Reykjavik, Iceland's capital and largest city, is earning its stripes as a startup hot spot. With a population of just 120,000, the city is fueling an economic recovery, thanks to private companies expanding into the U.S. 

It hasn't been an easy road. The Icelandic economy collapsed in 2008, when all three of the nation's private banks defaulted. The crisis led to a number of capital controls, which "scared investors away," said Jenny Ruth Hrafnsdottir, an investment manager with NSA Ventures, Iceland's leading venture capital fund.

Today, however, the Nordic country is making a comeback. 

"We don't have a ton of capital here, but what we do have is very creative teams," she continues.

To her point, venture capital in Iceland is still paltry compared to the U.S., with relatively few homegrown companies. Still, in 2015 alone, three new Icelandic VCs were created, raising a total of $80 million to invest in local startups. International investors are beginning to take notice, too.

CCP Games, a game developer based in Iceland (and the maker of the hit game Eve Online), raised $30 million from New Enterprise Associates in November of this year, led by CEO Hilmar Veigar Pétursson. CCP is partnering with Facebook and Oculus to create Eve: Valkyrie, the tech giant's flagship virtual reality game. 

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Another success story is Sólfar Studios, a gaming startup that scooped up $2.2 million in funding this year. In 2016, Sólfar will roll out its second game, Everest VR. (The first, called Godling, was announced with Sony in the summer of last year, and is in development for PlayStation VR.) Co-founder Thor Gunnarsson--himself a CCP Games expat--notes that Sólfar works frequently with U.S. partners, though its team of seven is currently based in Reykjavik.

Since 2009, a number of startups in Iceland have made notable exits. Clara, a software company, was sold to Jive Technologies for a reported $8 million in 2013. Modio, a 3-D printing app, merged with Autodesk earlier this year and re-launched officially as Tinkerplay. And Plain Vanilla, the maker of the once-hot mobile game Quizup, has pivoted this year to become more of a social-media platform, having raised over $32 million from investors including Sequoia Capital.

There are a number of factors that explain Reykjavik's recent success as a business hub. If you ask the entrepreneurs of Iceland, they point specifically to the culture: 

1. A growing number of resources for startups.

Bala Kamallakharan, an entrepreneur, startup coach, and early investor in companies (including Clara), says he saw the potential in Reykjavik even during the economic downturn. Affectionately, he calls Iceland "a rock in the center of the Atlantic." 

"The work of entrepreneurs has caused the economic recovery," he says. "I saw this trend in 2008 or 2009, and I decided that I wanted to build a community around entrepreneurs." 

In 2012, Kamallakharan founded Startup Iceland, a conference that has attracted prominent VCs (such as Brad Feld) and American entrepreneurs (such as Sarah Prevette and Matt Wilson). The event is capped at 300 tickets, and has sold out every year.

Other useful resource for founders include Startup Reykjavik, a seed stage investment program, and Startup Energy Reykjavik, an accelerator that provides mentorship, office space, and seed capital to young companies. 

Kamallakharan also credits at least some of Iceland's startup success to its size. "Iceland is a country that is the size of a city. When you are that small, you have to have all the services within the city's limits," he says. "If you want to build something, you can have access to anybody who is doing something in the space."

2. A population that is young and tech-savvy.

Iceland's work force is generally young, with 17 percent between the ages of 16 and 24, according to research from the International Institute of Management Development in Lausanne, Switzerland. 

Engineers stem from top schools in Reykjavik, including the University of Reykjavik--which has an internationally recognized Executive MBA program--as well as Iceland University. Together, those schools have more than 17,500 students. 

Gunnarsson says he's impressed with the quality and diversity of Icelandic talent. "It was difficult for software companies to recruit talent, and that changed after the downturn," he adds. 

He notes that a shift in the way that VR is done has allowed for smaller teams to achieve the same quality of work as bigger studios. At Sólfar, workers now use a new platform called Unreal Engine 4, a suite of pre-packaged tools.

3. A collaborative group of worldly entrepreneurs and investors.

Founders in Reykjavik are looking to expand early, so the city becomes a testing ground for foreign markets.  

"The biggest risk in doing a startup is in the early phase, when you're trying to figure out if there's a market for what you're building. The best place to try it out is in a small space," says Kamallakharan.

Gunnarsson, who spent much of career working in both Silicon Valley and London--and had previously launched startups outside of Iceland--says he's pleasantly surprised by the quality of the Reykjavik startup scene.

"I didn't assume there would be a strong enough hub of interesting companies here doing good work," he says.

Still, as the co-founder of a company that frequently works with U.S. marketers, he warns that communicating across borders and time zones is especially complicated.

In the early days of CCP, Pétursson recalls that setting up physical offices outside of Iceland was crucial.

"The challenge is when it comes to scaling. When you need to scale up your company, you run up against the fact that the country is tiny," he says.

4. A progressive space. 

Founders agree that nothing beats the small-business optimism in Iceland. 

"The default in the U.S. is that trust is earned, not given," Gunnarsson explains. "Here in Iceland, trust tends to be given until it's taken away. Your reputation is everything."

In many ways, Iceland was destined to become a gaming hub: With the country's natural beauty, but lack of direct sunlight during the winter, VR became a mode of escapist storytelling.

"The country itself is kind of a [VR] experience," Pétursson adds. "It's booming with tourists and geysers and waterfalls. When you grow up with all of these worlds, there's an innate need to replicate that somewhere."