The Government Efficiency Committee in Iceland has proposed to the Prime Minister to close down the Innovation Fund, known as the Kría Innovation Fund, because "the market failure it was intended to fix no longer exists."
First of all, the lack of capital for innovation or early-stage companies cannot be considered a market failure.
This is a highly risky and unpredictable asset class. It is rational that capital does not naturally flow there. There is nothing broken about that — it is how the market works.
But the thing is, innovation and early-stage companies are important actors in any country, beyond simply being players in a free market. They bring competition, new solutions, different value propositions, and fresh perspectives that make the market more dynamic. And that is why most countries have dedicated public funds to support them.
Entrepreneurs bring competition to industries. Competition drives innovation. And innovation leads to better solutions to existing problems, often at better prices.
In that sense, an innovation fund is not intended to fix anything. It is meant to complement existing market dynamics and support a certain type of company — one that has a real value proposition but may not fit the standard venture capital model, at a certain point in time.
It is very simplistic to argue that just because Iceland now has private investors investing, the role of Kria is done.
What is more difficult — and more important — is to understand how Kría should support the existing innovation ecosystem: what investment strategy it should follow, what type of companies it should back, and how it can best complement the private capital market.
Please, Iceland — do not confuse efficiency with effectiveness.
- Efficiency is about doing things right — optimizing the process.
- Effectiveness is about doing the right thing — achieving the desired outcome.
In this case, the Government Efficiency Committee may be acting efficiently, but not effectively.
This is, they are basically doing the wrong thing — very well.
