Iceland: From Vikings to the Valley

Iceland: From Vikings to the Valley

Kristinn - goes by Kiddi - is the founder and editor of Northstack and has analysed the Icelandic tech and venture ecosystem for the last five years. As a real job he works in tech.

When people think about Iceland, the things that probably come to mind are stunning – and  Instagram-friendly – natural beauty, unparalleled equality and social progressiveness.

While those things are true (although, nothing’s ever as pretty as the NY Times articles), and that the meteoric rise (and now, fall) of Iceland's tourism industry has made the country a household name, another less written-about story could also be the spark of interest.

In an economy that has for decades been completely governed by industries based on natural resource extraction, a slower, but steady, local tech scene has been growing in the shadow of the tourism industry.

Planting the Seed for an Ecosystem

In 1990, a group of Icelandic teenagers - Guðjón, Aron, and later Skúli - founded a computer graphics company: Oz. That company went through ups and downs, pivoting from graphics to VR and communications, moving to San Francisco multiple funding rounds, signing a major deal with Ericsson, and finally acquired by Nokia in 2008.

Seven years after the founding of Oz - 1997 - marked the founding of CCP Games, maker of long-running Space MMORPG Eve Online, which since has become a global game developer, acquired by Korean Pearl Abyss for $425 million. A founder and many of the first hires came from Oz, making the founding of Oz likely - at least from a story-telling perspective - the founding of the Icelandic tech industry (visualised by this map of companies founded by Oz-ers)

That same year - 1997 - the government merged several initiatives into the New Business Venture Fund (Nýsköpunarsjóður Atvinnulífsins), a public evergreen investment fund that invests in startups and new businesses. Ten years later, following the financial collapse, the government worked with the banks and pension funds to found Frumtak - a government backed (through the New Business Venture Fund) venture capital fund. That fund marked the birth of what would later become the first management company (Frumtak Ventures).

In 2015, three new venture capital funds followed. Three seed funds, ranging from $30-45m in size, with a focus on local startups with the potential for fast international growth.

Now, the founding of VC funds in no means stipulates the start of the local tech scene. The financial collapse not only brought on capital for innovation, but also spurred new companies. In years prior the the founding of the funds, Icelandic QuizUp had raised around ~$40m in funding from leading investors like Sequoia Capital, several startups like DataMarket and Clara had been acquired by international tech companies, computer science grads from the local universities had multiplied, and so on and so forth.

But the founding of the VC funds - which now marks the beginning of (hopefully) a VC industry albeit small - suggests several positive indicators. There are investors that are willing to embark on the long journey of starting, raising, and operating a VC fund in Iceland. There are enough institutional investors willing to commit capital into the asset class. And both LP’s and GP’s are confident enough that there are fruitful opportunities to invest in. Since then, an additional fund has been raised, and the previous ones are preparing, or already underway, in raising funds to follow the ones founded in 2015.


Since then, Iceland has had some interesting milestones:

  • First Fortune 500 tech company to acquire an Icelandic company: NetApp acquired Greenqloud in 2017 for $51m cash and has since increased investment in the Icelandic ecosystem, doubling the size of NetApp’s operations in Iceland.
  • First Icelandic company accepted into Y Combinator: Avo, a data quality management startup, previously funded by local investors, participated in the accelerator’s 2019 summer batch.
  • First a16z investment in Nordics: The Icelandic/Finnish game developer Mainframe Industries raised a €7.6m Series A round

There are definitely more firsts, and I’m not saying that these milestones are the only way to measure the development of an ecosystem. But they’re newsworthy, at least to us looking at the Icelandic scene.

Raising money in Iceland

Since 2015, Northstack has been tracking and covering the investment activity in the local scene. While Icelandic entrepreneurs had been successful in securing funding from abroad, the local investment scene was barely existent. But following the successful raise of several funds, we’ve seen a fairly active investment environment, with 2019 breaking a record in tracked deals. (Reminder, in Iceland there are ~350.000 people).

In comparison with these numbers for Iceland, Gothenburg - a city of 580,000 close to Stockholm, people had 25 tracked deals in 2019 and 27 deals in 2018, according to Crunchbase data.

The general rule is that most angel and seed investments are from local investors. Series A and later usually include foreign investors. This is represented in the numbers, as more than 72% of rounds by amount, include foreign money, with just under half of the number of funding events including foreign investors.

Five years of data are too small of a dataset to draw any conclusions on patterns or normalcy, and looking at capital deployed into startups and tech in 2015-2019 shows a big fluctuation, ranging from $35m to $91m (note: these numbers do not include “monster rounds”, $50m+ rounds which happen from time to time and skew any analysis heavily).

From a funding and transaction perspective, the last five years have been interesting to follow. The institutional investors have started to dabble in venture capital, slowly but surely increasing their allocation into the asset class, and the general feeling being that this journey will continue - talking to an asset manager on the institutional side they told me “going into a venture is a long term plan, we’re not just doing a couple of investments and then backing out.”

The number of local active venture funds and seed investments has also led people like me to declare that there is no lack of seed funding - something that is very often pointed at as a problem of the ecosystem.

But, as many readers might have noticed, there’s five years since the three funds were announced. In the meantime, there’s been one new fund founded (mid 2017), but none of the management companies that closed their funds in 2015 have closed another one. And whether they will, remains to be seen. They say that you raise the first fund on a pitch, the second on paper profit from the first, and the third on actual returns. I expect at least one fund to raise their second, and one to raise their third, this year. Whether they’ve delivered the goods to raise those still remains to be seen.

