Volatile Markets And Growing Tension In Europe Pushes Startup Investors To Look For Nearby Alternatives

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As economic challenges persist around the world, venture capital (VC) investors in Europe are slowly but surely starting to look for new territories that can offer them sustainable financial investment opportunities.

Even with most of Europe already home to a well-established startup ecosystem, with more and more European entrepreneurs to fast-track efforts and development in industries such as sustainability, fintech, software, technology, and tourism – the continent has seen its VC funding already down by 38% this year alone.

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Earlier in July, Crunchbase data revealed that European startups were unable to sidestep the brunt of declining VC deals, with total funding across all stages reaching $23.7 billion in Q2 2022, down from its peak of $38 billion during the same period in 2021.

The sudden turnaround of positive growth and VC-backed investment deals is not surprising, considering the ongoing political tension between Russia and Ukraine, and the continent experiencing slower than usual economic activity. The invasion of Ukraine has also meant that the European Union has imposed major sanctions on the Russian government, with major western corporations completely seizing operations and trade with the country.

The decline in funding, which has now become a common sight across several global startup ecosystems, signals warning signs for smaller and early-stage startups as economic conditions only deteriorate even more. Late-stage funding has also come down significantly, with year-over-year (YoY) investments falling 23%, and quarter-over-quarter (QoQ) nosediving 26%.

With the bearish outlook, and investors pulling back on major investment deals, startups in niche industries could find it increasingly difficult in the coming months to survive if the current trend continues.

In some sudden change of perspective, investors have grown increasingly interested in Icelandic-based tech startups that focus on more than conventional tech research and development. This is a complete change from what the country experienced throughout most of 2021, as being one of the only Nordic nations, among Denmark, Finland, Norway, and Sweden to see a decrease in startup funding capital raised. 

Though the landscape is looking to improve over time, especially as some now suggest that Iceland could soon be considered the Silicon Valley of Europe. Before that can even happen, there’s still a lot of investment and interest that needs to come from mainland Europe and the rest of the world.

Why Are Investors Choosing Icelandic Startups?

Investors usually make their judgments based on several factors, and while these can change across different startup ecosystems, small, yet growing interest in Icelandic startups has looked to become more promising in the tight economic conditions.

For the better half of the country’s startups, which are focussed on fintech, Web 3.0 commerce, and gaming, investors are now seeking out newer and more advanced businesses that could potentially lead Europe towards a more digital landscape. This would mean that those startups currently working within these fields can develop the tools and resources needed to advance the industry and could soon influence the broader global playing field.

On the other hand, blockchain-driven technologies have also played a major role in the rapid expansion of the country’s startup ecosystem. This filters down further to a small community of anti-money laundering (AML) and anti-fraud startups utilizing the abilities of Artificial Intelligence to improve financial security in the country.

Slow And Steady Economic Recovery

A third industry, which has for decades been vital to the country’s economy and growth is leisure and tourism. The major disruptions caused by the pandemic saw the country welcoming less than 500,000 foreign visitors in 2020, and around 700,000 in 2021 according to Statistics Iceland.

The severe lack of leisure and tourism caused the country’s overall economy to contract by 7.1% in 2020.

Reports found that during the height of the COVID pandemic, mostly between 2019 and 2020, Iceland’s GDP nosedived from $24 billion to $19 billion, as the country experienced a 10-month halt in tourism.

Overall, the Icelandic tourism sector employs more than 30,000 citizens, and has been a vital driver of financial and economic support for the country throughout the years. The crucial matter here is that the country, while having limited access to natural resources and continental Europe, tourism remains a vital part, representing 39% of the country’s export revenue.

Now, with the country’s economy fully reopened, and has lifted most of its travel restrictions, domestic growth has seen significant improvement throughout most of 2022. At the beginning of June this year, Landsbankinn, an Icelandic financial institution confirmed that the country’s economy is back on track, as the island experienced an 8.6% growth in Gross Domestic Product (GDP) compared to the first six months of 2021.

The pleasing news, which brought an influx of both tourists to enjoy whale watching in Iceland and volcanic eruptions, and venture capitalists has pleased economic experts to predict the country’s economy to continue growing at a predicted forecast of 5.1% this year. This estimate made by domestic economists is higher than the 4.2% predicted by the OECD.

While the country has deemed it safe and acceptable to welcome back foreign visitors, macroeconomic factors and political tension could potentially impact the rebuilding of the tourism sector.

Tensions between Russia and Ukraine have also played a role in the recovery process of the country’s overall tourism industry and domestic economy. Like most of Europe, Iceland relies on Russia for 30% of its oil used to produce motor fuel. Since the start of the year, fuel prices - which were already high to start with - rose to a record-shattering $9.37 per gallon, the second highest in the world after Hong Kong.

In the U.S. fuel prices have been falling for seven straight weeks, coming down below $4.00 per gallon in almost every state, except California and Hawaii.

Soaring fuel prices have also now made it more expensive to travel to the country, as airlines look to pass higher costs onto travelers during the peak travel season. Economic experts have also been concerned over Europe’s choppy road to recovery, as the European Central Bank has been working to sidestep the possibility of a looming recession, all against the backdrop of the recent pandemic and the changing economic cycle.

Even as the country looks to hike its prime interest rates in the next several months, the overall rebound has been slow and steady despite major macroeconomic headwinds.

Iceland’s Growing Startup Ecosystem

Though we see several reasons for the growing startup ecosystem in Iceland, compared to other nations, including the United Kingdom, United States, India, and China - Iceland still lacks significant financial support from private investors.

Perhaps many may see this as disproportionate, but there’s continued interest that’s coming from a handful of investors from different corners of the world, most stemming from Europe.

When we look at what Iceland has to offer, compared to other more advanced startup ecosystems, it’s clear that the most basic needs and requirements of investors are being fulfilled by the different startups found on the island. Icelandic startups offer progressive innovation, not just in particular markets, but a shared or rather divided interest across several important industries.

Along with the need to attract investors, both for expansion and economic purposes, the startup landscape is positioned in such a way that it will, and could secure lucrative investment deals as it encompasses traditional concepts.

Looking Forward

There’s not to say that the current economic climate won’t deteriorate Iceland’s growing startup ecosystem, the country has solidified itself as a leading cause of influence among venture capital investors.

As European nations, along with those in the European Union feel the pressure coming from political and economic tension, Iceland’s autonomy from the continent and governance means that it’s able to remain resilient in the face of uncertainty while advancing its startup landscape and economy.

Though the potential is there, it’s not to say that the country will at any time catch up with larger and more advanced rivals such as France, Germany, or the UK. Iceland can become a key player but it would take a lot of advancement and progressive innovation before the country will be able to dominate on the world stage.

While there is interest coming from investors both in Europe and around the world,  Icelandic tech startups don't necessarily offer investors recession-proof opportunities and are often restrictive in their near-term innovations.

As the rest of continental Europe becomes overrun by political asininity,  the coming years will be crucial to the further growth and establishment of the Icelandic tech startup ecosystem. If the country and its innovative entrepreneurs prove to be a viable and lucrative investment opportunity, there is perhaps a chance that in the coming years Iceland will be considered a key influence for  European and global digitization.