goes to work. Where VR companies build offices and where VR innovation happens.

Icelandic regulators should pay close attention. If these companies start gaining traction, officials should make sure the environment here is great for starting VR businesses. They could encourage the adoption of VR technologies, and fund research by Universities and academia to further innovation in the sector. How exactly regulators should enable a VR industry is not mine to say, but to quote Andreessen, the government should do what they do best: “create, or rather, relax laws.”

Risky business

While I’m ecstatic that entrepreneurs and innovators in Iceland have been able to secure the confidence and cash of investors, we must remember that VR is a very untested market. Several days ago, EA Games, one of the gaming industry’s giants, announced that the company would not invest heavily in VR gaming for the next several years. The reason: they don’t believe the market is there or will be there for the next 5 years.

This, of course, could be the arrogance of the incumbent. Incumbent smartphone manufacturers didn’t believe people wanted touchscreens until the iPhone came, and then it was to late for the incumbents.

Analysts don’t agree either. Kzero, a consultancy group in the virtual space, estimated that the consumer VR market will be $5.2 bn in 2018. Another consultancy, Digi-Capital, estimates the joint AR (augmented reality) and VR market to hit $150 bn by 2020 (and the VR market in 2018 supposedly will be a little over $15 bn according to their graphs). The third group, Grand View Research, estimates VR gaming to hit $9.55 bn by 2022. In short, a lot of unknowns.

The prospects of Iceland becoming a hub for VR increased dramatically last week, but it’s still far from certain. To get there, we need to help the current companies succeed, enable new ones, and create an environment where this industry can prosper.

Norðurskautið covers the Icelandic Startup and Tech scene. Follow us on Twitter or sign up for our mailing list to keep up to date. You can also join our Slack community –

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

Helgarlesturinn: Fullt um fjármagn

Þema helgarlestrarins þessa vikuna er fjármagn & fjármögnun. Fyrr í vikunni gáfum við út hlaðvarp um það sama (sjá hér) og í kjölfarið hefur mikið af áhugaverðu efni um sprotafjármögnun dúkkað upp.

a16z hlaðvarpið: Venture Capital með augum LP’s

Venture Capital fyrirtæki byggja á tveimur tegundum af Partners, annarsvegar General Partners (GP’s), sem reka sjóðinn og sjá um fjárfestingar í sprotafyrirtækjum, og hins vegar Limited Partners (LP’s) – sem fjárfesta í sjóðunum (t.d. lífeyrissjóðir, stærri fjárfestingasjóðir ofl.). Í þessu virkilega áhugaverða spjalli við LP’s hjá Andreessen Horowitz segja nokkrir fjárfestar m.a. frá ástæðum þess að þeir fjárfesta í VC sjóðum og afhverju þeir fjárfesta frekar í bandarískum VC sjóðum en evrópskum (spoiler: það er af því sjóðsstjórarnir í US eru betri).

K9 Ventures um breytinguna sem hefur orðið í seed-fjármögnun

Manu Kumar, fjárfestir hjá K9 Ventures, fjallar hér ítarlega um breytinguna sem hefur orðið, og er að verða, í fjármögnun sprotafyrirtækja, og þá sérstaklega um hvernig seed-round fjárfestingar hafa stækkað og þeim fjölgað. Hann fer yfir hvernig það hefur áhrif á Series A, og líklegar ástæður þessara breytinga.

Hvað er að gerast í VC fjármögnun með Benedict Evans (Slidedeck)

Mjög áhugavert slidedeck frá Benedict Evans og félögum hjá a16z sem fjallar um hvað er að gerast í fjármögnun sprotafyrirtækja í Bandaríkjunum. Þeir svara m.a. spurningunni „Er tæknibóla í Kísildal?“ (Spoiler: Þeir segja Nei (Innskot blaðamanns: þeir eru VC fjárfestar svo þessu skal tekið með fyrirvara)). Í þessu hlaðvarpi fjalla þeir félagar um niðurstöðurnar hjá sér. Áhugavert efni þar er umfjöllun um að fyrirtæki í dag taki frekar VC fjárfestingu en að fara í IPO, og ástæðuna fyrir því.

Fjármögnun sprotafyrirtækja: Hvernig hún virkar og er að breytast – Hlaðvarp Norðurskautsins

Í þætti dagsins fjalla Kiddi og Jökull um fjármögnun sprotafyrirtækja, og hvernig hún gengur almennt fyrir sig í Kísildal. Einnig ræðum við um háværa umræðu vestanhafs um mögulega bólu í fjármögnun tæknisprota, og veltum fram spurningum um umhverfið hér á landi.

Hér er bloggfærslan hans Semil sem við ræðum, og bloggfærslan sem hann fjallar um er hér.