To make sure we continue the growth and maturing of the ecosystem, it’s essential that we continue to have active local investors. Which is why the government is trying to help on that front.

The Talent Pool

Although Iceland probably has the best pools in the world - that sweet geothermal water can’t be beat - our talent pool isn’t. When it comes to STEM we lag behind other OECD countries. Our talent is usually more generalist than specialist, possibly due to the fact that Icelandic companies aren’t large enough to enable deep specialization. We’re known for a “þetta reddast” attitude: “it will be OK”, which leads to a less-than-stellar planning culture and last-minute fixes.

But Icelanders are also non-hierarchical, roll up their sleeves, and get sh*t done. Unlike some of our neighbors that might have taken the whole scandi-welfare-hygge thing to the extreme (I heard a story from a Norwegian angel investor who had problems with some of the founders he invested in because they couldn’t take meetings at a Thursday 2PM because they were going skiing), we’re used to putting in the work.

Anyone can study at university for basically nothing (there’s a ~$500 enrolment fee). That, coupled with wage equality, has in my view led to a certain lack of return on investment calculations when students choose their subjects. While in other countries, a STEM degree might mean 2x+ starting salary than a liberal arts one, in Iceland it’s more like 1.2x.

There are some positive signs. Talk on the need for more STEM education is growing. The universities are becoming more active in focusing on a connection between industry and education. Computer science graduates doubled from 2014-2016 and have remained steady since. Merge all that with much more informed public officials on the need for innovation and tech as a sector, and Iceland might get there.

Government, technology, and innovation

Innovation is probably the most politician-friendly buzzword there is. No one is against it, it’s too abstract for people to have deep opinions on policy actions related to it, and startups and tech companies provide great photo ops. Especially in Iceland, where the tech and IP intensive industry is small, loosely organised, and (rightfully) more focused on building their business than lobbying for specific policy actions.

Iceland is heavily dependent on natural resources. Our fishing industry - arguably one of the best in the world in terms of efficiency, not as good at social responsibility or marketing (like Norway with their salmon) - has always been a staple. Since the introduction of the quota system in the late 80’s, the industry has evolved, and consolidated, and created massive value.

Our energy industry, based on hydro and geothermal, is a big driver of currency influx, through massive, long term deals with multinational resource companies like Rio Tinto and Alcoa. Those deals were, and still are, controversial, and with recent news of Rio Tinto considering suspending production, we’re looking for some energy intensive ideas to deploy here.

The third industry is tourism. Our tourism is based on several limited resources: enjoyable nature and hotel rooms. We can’t support an endless number of tourists, and at some point the experience degrades. These three industries have been the main source of currency and revenue for the economy. They’ve also been pretty good at lobbying, which comes with the territory of being incumbent.

In the last five years, that’s changed, due to a somewhat concentrated lobby drive, politicians that are eager to get results in this area, and a government that after the last election wrote out a set of ambitious goals for the sector - at least compared to earlier years. This has resulted in the development of a broad, bipartisan, high-level innovation policy for Iceland, which is supposed to outline the policy driving the category for the next decade.

And shortly after the unveiling last autumn, Þórdís Kolbrún R. Gylfadóttir, the minister for Tourism, Innovation and Industry, has announced actions, some of which are already underway in parliament.

[Disclaimer: I’m an active advisor for the minister on topics related to innovation policy, and have been for the last several months.]

One of the first things the government did was increase tax incentives for R&D expenditures. Following that increase they are 20% of up to 900m ISK (~$6.3m), and set to increase further to 35% of up to 1100m ISK ($7.7m) as part of the government’s Covid-19 response

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.

It’s quite clear by how the ministers talk, that they’re not expecting the tourism industry to reach the same level of economic impact it once had, fast. And it’s also clear that the government is interested in supporting the growth of IP-intensive exports, hopefully adding the fourth foot pillar to Iceland’s economic foundation.  

The Impact of COVID-19 on the ecosystem

The Covid-19 pandemic has resulted in massive problems for Iceland’s tourism industry and connected industries. The government rolled out a partial unemployment plan, which more than 35.000 people have applied for. Iceland’s labor force is around 205.000 which means that 17% applied for this partial unemployment plan. And now at the end of April, Iceland had 51 announced mass layoffs, totaling more than 4200 people laid off. All in all, employment wise, the fall will be difficult.

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.

It’s not all dark and gloomy, however. The last few years, we’ve seen computer science graduates double, from roughly 100 in 2013 to around 250 in 2019. The government has also introduced tax incentives for foreign experts that move to Iceland, hopefully increasing the chance of people moving to Iceland for work.

From crisis comes opportunity

The last time we had a crisis, with the total collapse of our island’s financial system in 2008, opportunities did come. That marked the beginning of the tech and startup ecosystem we have now, spurring the founding of several of the startups that have since been sold or become sustainable, with founders recycled into new companies and as investors in others.

We might be running into a similar opportunity, but only time will tell. We have much better underpinnings to support an uptick in entrepreneurial activity than in 2008, much more capital, experience, and connections to leverage. But the question is whether that opportunity will be used to create an incremental addition to what we have today, or if in ten years time we have a real, innovation and IP-based international export business, to rival the other three pillars.