Ecosystem Deep Dives #20: Iceland - Small but mighty
Ecosystem Deep Dives #20: Iceland - Small but mighty
Hit hard by the 2008 financial crisis, Iceland doubled down on its strengths to come out of its economic headache. The country's start-up ecosystem followed a similar route.
Ecosystem Deep Dives is a weekly series in which I analyze and compare different start-up ecosystems from around the world. If you enjoy and gain value from my work, feel free to share and subscribe!
Rich history
First founded more than 1,000 years ago by fearless Norse and Celtic during the Viking Age of Exploration, Iceland is often recognized as one of the world’s most progressive countries, especially in matters such as gender parity. The country’s parliament “Althing” claims to be the longest running parliament in history, starting in 930. Despite its small population of around 366,000 people, needless to say Iceland has continuously pulled its weight on the world stage.
Fast-forward to 2008 and the country once again gained attention internationally, but this time for the wrong reasons. Indeed, the country was hit with one of Europe’s worst economic crisis, fueled by overzealous bankers who managed to accumulate liabilities almost 10 times the size of the national economy. Due to the sheer size of the crisis, Iceland’s central bank didn’t even have sufficient cash reserves to bail-out the faulty banks (the opposite scenario of what happened in the US), leading to the crash of 3 of Iceland’s major financial institutions.
“2008 hit Iceland hard: the stock market plunged 80%, 3 major banks collapsed, the króna (national currency) lost 35% against the euro in the space of 9 months, inflation hit 14%, and half of the number of businesses were technically bankrupt. The financial crisis was the worst experienced by multiple generations of Icelanders.” - Source
The way Iceland dealt with their national version of the 2008 economic crisis (which severely hit the US, Canada and Europe) is fundamentally different than the way other countries did. Instead of bailing out banks, Iceland decided to temporarily nationalize them and send bankers to jail. In order to recover from the crisis, the government decided to devalue its national currency, the króna, in order to make its exports (such as fishing and aluminum) more competitive. A side effect of the devaluation of the króna was the boom in the Icelandic tourist scene, a major component in the economy’s recovery. Today, the way Iceland managed to recover from its economic debacle is largely viewed as a success amongst its European peers.
The birth of the Icelandic start-up ecosystem
Although the “modern” Icelandic start-up ecosystem was mostly born post-economic crash, Iceland has birthed a couple start-up successes pre-crisis. One of the most telling examples includes Oz, a computer graphics company founded by 3 teenagers in 1990 and acquired by Nokia in 2008. CCP Games, which came out of Oz, was founded in 1997 and acquired by Korean company Pearl Abyss for $425 million. A couple years down the line, in what could be called “the second wave”, Iceland birthed another couple successful start-ups such as DataMarket, Clara and, a bit later, Plain Vanilla Games (who developed the famous QuizUp app). Other early Icelandic success occurred in one of the country’s most developed sectors, fishing, with companies such as Marel and Skaginn bringing new tech to the fishing/food processing industry.
Iceland’s economic crash coincided with the rise of new start-up initiatives such as Gulleggid, an MIT-inspired business case competition. Some of Iceland’s biggest start-ups to date such as Meniga and Controlant spun out of that event. Further down the line, initiative such as Bala Kamallakharan’s ,Start-Up Iceland and the opening of one of the country’s first accelerator, Start-Up Reykjavik, consolidated the ecosystem even further.
The government took notice and did its part to boost the nascent, local VC scene through the establishment of Frumtak Ventures, a government-backed VC fund, which was born out of the government’s post-crash support. Other government initiatives such as the newly-established Kría Icelandic Venture Initiative are a testament to the government’s approach to VC development, with the government providing the initial funds to enable the private VC landscape to takeoff.
“The minister has also announced a set of initiatives for the venture capital industry. First, she’s launching Kría - the Icelandic Venture Initiative , providing matching funding into VC funds, increasing the amount of capital available to VC fund managers, and adding one more LP to the mix. In tandem, laws around pension funds are being loosened, so that the institutional investors can invest higher amounts into venture capital. The Covid-19 response also includes a matching fund directly into startups and several options for subsidized hiring unemployed people, if the projects they will be working on are related to innovation.” - Kristinn Hróbjartsson blog post.
On the private side, Icelandic VC’s include Eyrir Ventures, Brunnur Ventures, Iceland Venture Studio and the recent launch of Crowberry Capital’s new fund, $90M, women-led early-stage fund aimed at the Nordics. Frumtak Ventures, which started out as a government-backed VC, is now making the switch to private especially with their funds II and III.
