Eirikur Hrafnsson

Eirikur Hrafnsson (Photo credit: AlphachimpStudio)

My partners and I took a long bet on Iceland right after the financial collapse in 2008. Our first investment was in CLARA and we have invested our time and effort in Startup Iceland and a couple of Hospitality and Tourism related projects. Nothing to sneeze about but we have taken a long term view of our investment horizon whether we are successful in it or not depends a lot on the local community stepping up to the challenge. I am constantly approached by Entrepreneurs and Wanna-Preneurs asking us to invest in their idea. I never say no to such a meeting, I meet with each and everyone and listen to their thoughts and ideas and try to be constructive in the dialogue and discussion. What we need in Iceland is local capital, I believe there is enough and more local capital that can be channelled into Entrepreneurs and venture ideas. Mark Suster has written a wonderful post on this and #2 requirement for a Startup Community to take off is local investors and entrepreneurs investing their time and effort in their local communities. I don’t believe I can say it any better than what Mark says about Local Capital:

2. Local Capital – I do believe that you’ll struggle to get a community started without some local capital. And in many communities that are new to building tech startups I’ve found that a lot of angel money is not very sophisticated at investing in startup companies. So you see long, drawn-out processes, non-commercial terms, investors who want to meddle too much and so on.

My suggestion is to get some of the angel groups – notorious for slow decision-making and hat passing – and pool their money into a small fund structure of say $5-10 million. Elect 1-2 representatives and even invite a local VC to invest personally and sit on the investment committee or be an advisor. The key it to have “realistic capital.”

There are two reasons you need local capital. First, it is unlikely that a serious investor will commit to funding a company outside of their geographic sphere until you have a degree of success, traction, scale – whatever. So usually the first money comes locally.

The second reason for local capital (this time in the form of venture capital) is that without it every company that starts scaling will have to talk to Silicon Valley VCs who – I promise you – will tell the company that they have to relocate to the Bay Area in order to be funded. If you’re super hot / successful you can resist. Otherwise, good luck!

And not that I blame them. If you’re working with early-stage companies you need to be spending quality time with them which means you need to be nearby. And with thousands in your backyard, why would you go to far flung places to find deals?

Another important point that I can make given that I a “foreign” investor in Iceland (I am not, I live in Reykjavik and this is my home) is that it is hard to convince anyone outside of Iceland to invest in Iceland and take a long term view. I believe the Government efforts to attract Foreign Direct Investment will never work for the patient capital that is needed to build a Startup Ecosystem, it will only attract easy flight capital and we all know the consequence of attracting that capital, it moves in and moves out at a very rapid pace. Given the current currency controls I don’t believe that capital is ever going to come back to Iceland. VC and Private Equity funds will NOT come to iceland looking for deals until there is a big win and some company that is starting to make an impact in the global market. I have taken on this challenge by joining GreenQloud which I believe can make a huge impact without having to leave Iceland.

It is disturbing to listen to some of the investors in Iceland advising Startups to leave Iceland to be successful, what a twisted thinking! I cannot disagree more to this notion, Iceland is a fantastic place to build and grow your startup and I have no religious views but logical ones. I keep wondering why local investors do not invest in Startups and there could be million reasons but we need to take the first step. We need to believe that local capital can be channelled and we can create world class companies out of here. We need a better quality of Venture Funds in Iceland as well. We need fund structures that invest in all stages of a Company development. The sad truth is that local investors want to pick winners in this game and I have written about Picking Winners in a Farm of Black Swans, which is extremely difficult if not impossible. I wish I can convince some of the investors and wealthy people to invest in the Ecosystem and in building a Startup Community. I wish I can convince the existing Venture Funds to not act like they know what they are doing and take long bets on every idea that comes their way. I don’t believe there is any magic bullet to solve this problem of local capital but education and a lot of lobbying. I believe it can be done and I know many of the Entrepreneurs think the same way in Iceland as I do.

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