Iceland's venture scene soon to erupt

Following the collapse of all three of Iceland's major privately owned commercial banks in 2008, the island's banking crisis was the largest suffered by any country in economic history, relative to the size of its economy.

Creating a resistant start-up ecosystem is therefore more important than ever for Iceland. "Following the tough financial times there is a more acute emphasis on building a thriving business community here than there is in, say, Sweden or Finland", says Kristján Freyr Kristjánsson, managing director at StartupReykjavik.

StartupReykjavik is Iceland's first accelerator programme. Founded by Arion Bank, Innovit Entrepreuneurship Center and Klak in 2012, it takes on 10 new teams per year for a 10-week period.

Arion Bank provides $16,000 in seed funding in exchange for a 6% stake in the business. The companies also receive perks such as office space, connections and advice from more than 70 mentors. The selected start-ups, of which 50% are tech companies, then go through a step-by-step "learning by doing" process.

On 2 June, Mymxlog from the StartupReykjavík 2012 batch, received $370,000 from the Icelandic Technology Development Fund (TDF). According to CEO Gisli H Thorvaldsson, the most valuable experience was building relationships with the other teams. "In Iceland we tend to get lost in the work and forget about networking. It needs a new way of thinking, but we are getting there," he says. When Mymxlog joined, only half of the start-ups taking part actually had a product. Most ideas were only crude prototypes at that stage.

Since the competition, Mymxlog has been approached by a lot of people interested in hiring their team. Short lines of communication and an absence of gatekeepers facilitates this well. "You can just pick up the phone and give anyone within a company a ring. In the US, that would never work," says Thorvaldsson.

In addition to making it easier to liaise with the right politicians and industry contacts, the nation's diminutive size presents another advantage; it provides a kind of "beta hub" for testing out ideas domestically first. "Iceland is a heterogeneous society with only around 340,000 people, making it a perfect place to try out a product before launching it in other markets", explains Kristjánsson.

The geographical location is another benefit. Two thirds of Icelanders reside in Reykjavik, which is located less than a six hour flight from JFK, and just three hours from London.

Iceland's financial situation is unique in the world, with state ownership of the country's largest bank, comparable geo-political isolation, and the extent of the economic damage it sustained in 2008. Despite its uniqueness, however, the country is still a part of the Nordic region and enjoys the same benefits, such as top-notch infrastructure and an educational system that contributes to innovation.

Olafur Haraldsson, CEO of Designing Reality, founded during StartupReykjavik 2012, points out his start-up's close link with universities: "The dean of Reykjavik University Business School is monitoring our business closely," he says. The company, which creates high-accuracy three-dimensional models, is about to come to market in the next few weeks. According to Haraldsson, new companies in Silicon Valley tend to follow a trend in what's going on, whereas Nordic start-ups often think a bit more outside the box.

On the downside, Iceland's geographic position makes distribution more expensive. If an idea turns out to be profitable, the local market is too small for significant expansion and successful entrepreneurs are forced to export the product overseas to larger markets.

Another local VC forum is Startup Iceland, an event that took place earlier this month, launched by Bala Kamallakharan last year. Although Startup Iceland is only in its second year running, it already attracts angel investors from the US and Europe.

There are also great difficulties in securing funding: Haraldsson and Thorvaldsson both believe the government could provide more support, either by implementing strategies such as tax breaks or through direct grants. With the currency restrictions still in place, foreign investors remain cautious. In October 2008, the central bank introduced restrictions on the purchase of foreign currency within Iceland. Therefore it is vital for Iceland to continue untangling the aftermath of its meltdown, including the "brain drain" that followed.

Haraldsson calls for action from investors. "If 10% – or even 1% – of Icelandic institutional investors' investment portfolios were dedicated to start-ups it would improve the situation a lot," he argues.

Helga Valfells at NSA Ventures, the only Icelandic VC firm actively investing in early-stage, agrees that there is too little funding. "Temporary currency restrictions exist, but there is no prohibition on new capital, so in practice it's not a hindrance for foreign investors." She also emphasises that despite a good deal of angel activity taking place in Iceland, access to funding for start-ups is difficult wherever you are in the world.

Valfells concedes: "There are limitations, yes. But with its location, work-ethic and young intelligent workforce, Iceland could become a leader in exporting technology that builds on the use and management of renewable energy, certain areas of IT and of course Medtech."

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