It is a common misnomer that Iceland’s name is an indication of its climate. While hardly tropical, the Nordic country located in the North Atlantic has a cool yet temperate climate, with the Gulf stream keeping it many degrees warmer than its latitudinal position should merit. But as more accurately evoked by its name in Icelandic, Ísland, it is simply an island nation, rather than a frozen one, and this characteristic dictates much more about its nature and its economy than its weather.

As with most islands, the sea is Iceland’s lifeblood. A seafaring and fishing nation since the Viking days or even earlier, Iceland is a major exporter of marine products. The quality and abundance of fresh seafood found in local restaurants makes it a pescetarian’s paradise. And it is big business, accounting for up to one-third of the country’s GDP. Icelandic seafood equipment manufacturers have global scale and reach, such as Marel, a multinational with 4000 employees.

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It is also an old business, as fishing is one of the most primitive industries that exists. Perhaps surprisingly, though, the seafood industry is a critical part of an emerging innovation cluster in Iceland. One might wonder how innovative pulling fish out of the sea could possibly be – but a visit to the Iceland Ocean Cluster in Reykjavik’s harbour illuminates the possibilities. Set up in 2011 to firm up previously weak ties between the city’s marine technology companies and to foster a sense of collaborative innovation, the cluster now has 60 companies who are paying members, 40 of which are resident in Ocean Cluster House, a renovated former fishing-net factory. Already at maximum capacity, new space is being added to the facility.  

Fishing for business

Technological advances are allowing Icelandic seafood producers to boost their competitiveness, and companies in the sector are now moving beyond primary seafood production and working to extract more value from seafood side products, even branching out into pharmaceuticals and beauty products. A stroll through Ocean Cluster House’s quirky, maritime-themed offices reveals a range of technologies and products being pioneered, from those related to the logistics of fishing through to consumer goods and health applications.  Feel Iceland is just one example: barely more than a year old, the company is making luxurious-feeling skin creams from the collagen found in fish skins, and plans to target the Asia market, where the demand for beauty products borders on insatiable.

The marine cluster typifies the type of technological innovation and business evolution that the mayor of Reykjavik would like to see multiplied. “Our industrial policy for the city of Reykjavik is aiming to enhance the knowledge-based economy,” says Dagur B Eggertsson, mayor since June 2014.

“The biggest challenge is young people – we have to create an attractive environment for young people, not just to study but to live, and then we are competing with other cities. Because we are growing fast, we need housing, we need top-of-the-line services, in terms of kindergartens and schools and education, and it needs to be affordable, so those kinds of basic things have to work. And when they work, I’m happy.”

Reykjavik has a lot of young people too – the average age in the city is 34 – and they are well educated: 41% of the city’s residents have a university degree.

Providing a base

Iceland is already solid in many areas of technology, with notable local successes in data centres (such as Advania) and biotechnology (Alvogen, Decode Genetics) to point to. Importing innovation is one way to encourage a tech sector to thrive, but growing it organically from scratch is a more durable, if difficult, path. Cultivating a start-up culture is part of the puzzle; another piece is providing an environment in which start-ups can thrive, and keeping them anchored in Reykjavik once they succeed.

“Reykjavik cannot yet attract a lot of foreign innovation but we want to at least be innovative enough to keep our own,” says Óli Örn Eiríksson, head of economic development for the city of Reykjavik. “Our universities are adapting quite well to train for highly advanced scientific disciplines and we have major strengths in genetic coding and health sciences.”

Because of the small size of the market and the limited pools of local financing, companies in many cases find they need to find bigger opportunities, and bigger purse-strings, elsewhere. “Start-ups tend to move their headquarters elsewhere eventually and keep just their development centres here so that’s not ideal. But we’re making headway though and showing that Reykjavik is capable of creating start-ups that can grow,” says Mr Eiríksson.

Recycled success

One such start-up is Carbon Recycling, which develops technology for renewable fuels using hydrogen and carbon dioxide to make methanol. Its first plant, located near the Blue Lagoon geothermal pool, is the first in the world to be making fuel out of carbon dioxide. Currently housing 25 employees, the company was established in 2006, having sprung out of a lab in Reykjavik. Money for its initial development was raised locally, and then in 2013 a $500m equity investment came from Methanex Corporation, a Nasdaq-listed, Canada-headquartered methanol supplier. “We see rapid scale-up on the horizon for us,” says Benedikt O Einarsson, Carbon Recycling's finance director.

“We will have larger production plants and add capacity. The plan is to expand internationally, mainly into Europe at first.”

His colleague, Benedikt Stefánsson, says: “The advantage of being in Reykjavik is the availability of renewable energy activity here. In that respect we will not be limited by our Icelandic pedigree. It is a technology that has international applications.” 

That said, in order to achieve the international scale-up the company desires, more fund-raising is needed, and that is where the limitations of being in a small market come in. “It is difficult to raise a significant amount of money here. The local market is fine for microfinance, but as soon as you get into real numbers, things get complicated,” says Mr Einarsson. “Icelandic investors are very monotone, focused on the few sectors they know, such as real estate and pension funds. What’s lacking is the incentive to invest in something new and higher risk but which could create value. But lately we are hearing about new funds being set up, and that is encouraging.”

Mr Stefánsson says: “The current government is very supportive [of business] and what the crisis did is recalibrate everyone’s thinking so that people are more open to new opportunities and ideas.”

Start-up energy

A name that comes up often in Reykjavik’s start-ups circles is Bala Kamallakharan, an Indian entrepreneur, financier and former banker who moved to the city in 2006 with his Icelandic wife, who he met at university in the US. Mr Kamallakharan got involved in a few early ventures that later found success, including games company Clara, which was acquired by a Silicon Valley-based goliath of the games industry in 2013.

“Word got around there was this crazy Indian investing in Icelandic companies and all the entrepreneurs wanted to meet me,” he recalls. “But I realised one thing that was missing here was mentoring of entrepreneurs.”

With this in mind, Mr Kamallakharan started a blog, startupiceland.com, and then an event, Start Up Iceland, which launched in 2012 with inauspicious beginnings in an old Nato base outside of town and to some scepticism. But now, he says, the event has taken off, and so too has Iceland's start-up community in general. “We are starting to see the energy of the start-up community growing and there is now a vibrant start-up culture here,” he says.

And Mr Kamallakharan is putting his money where his mouth is; apart from investing in local hospitality projects and tech start-ups, he is partnering with his former employer Íslandsbanki to launch the first private venture capital fund in Iceland. “Start-ups here would find that at the venture capital stage, there is no one around to write a cheque. But in fact, there is a lot of capital here – it is trapped, because of capital controls – so why not invest in start-ups that are actually creating a lot of value? That is the idea behind the venture capital fund.”