Where does any startup start? With a problem. When the awareness of the problem comes, the idea for its solution appears. A team gathers around the idea, wishing to implement this idea. But in the process of executing, the startup itself is faced with one big problem that is inherent in many startups in Azerbaijan. This problem is financing. Where does this problem come from? Let’s find out.
In any startup ecosystem, the main sources of investment are: business angels, banks, large private companies, venture funds and the state. In Azerbaijan, each type of investment has unique challenges hindering the ability to startups to raise money.
Business angels. There are no business angels in Azerbaijan. At least officially. Azerbaijani entrepreneurs prefer not to disclose information about their own assets, and large open investments in a startup can attract the attention of tax inspectors. The startups themselves also try not to take investments secretly, as this may further affect their image in the eyes of future foreign investors. In addition, many large businessmen in Azerbaijan are not particularly ready to keep up with the times and more often invest in traditional business.
Banks. Few startups in Azerbaijan are considering taking a loan from a bank. There are no clauses in the legislation of Azerbaijan that simplify lending for startups. Therefore, startups have to take consumer loans, since banks will not issue loans for the development of a startup. Banks most often prefer to create startup projects within the bank itself so that the team creates the necessary innovation. The largest banks developing the internal ecosystem in Azerbaijan include the International Bank of Azerbaijan and Pasha Bank. But, it should be noted that in this context, we are not talking about entrepreneurship, but intrepreneurship.
Private large corporations. In recent years, private companies have begun to actively fund startups. But unlike banks, companies such as Azercell, Bakcell, and Nar Mobile gave grants to incubation centers for holding a competition between startups. However, the level of remuneration, in case of winning the competition, was not great. On average, the winner of the startup received US$1000-3000 toward development costs. Ultimately, many startups attempt to survive by participating in such competitions.
Venture funds. The institution of investment is rather poorly developed in Azerbaijan. There are no local venture funds in the country due to gaps in the legislation, and foreign funds are not particularly keen on Azerbaijan. Azerbaijan is still, erroneously, considered as an offshoot of the Soviet Union. Due to these stereotypes, Azerbaijani startups have to register their projects abroad. But, this past year there has been significant progress on this issue. Bogazici Ventures has opened its representative office in Azerbaijan and is ready to invest US$5 million in Azerbaijani startups. This event attracted the attention of other venture capital funds from the West.
State. In Azerbaijan, the main sources of funding for startups are the Azerbaijan Innovation Agency and the Azerbaijan National Academy of Sciences. Both structures conduct acceleration programs, startup battles and open grants. But with all the money allocated from the budget (US$70-80 million per year), startups do not receive the required amount of investment. The state is trying to play a mediating role in this problem, providing startups with some ecosystem resources so that in the future startups can find investments at the global level.
Bottom line: The problem of funding for startups remains the main reason for the slow development of the Azerbaijani ecosystem.
Ease taxation of entrepreneurs and stimulate their desire to invest in startups. Potential business angels need to be sure that their investments are protected, and the possible dividends from the success of the startup remain untouched by the tax authorities. In addition to these measures, it is worth developing an investment culture in the country. Information about the innovation exchange within the country and abroad should be available to a wide range of potential investors.
Banks should not create an internal closed ecosystem, but hold competitions and open grants for startups. With this approach, the most competitive environment for startups will be created, and banks will receive more useful products for business development.
The government of Azerbaijan should reconsider its views in relation to venture funds. The legislation should spell out clear procedures for creating a venture fund, and most importantly, providing guarantees for the protection of foreign and local investments. Investors must be sure that their investments in Azerbaijan are under reliable protection of the law. Such measures will motivate local large companies to create funds domestically.
The state should move away from the practice of financing startups from the state budget. The role of the State should be limited to consulting and seeking potential investors. An ecosystem has already been built in Azerbaijan in terms of technology and business conditions. The main tasks facing the state now: active work with talents, stimulating the private sector to invest in innovation, support in the entry of startups into the international market.
Nikita Yudin graduated from the Baku State University at the Department of Social Sciences and Psychology. Since 2018, he has worked as a journalist covering the intersection culture, technology, and the local startup ecosystem. Nikita also runs his own blog, TechTechTime, covering ecosystems in Azerbaijan and surrounding countries.