Iceland's start-up scene looks set to erupt

February was an unusual month in the Nordics, with three new venture funds raised in the same country, in the same week. While this level of venture activity would normally be associated with the tech start-up hotbeds of Sweden or Finland, it was in fact Iceland that saw the sudden 250% growth in VC funds.

Until this month, Iceland had been home to just two VC funds since 2008: an evergreen government-backed growth fund; and a second venture fund that was fully invested in 2012.

Government-backed Nýsköpunarsjóður (NSA), meaning 'New Business Venture Fund', was established in 1997 and has been making roughly two investments each year ever since. NSA's evergreen structure forces it to exit investments before it can re-invest and, as a result, the fund has struggled to meet rising demand for investment in the country.

Since the Icelandic economy was nearly wiped out in the financial crisis, the country has been nurturing its start-up environment – and the returns are beginning to show.

"The last five years have been fantastic for us," says Helga Valfells, CEO of NSA. "Recently, we have only been making about two investments a year, but that is not for lack of opportunities. Ever since the crisis, things have been very good for the venture economy. Like the rest of the Nordics, there is a very vibrant start-up scene."

Returns have been around 20% year-on-year in the VC's evergreen fund for the past five years, according to Valfells.

Despite this, Iceland has been relatively overlooked by Nordic venture investors. NSA has been hard at work syndicating investments and bringing international VCs and angels on board, mainly from the US.

"In the last few years it's really been our mission to work with more international investors and we've had great success," says Valfells. "At least half of our exits are international trade sales, so we've had some success in that," she adds.

Growth over glamour
Although some venture funding has come from as far afield as Chile, there has been a conspicuous lack of investment from VCs in the countries geographically and culturally closest to Iceland: the Nordics.

The lack of Nordic venture funds is mirrored by the LP groups of the Icelandic funds, which lack any LPs from outside the country. Investors are mainly national pension funds, the Icelandic government, and private backers.

Nordic VCs' lack of interest in Iceland cannot be discounted purely on the size of the population, but may in part be related to its lack of a local Spotify or Skype – a start-up with a massive valuation and international brand recognition.

Rightfully, the country should be seeing more interest from its fellow Nords: it has a well-educated population; is culturally close to Scandinavia; has a stable political climate; great internet infrastructure; and cheap, sustainable energy.

"There are a lot of opportunities for other Nordic funds in Iceland," notes Valfells. "Because our currency is low, I think valuations are lower than in the other Nordic countries. There is a strong work ethic here and a powerful can-do attitude, and it's probably the least bureaucratic country in the Nordics – people just get on with things."

She points to fintech and medtech as the sectors to watch, with many ex-bankers at the helm of start-ups in the former: "Maybe a lot of this entrepreneurial spirit was in the banks where it didn't belong, but I think it certainly belongs in the start-up scene," Valfells says.

Although the country is generally overlooked when one considers the current Nordic start-up environment, it may not remain that way for long. "There is a lot of growth, there is a lot of traction – we are becoming very knowledgeable and very internationally focused," says Valfells.

Valfells wants Iceland's start-up scene to be part of the success story being told in the rest of the Nordics: "We have every opportunity to be part of that story. I think as the Nordics grow, we will grow as well."

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