Iceland’s Startup Scene Punches Above its Weight

Reykjavic

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For Iceland, size is rarely an issue – just ask England’s overpaid soccer stars, who were roundly and embarrassingly beaten by Strákarnir Okkar (‘Our Boys’, the national team’s nickname) at this year’s European Championships.

When they scored, players told journalists at the tournament, so small is the Icelandic population that they could see family and friends in the crowd (during Iceland’s earlier draw with Hungary in Marseille, five percent of the national population was in the stands). Many of those will have worked in the country’s tech sector, whose entrepreneurial spirit is emblematic of Iceland’s striking route away from financial ruin in 2008.

Back then Iceland’s three largest banks collapsed under debt six times the national GDP. They would receive no bailout. Interest rates went up, the value of its currency – the króna – was devalued by half, and the banks nationalized.

It was a bank that brought Bala Kamallakharan and his Icelandic wife from Texas to Iceland two years before the crash. When it happened he turned to the Foundry Group’s Brad Feld, and his Boulder Thesis for creating entrepreneurial ecosystems outside major cities.

Kamallakharan’s clarion call to go-getting Icelanders was soon answered – buoyed by a robust education system and large numbers of computer science graduates – and a new generation of risk-hungry Icelandic startups was born. In 2012 Kamallakharan founded the Startup Iceland show, and is surely the country’s most connected person. Speaking after the event’s fifth edition he told Red Herring, “The continued effort by the community to re-invent, invest and focus on entrepreneurship has been a real milestone achievement.”

He added that before Startup Iceland there was no VC network in the country, but that now there are four groups looking to invest in local talent including NSA Ventures and Frumtak. Now, says Khamallakharan, foreign investors are taking notice.

A recent freeze on foreign investment – Iceland’s attempts to stave off the boom-and-bust culture that caused its economy to cave in eight years ago – might put off some of those VCs. It may also push Icelandic entrepreneurs, who Magnus Jonsson of home-rental platform Bungalo said are mostly nationalistic and want to grow the nation, away.

“The government limits the flow of the Icelandic króna overseas and has strict rules on how foreign currency is to be used, and that has literally forced some of our biggest successes to move their HQ overseas, so they can circumvent some of these restrictions,” Jonsson said.

Scaling, too, in such a small and relatively isolated nation, can be a challenge. Jonsson admits that growing vertically will be “difficult,” adding that Bungalo’s perceived likeness to AirBnB has already led to a pullback from Canada. In order to scale, added Paula Gould of travel comparison site Dohop, “the startup and Icelandic small business community realized it needed to capture a much larger audience…which is not possible in Iceland given the population.”

What is lacking, added Gould, is a network of experienced mentors: “Startups that have grown beyond Iceland can contribute back to the ecosystem by joining boards of younger startups, mentoring less experienced entrepreneurs and extending their experience and international network back to the community which fostered their initial success.

“Additionally, having access to larger capital locally when a startup enters a growth stage streamlines the fundraising process,” she added. “There’s also the capital controls. While it’s relatively easy for foreign investors to receive exemptions from the Central Bank in order to invest in Icelandic startups, the perception of the capital controls has been a deterrent. Instead, many companies leave the island for investment.”

Attracting talent, however, is not a problem in a country whose dramatic landscape, liveable towns and work-life balance – “one of the best in the world” according to Kamallakharan – are putting it on the map. “We have a number of employees in (travel startup) Guide to Iceland who moved to Iceland all the way from Singapore and work here,” Khamallakharan added. “It all comes down to what the potential employee wants to do and the opportunities that exist here.”

But overall the Icelandic tech scene is rattling along at a brisk pace, aided by strong legacy industries such as tourism and fishing. The latter even has its own dedicated tech HQ thanks to Reykjavik’s Iceland Ocean Cluster (IOC). The idea came to founder Thor Sigfusson during his PhD research. “The marine tech CEOs had smaller networks which were more based on strong relationships with few while others had larger networks of looser relationships,” he told Red Herring. “This indicated a lack of trust in the industry as I believe now is also the case with many natural resource industries.”

Iceland is experiencing a fishing boom: in 1981 it caught 450,000 metric tonnes of fish with a present value of $340 million. In 2011 it earned $680 million with just 180,000 metric tonnes. “The industry is creating much more value with less,” said Sigfusson.

Today IOC is home to over 25 startups, which Sigfusson says is “just the beginning.” Green tech will also play a big role in the cluster’s future, ensuring success in Iceland’s energy-driven economy.

Renewables have become a major avenue of exploration in Iceland, with firms such as XRG Power and Keynatura working to capitalize on the island’s abundance of biofuel, hydroelectric and geothermal energy. All of Iceland’s energy is renewable and it produces five times the need of its 323,002 citizens.

The country’s almost-equidistance between the U.S. and western Europe has made it not only an attractive tourist destination – the number of visitors has increased from just under half a million in 2010 to 1.3 million last year, and represents 31% of foreign exchange earnings – but reduces latency and time issues.

The lure of fueling data centers on clean energy is also tempting for tech’s major players. Many large brands, such as BMW, which announced that it pays 83% for data in Iceland than Germany, have arrived.

Iceland’s stringent data privacy laws, too, have piqued interest from individuals and companies alike (Iceland’s links to Wikileaks, Silk Road and the Pirate Bay have been well-documented). In December 2014 Birgitta Jónsdóttir, of the International Modern Media Institute, told Reuters that “Iceland should become for information what Switzerland is for money.”

Views on the government’s initiatives towards startups are mixed. Khamallakharan lauds its Innovation Bill, released just last month, which among other things makes tax reductions on investments, and taxes employee stock options at sale. Others, however, criticize the laws on server farms and foreign investment.

“There are government agencies that were created for the sole purpose of funding various tech projects and the overall positivity towards the startup scene is really good,” said Jonsson. “But I personally don’t believe government forerunners truly understand to what heights the Icelandic startup and tech scene could climb.”

Iceland has honed a reputation for high tech with VR and gaming companies CCP Games – maker of hit Eve Online – and Sólfar Studios raising $32 million last year. Khamallakharan points to Iceland’s education system, where “the enrollment and interest in software engineering, gaming and other technologies at the university level has skyrocketed,” as the main catalyst for this reputation.

Perhaps so, too, will the national soccer team’s success in France – which has shed additional light on an island nation punching well above its weight amid a massive push in the direction of entrepreneurialism. With the local tech scene seemingly in top gear, it’s a move that should continue to go in the right direction for years to come.