Ecosystem strengths
Iceland’s uniqueness gives its ecosystem a couple advantages. First, the country’s tiny population makes the government very accessible, a factor which Bala Kamallakharan (founder of Start-Up Iceland) explains was key in revving up the ecosystem. As we’ve seen in previous articles, coordination between the government and the ecosystem’s actors is fundamental in developing a solid and sustainable ecosystem, a component that Iceland’s demographic layout strongly facilitates. The country’s tiny domestic market also forces founders to think global from the get-go, while utilizing Iceland’s market as a sandbox to test different ideas.
The country’s start-ups also take advantage of the country’s two main sectorial strengths, fishing and geothermal energy. On the fishing side, an initiative named Iceland Ocean Cluster House (Sjavarklasinn) aims to build on Iceland’s fishing expertise to propose new innovations and explore futuristic domains such as the circular economy. On the geothermal energy side, start-ups such as Verne Global, which host high-performance data centers powered by 100% renewable energy, are making their mark. The ecosystem has also seen a couple landmark moments in the past couple years, such as the first Fortune 500 company to acquire an Icelandic company (Greenqloud), the first Icelandic start-up accepted into Y-Combinator (Avo) and a16z’s first investment into an Icelandic Finnish start-up (Mainframe Industries). Other notable Icelandic start-ups include:
Alvotech: A biotech start-up set to IPO soon. $450M+ in funding.
Oculis: A clinical-stage, privately held, pharmaceutical development company focusing on ophthalmic drugs and novel drug delivery. $94M in funding.
Controlant: A leader in real-time supply chain monitoring and visibility for heavily regulated industries, such as pharmaceuticals & life sciences. $55M in funding.
Meniga: A digital banking platform that helps banks, businesses, and individuals manage their financial data. $55M in funding.
Kerecis: Develops, manufactures, and markets implants and repair materials for the human body from omega3 rich fish skin. $48M in funding.
GRID: An all-in-one tool for modern teams to explore, explain, and collaborate on the numbers&calculations. $16.5M in funding.
Lucinity: Unlocking behavioral insights to identify risky customers and reduce companies’ exposure (anti-money laundering). $8.1M in funding.
Indó: Iceland’s first neo-bank. Just got their banking license. $4.5M in funding.
Carbfix: Provides a natural and permanent storage solution by turning CO2 into stone underground in less than two years. $4M in funding.
Kara Connect: A simple and secure practice management platform for therapy and counseling teams in the health and welfare sector. $3.4M in funding.
On a side note, Iceland is also home to one of the world’s most successful pension funds, a potentially juicy LP emerging Icelandic VC’s can tap into.
Icelandic weaknesses
A number of Iceland’s advantages also have a flip side of the coin. Its tiny size makes the breadth of the local technical talent pool extremely limited. Although Icelandic teams are used to work in remote teams, close proximity to local talent is often needed to kickstart a project. To give you an order of magnitude, only 250 people graduated with computer science degrees in 2019, even though that number has more than doubled from 2013.
The lack of STEM expertise is a true challenge for the ecosystem as a whole. To remediate to this, the Icelandic government has launched initiatives to attract tech talent from abroad. But in an era where multiple countries are pushing “tech/start-up visas”, Iceland will have a hard time competing with countries such as Portugal, which is cheaper and where the weather is nicer.
“The sad truth about this is that Iceland’s labor force is not superb for building up innovation and IP intensive industries. We might have a high number of college graduates, but we have relatively few STEM educated. Which means that repurposing the massive (yeah, those numbers are tiny but in relation to Iceland they’re massive) amount of available labor will be expensive, painful, and take a lot of time, if it is to be repurposed for the tech and innovation sectors.” - Kristinn Hróbjartsson, founder of Northstack
Iceland’s location is indeed at the crossroads between North America and Europe, but it does still remain an island. Testing a product on the local market is facilitated by the incredibly well-connected population (Facebook has 90%+ penetration rate in the country) but scaling to another market will always require to get on a flight and adapt to a different market. This burden should be eased by the democratization of remote work, with successful Icelandic companies potentially moving faster by directly contracting local country managers instead of traveling there themselves.
Conclusion
I definitely see some parallels between the Estonian start-up ecosystem and the Icelandic one. Both countries are small, have a stable government, a well-connected population and are digitally-native. I do think Iceland’s ecosystem could learn from the “branding” Estonia’s ecosystem undertook, especially through the different initiatives undertaken by Start-Up Estonia. Estonia has also been good at attracting talent to a relatively inhospitable climate, something Iceland could take lessons from.
Overall, the Icelandic ecosystem is interesting because many of it start-ups focus on the country’s sectorial strengths, such as geothermal energy. Going back to economist David Riccardo’s seminal theory of “comparative advantages”, the Icelandic ecosystem can strongly benefit by doubling-down on their local expertise in certain areas of innovation, and on their extraordinarily progressive society to attract the world’s best talent.
Ecosystem Deep Dives is a weekly series in which I analyze and compare different start-up ecosystems from around the world. If you enjoy and gain value from my work, feel free to share and subscribe!