Azerbaijan expands capitalization of startups Review by Caliber.Az

Formation of the basis of Industry 4.0 and its integration into the global economic system is the most important objective of reforms on the digital transformation of the economy being implemented in Azerbaijan. The development of the startup ecosystem and innovative production as well as the attraction of international and local donors for the commercialization of IT projects is designated as the most important component of this strategy.

Over the past two years a lot of useful moves were made in this area: agreements with Turkish and Israeli companies to attract donor capital and create technology parks, there is active support for local startups, and the formation of venture capital structures has begun. So, the day before the Agency for Innovation and Digital Development and PASHA Holding Group of Companies announced the creation of a venture fund.

Starting to develop a startup ecosystem comparatively recently, Azerbaijan still does not have enough experience in the commercialization of experienced hi-tech developments and software solutions. Until recently, high-tech projects implemented in the country were mostly of applied, research nature, and were carried out mainly in the framework of state support and international donor grants. But in recent years, with the support of the Ministry of Digital Development and Transport and other specialized structures in the country, isolated projects began to be streamlined and structured and a single base for the buildup of the startup ecosystem began to be formed. Thanks to this, the country has noticeably improved its development dynamics and increased the number of startups operating on the basis of incubation and acceleration centers at universities and research and production structures. Incubation and acceleration centers, programming schools, and a number of other specialized institutions formed under a number of universities, the National Academy of Sciences, and state agencies act as a driving force here: the most active of them are incubation structures Barama, New Space, AppLab, Youth Inc and Tech.az, etc. Moreover, since last year support to innovative businesses is provided by fiscal preferences: SMEs that received startup certificates are exempted from income tax and tax on income from the innovative activity for three years. Also, relatively recently, local start-ups began to seek support from international vendors and are making the first steps towards attracting contract orders from leading companies in the EU or in the Silicon Valley of the United States, as well as in other global centers of the IT industry. The OECD, ICESCO, BP-Azerbaijan, etc. are ready to provide certain support in the framework of the pilot and educational projects in our country.

At the same time, since last year the key vector of international cooperation to support local innovative ventures was focused on coordinating partnerships with Turkish and Israeli technology and donor companies. The first step in this direction was last year's decision of Turkish venture fund BoğaziçiVentures to allocate $5 million for the acceleration of Azerbaijani startup projects. In turn, a number of projects on the development of the startup ecosystem, including the creation of joint Turkish-Azerbaijani technopark and technological workshops Deneyap are planned with the support of the Ministry of Industry & Technology of Türkiye, Turkish Technopark GOSB, as well as the Agency for Innovation of Azerbaijan. According to the talks held at the recent forum Teknofest Azerbaijan in Baku, the Azerbaijani and Turkish experts are planning to develop innovative projects in the renewable energy and energy-saving technologies, introduction of IoT (Internet of Things) components in utilities, industry, shipbuilding, development of artificial intelligence, formation of DATA centers, "government cloud", etc.

And last July an agreement was signed between the largest Israeli venture capital company OurCrowd and Azerbaijan Investment Company (AIC). Leading global structure OurCrowd specializes in investing in startups operating in the field of artificial intelligence, transport, energy, healthcare, security, etc., and its experience in the commercialization of experimental developments of startups and incubation centers would be extremely useful for Azerbaijan.

However, despite certain successes in the formation of the startup ecosystem in Azerbaijan, for many years attempts to create venture funds (venture - risky enterprise) - specialized financial structures that invest in developing high-tech businesses or startups, whose success prospects are not yet known, were unsuccessful.

In particular, in 2018, the country was negotiating the establishment of the High-Tech Investors Club, the members of which were planned to become local IT companies, including Sinam, BestComp, Neuron Technologies, Azercell, Enginet, Hesab.az, and a number of other structures. The club's activity was planned to be aimed at the commercialization of promising startup projects by means of equity participation in them. However, the attempt to unite target investors - the so-called "business angels" - did not lead to concrete results. Another attempt to form a venture fund in the country was made in May 2019 - a memorandum of understanding was signed between the Department of Communications and DAAL Venture Capital (specializing in financing startups operating in the field of financial technology), but this project remained at the stage of intentions.

Nevertheless, since last year, the need to develop venture financing in the country as an unconditional factor in the development of the startup ecosystem was outlined as the basic goal of the state strategy of digital transformation in Azerbaijan. "By the end of 2022, Azerbaijan may adopt a law on venture capital funds, which are so necessary for the development of the startup sector, innovation and technology industries. Specialists of the State Agency for Services to Citizens and Social Innovations under the President of Azerbaijan, SME Development Agency, Ministry of Economy and Digital Development were involved in the development of the document," chairman of the SME Development Agency Orkhan Mammadov noted recently. The new Law on Ventures is designed to expand the tools for financing and development of the startup sector, innovation and technology industries, and attract the private sector to these processes.

Apparently, support of the state in the matter of forming financial resources for innovative projects has played a crucial role in the acceleration of national venture capital development processes. The first successful step in this direction was the creation of Angels Club - Technovate-Sabah, uniting investors-trustees, a month ago in Azerbaijan.

The day before it was announced about the creation of another joint venture capital fund, the founders of which were the Agency for Innovation and Digital Development under the Ministry of Digital Development and Transport and the group of companies PASHA Holding. "We believe that the new fund will open wide opportunities for the development of innovation infrastructure, help optimize the business environment, attract foreign investors to the country and bring local IT projects to foreign markets," said Digital Development and Transport Minister Rashad Nabiyev, who took part in the presentation event. The minister emphasized that the country plans to create a special zone for startups: a relevant bill has already been prepared and is being discussed by the government, and its adoption is expected by the end of the year.

The capital of the new fund is 11.3 million manat, it was formed at the expense of parity investments of five million each from the two co-founders, as well as 1.3 million manat provided by several private investors. Based on the analysis of incubation and acceleration programs implemented in the country, the Fund is expected to invest in about 150 local and regional start-ups in the next seven years. Priority is given to innovative directions in the financial, educational, and agrarian sectors, as well as the sphere of cloud technologies, retail, e-commerce, and game industry.

It is expected that the venture fund created by the Agency for Innovation and PASHA Holding will cooperate with another newly created structure - Technovate-Sabah, special attention will be paid to the partnership investment model, as well as joint development of training programs on investment and organization of the visit of investors in Silicon Valley in the United States.