Frequently asked questions about innovation

Patents are granted to technological inventions that solve a specific problem. For example, patents may be granted for a new:

• technological product
• process
• piece of equipment
• application

In order to be patentable, an invention must be new, original and commercially exploitable. All publicisation of an invention, in speech or writing, affects the novelty of the invention.

An invention is not eligible to be patented if is made public, for example in articles, books, newspapers or at conferences, before the patent application has been submitted.

For an invention to be considered original, it must go beyond what would naturally have occurred to a professional in the relevant field based solely on existing knowledge. It must also be possible to mass produce the invention, so that it is commercially viable.

Patents do not protect:

• ideas
• discoveries
• scientific theories and mathematical methods
• works of art
• business methods
• computer programs as such
• dissemination of information and skills

A patent may be necessary in order to attract investors, or to market the invention at all.

Patents are generally valid for 20 years from the application date.

A trademark is a specific distinguishing feature used in business to identify a product or service. Trademarks can be a range of things, such as:

• words and names
• images and patterns
• letters and numbers
• colours, sounds and tunes
• product packaging

provided that the trademark distinguishes products and services from one party from the products and services from another party. The public must also understand the meaning of the trademark and the protection it confers.

Trademark rights are established by registering the trademark with the Icelandic Intellectual Property Office, in accordance with legal requirements. The trademark must also be used, since owners lose the exclusive rights over abandoned trademarks. Trademarks are registered for a specific product or service.

Trademarks need to be registered every 10 years.

Design rights protect the visual appearance of a product or part of a product, defined by individual aspects of a design, in particular:

• lines, outlines, colours, shapes, construction and/or materials

A design may be 2D or 3D, handmade or machine produced. For a design to be registered, it must be new and distinctive at the time of application.

Designers may test the design on the market for up to 12 months before applying to the Icelandic Intellectual Property Office for protection.

Design rights may be valid for up to 25 year after the application deadline.

For a work to be protected by copyright, it must meet certain requirements and be a new and independent creation.

The author of a literary work or creator of a piece of art owns the copyright to that work, subject to the limitations of copyright law.

Computer programs are protected by copyright law, the same as literary works.

Copyright applies only to the work itself, not to:

• ideas
• facts
• methods
• prototypes
• discoveries 

Copyright is valid for 70 years from the start of the year after the author's death.

Self-financing

This is the easiest and most popular option for people starting a company.

• Founders need to think carefully about the funds they invest
• Money may be lost if the enterprise is unsuccessful
• If the founders are not willing to contribute personally, it is unlikely they will be able to persuade others to invest

Contributions from friends and family may count as self-funding, for example in the form of loans or pro bono work There are financial and social risks involved in accepting contributions from friends and family. The phrase 'Friends, Family and Fools' is often mentioned in this context.

Internal financing

Generally this means the income from selling products/services. Another kind of internal financing is 'bootstrapping', which means that founders are extremely economical and constantly looking for ways to minimise outlay. Common bootstrapping tactics:

• working at home instead of renting office space
• giving staff the option of becoming co-owners rather than paying them higher salaries
• recruiting students to help on the project
• using contractors instead of hiring permanent employees
• borrowing equipment or buying used equipment
• selling consulting services alongside developing the company's main product or service

The term 'organic growth' is used when a company is able to make good use of internal financing and the company grows in line with increased income.

If internal financing proves insufficient to fund operations, the founders will need to acquire external financing from customers, suppliers or investors.  

Benefits of self-financing / internal financing 

• Founders maintain 100% ownership
• Simple, informal and accessible
• Generally favourable terms for the company

Downsides of self-financing / internal financing 

• Growth will be slow 
• Often does not meet essential requirements for capital
• The company becomes dependent on people closely connected to the founders/company, which can have unwanted social consequences

This kind of financing helps to reduce the enterprise/company's need for capital.

Financing from customers could involve:

• partial or full advance payment for products
• shorter deadlines for payment after product delivery

Financing from suppliers could involve:

• deferred payment or payment in installations

Entrepreneurs might also think about renting equipment instead of purchasing it, or finding other ways to share the risk with suppliers.

