The status of the Icelandic startup ecosystem – good or bad?

The innovation ecosystem in Iceland has been recently well documented in most recent years. The addition of Northstack has severely helped. I have also written about this positive development. But ecosystems are not stagnant, they evolve and mature or whither.

First, the bad stuff

Here is my view on what is good and what needs to improve:

  1. Funding up to Series B shrinking

The establishment of new VC funds in 2015 – 2018 was a needed injection for startups. However, these funds are now fully or near fully invested, giving room for same or new GPs to raise new funds. Although the government has promised increased support via fund-of-funds, the amount is quite limited (ISK 2 billion / EUR 14 million over 3-5 years), which will not get us very far. Still, an important and new sign from the Ministry of Innovation. Details on practicalities and arrangements are still to emerge and are awaited.

  1. Follow on investments not nearly enough

Due to the limited size of current VC funds mentioned above (they are all ~EUR 35 million, i.e. small), they really haven’t had the capacity to fully support their current investments. Additionally, there is substantial room for improvement in bringing non-domestic VCs to the table. The question remains how will they do that?

  1. Private money has been withdrawn from grassroot level

The rise of accelerators benefitted the grassroot / seed stage level enormously from 2012-2019. Startup Reykjavik, Startup Energy Reykjavik, Startup Tourism and Sea & Food were all funded by corporates. The future of all these accelerators is now uncertain, leaving a huge gap for new backers to emerge. Some of Iceland’s best startups were born or “raised” via these vehicles.

  1. Competitiveness of Iceland not improving

Iceland, as a Nordic country, likes to be compared to its neighboring countries. Despite ranking number 24 out of 140 countries in the last WEF Global Competitiveness Report, there is still a wide gap compared with the likes of Denmark, Sweden, Norway and Finland. Predominant lagging factors are market size (not controllable), Infrastructure and Innovation capacity (controllable). 

  1. IP and patents still not many enough

There may be more than one explanation to the fact that strong IP and patents in Iceland are still relatively few. Only until the last very few decades, Iceland has been a resource driven economy. Therefore, a culture of building scalable IP via licensing rights (or similar) or straight out patents is still in its infancy although we are gradually catching up. This goes both for academia and corporate world. Still, the registration of patents is limited to a few number of entities, even limited to certain sectors.

Now, the good stuff

Yet, let’s not forget the positive development that has happened since 2010. Additionally, here are a few items that I feel will (continue to) contribute to an improved environment for innovation and startups in general:

  1. Iceland’s new strategy on innovation

In the fall of 2019, the Minister of Innovation introduced a rather cohesive strategy on behalf of the government on innovation. Whilst the strategy was well thought through and stated all the right things, there are still some practicalities that remain uncertain, which are expected to see the day of light in the next few months. The key point here is that there should not remain any uncertainty any longer about the where the focus lies and how those objectives can be reached. I feel very optimistic about the implications in the next few years. Additionally, the Icelandic Federation of Industries has proclaimed the year 2020 to be “The Year of Innovation”, see its strategy.

  1. Science Park on University of Iceland’s campus

The Science Park was founded roughly a decade ago and its mission was to create an environment where academia meets corporate world and startups. In essence, to foster innovation in any shape or form. Insofar, the focus has mainly been on the real estate that the company owns and operates, while the next step is to conceptually shape what operations the park will focus on, what and how the University in cooperation with both internal and external stakeholders, local and international, can provide ever increasing value. This is no small undertaking, but I have a feeling the Science Park will have a major role in fostering innovation in a structural way in the next decades. There are dozens of similarities with other parks around the globe. Today, headquarters of deCode Genetics and Alvotech / Alvogen are located in separate buildings.

  1. Gróska House at University of Iceland campus

Gróska is one of the buildings in the Science Park. It will be opened formally this year, 2020. In the building, we will have headquarters of CCP, creator of Eve Online, dozens of startups and supporting entities to the ecosystem, service providers, lecture halls, etc. Located centrally on the campus, the University of Iceland and city of Reykjavik will have a poster child of vibrant innovation where various kinds of companies and institutions share a large facility in a beautiful design intended to support cross fertilization of ideas. One of them is Auðna, a long needed supporting entity for tech transfer.

  1. Non-domestic investments / exits in companies

Northstack has written a regular report on funding activities in Iceland. When it comes to funding, being humble serves no one. “The more, the merrier”, should apply, obviously with a twist. Fortunately, Icelandic companies have seen a stable growth in most recent years when it comes to non-domestic investments. In order to scale internationally, this is an important prerequisite. Icelandic investors, private or institutional, do not have, with very few exceptions, the most appropriate network of investors or corporate clients for Icelandic companies. I therefore celebrate non-domestic participation in rounds. Building connections and networks is an ever-lasting project investors continually must work on.

The good and the bad stuff for the Icelandic startup ecosystem in 2020

All in all, we have a fantastic mindset in Iceland. There are no obstacles, only problems to solve. “Þetta reddast” is a saying in Icelandic, or “things will be all right”. That is also my feeling this time.

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