Customers and suppliers may want some kind of compensation for their contributions. For example, customers could be granted temporary exclusive rights to use the product/service, or the company could guarantee that they will not purchase products or equipment from other suppliers.

Benefits of financing from customers or suppliers

• Reduces the company's need for capital
• Lower costs

Downsides of financing from customers or suppliers 

Limited amount of funding available
Requires collaboration with customers or suppliers
Affects the relationship with customers or suppliers

Public institutions – states or municipalities or the European Union (EU) – may award funding to companies and commercial enterprises in the form of loans, grants or equity capital.

Financing of this nature is sometimes based on social considerations, for example in the case of support for start-ups in rural areas or fragile communities. It may also be motivated by a focus on developing a certain sector, specific technology, or supporting a certain age or gender demographic.

Companies that conduct research and development are entitled to have part of the development costs reimbursed. Further information on tax deductions for research and development projects. 

Public funds that support companies 
Start-up grants are not available, but companies must be registered with the Register of Enterprises at Iceland Revenue and Customs.

A large number of grants are available for research and development based enterprises/companies; the Icelandic Centre for Research manages these grants.

Examples of Icelandic funds/grants

• Research Fund
• Technology Development Fund
• Climate Fund
• Student Innovation Fund

The Icelandic Centre for Research (Rannís) also coordinates EU grants.

The Icelandic Regional Development Institute provides grants for enterprises/companies in regional Iceland.

Venture capital simple means funding provided by venture capital funds or other investors to companies in the form of equity capital. These investors purchase equity in the company, with the expectation of profiting on their investment.

There are a huge number of venture capital funds in the world today. Several such funds operate in Iceland, for example:

• New Business Venture Fund
• Brunnur Ventures
• Eyrir Sprotar
• Crowberry Capital
• Frumtak Ventures

These funds generate returns on their investors' money by investing in promising start-ups. By far the largest investors in the aforementioned funds are Icelandic pension funds, as well as private investors.

Venture capital can be divided into two subcategories:

Public equity: investments in companies registered on the stock exchange.

Private equity: financing that generally comes alongside active but temporary involvement on the part of the investor. These categories can be divided into:

• Venture capital, which means investing in younger companies in their initial or growth stages
• Equity funding, which means buying equity in established companies.

In order to attract investors, the founders of a company must be able to explain the company's potential exit strategy. The planned exit is the day when investors can expect to get their investment back, ideally with significant interest.

Of course investors are all different and have varying levels of patience. All investors understand that building a good company takes time, though.

Examples of exit strategies for investors:

• Initial public offering (IPO), listing the stocks of a company on the stock exchange.
• Acquisition of the investor's shares by a third party. This might be a company working in the same sector or another investor.
• The founders buying out the investor.

The basic factors required to persuade venture capitalists to invest are:

• The company must be a private limited-liability company or a public limited-liability company
• The business proposal must be unique
• Focus on growth and profitability
• The company must be scalable, which means that profits can grow much faster than costs
• The company needs the right mix of expert knowledge and experience (a strong team). Many investors look more at the team and its ability to realise the business proposal than they do at the proposal in and of itself.
• A clear and credible business plan

Investments from Icelandic venture capital funds can be between 30 and 300 million ISK. The funds generally work in collaboration with funds abroad. The funds abroad could be interested in investing alongside the Icelandic funds, which would increase the sums involved.

The life cycle of an individual venture capital fund is generally around 10 years but may be longer, for example in the life sciences and the energy sector.

Venture capitalists are active investors and will take a seat on the board of companies they invest in.

The Invest Europe (previously EVCA) website contains a list of European venture capital funds by country.

Benefits of venture capital

• Early-stage financing (no requirement for the company to be already generating income)
• A lot of funding available that can speed up development of the company
• The owner of the capital is generally an active investor and will share contacts, expert knowledge and experience

Downsides of venture capital 

• Founders do not retain full control of the company. 
• Investors generally demand significant returns

Another kind of venture capital comes from private investors, often called business angels. Business angels invest not only money but also their own time and expert knowledge into the company.

They are people who have experience in founding and running companies and who have profited by exiting one or more companies. They are then looking to invest these profits into supporting new and promising ideas.

As well as the capital, the company benefits from the investor's experience, expert knowledge and networks.

Business angels generally have a different approach to venture capital funds: 

• The sum of each investment is generally lower
• The decision to invest is more likely to be based on personal insight and faith in the entrepreneur
• The decision on whether to invest or not is quicker, since the business angel operates independently
• Business angels generally have other considerations when deciding to invest, beyond purely commercial interests. They look at societal impact, the company's mission, whether involvement will be a personal challenge for them, and how interesting the team or business proposal will be to work with.

In Iceland there are a fairly low number of business angels.

In most of our neighbouring countries, there are active business angel networks (BAN); such an organisation or network has yet to be established in Iceland.

It is easy to find localised networks, for example within the Nordic countries, using search engines. 

Benefits of business angels

• Opportunity to acquire early capital, even before the company has generated any income
• Quick decision making and access to funding
• Access to expert knowledge, experience and networks, meaning that business angels are active owners

Downsides of business angels

• Can be difficult to find the right business angel for the company
• Generally very picky about what they choose to invest in; they want to find a company that suits them
• Founders can no longer make all decisions independently

A loan from a financial institution is probably the most common way for companies to acquire external funding. Banks specialise in providing access to funding, while minimising their own risk. This means that they require some kind of collateral from borrowers.

Before the company is established, the most common way for founders to provide collateral is by mortgaging their own real estate (this is not recommended), but collateral in the form of equipment, inventory, unpaid invoices or company real estate is suitable once the company is established.

Banks always require:

• a business plan
• future plans
• financial statements
• financial plans 
• in order to evaluate the company's creditworthiness.

Early-stage companies without income or profits will therefore generally not qualify for a business loan from a financial institution.

If a bank loans money to a company, there will always be a loan agreement setting out the main terms and conditions, as well as a payment schedule and overview of collateral. Interest depends on the bank's risk assessment of the company's operations and is therefore negotiable.

As part of the risk assessment, the bank will evaluate:

• Cash flow, i.e. the company's ability to make regular repayments
• Financial strength – proportion of owner's equity out of total company assets
• Their own returns on the loan provided to the company

Banks also carry out a credit assessment on all companies that apply for business loans, which involves looking at the background of the company and its owners.

Benefits of bank loans 

• Banks are financially strong and able to provide access to loaned capital at relatively short notice
• Various financing options are available
• There are several ways to access capital against the company's assets, such as factoring loans or inventory loans

Downsides of bank loans

• Banks are formal lenders that require positive cash flow and/or profits
• Collateral is required
• Most suitable for companies that are already established

Crowdfunding is a kind of financing that enables many people to invest in or support a specific project or company. The sum contributed by each investor/supporter is low, but financial targets are reached by persuading a large number of people to back each project.

Projects are funded through special websites, such as:

• Karolina Fund 
• Indiegogo 
• Kickstarter

Where the founders wish to acquire new equity capital, companies can find investors on websites like: 

• Funderbeam

Companies that use crowdfunding always set a funding target and clearly describe what supporters/investors will receive for their money.

Crowdfunding has grown in popularity in recent years and there are many examples of successful campaigns that have generated significant capital for companies. A good funding campaign must be well organised and almost always takes place on social media.

Crowdfunding kills three birds with one stone:

• marketing of the company/product
• market validation
• financing

The cost of crowdfunding is generally between 6-12%, to be paid at the end of the campaign.

Benefits of crowdfunding

• Raises awareness of the project/company
• Quick way to acquire funding
• Investors can help to publicise the enterprise/company among their own contacts

Downsides of crowdfunding

• If the funding target is not reached, the enterprise will not receive any funding
• Administration surrounding purchased equity / Administration surrounding delivery of purchased products