What’s holding back Azerbaijan’s startups Venture pause

Azerbaijan is exploring new avenues to finance its startups. In addition to preferential lending through government funds and international grant support, the country is developing mechanisms to back local startups, software, and IT companies via private specialised venture funds. A draft law on these specialised funds has also been finalised. Accelerating this process is crucial, as Azerbaijan still lags behind other regional countries in both the number of startups and their access to venture financing.

The challenges facing the nation’s innovative entrepreneurship sector were highlighted recently during the annual report of the Innovation and Digital Development Agency (IRIA), which operates under the Ministry of Digital Development and Transport of Azerbaijan.

The history of modern venture investing dates back to the rise of digital technologies and the internet in the late 1980s and early 1990s. Venture investments from (venture — a risky enterprise) are made in emerging high-tech businesses or startups whose chances of success are uncertain. In other words, these investments offer the potential for rapid profits in exchange for funding, but due to the high risks involved, a venture fund can lose its entire invested capital.

At the same time, venture investing can produce colossal returns. The market value of some companies can grow tens of thousands of times beyond the initial investment. This is the story of startups such as Zoom, Uber, Slack, Airbnb, and Facebook, all of which have become giants of the digital industry. Perhaps the most remarkable example is Google: two venture investors initially put around $200,000 into the company, and today, its market capitalisation exceeds $1.581 trillion.

Azerbaijan is also taking targeted steps to strengthen its startup ecosystem. In recent years, specialised laws have been adopted, incubation and acceleration programs organised, and hackathons and ideathons held, supporting more than 600 startups. Domestic universities and research centres have played an active role in this process, alongside local and international partners—primarily from Türkiye and, to a lesser extent, Israel.

Meanwhile, the Azerbaijan Agency for the Development of Small and Medium-Sized Enterprises (KOBIA) has implemented a dedicated mechanism to support startups. To date, 2.5 million manats ($1.47 million) in grants have been allocated to 130 startups, and such projects enjoy tax exemptions for up to three years. Overall, from the launch of the “Startup” certification in 2021 through the start of this year, 247 SMEs have been certified through KOBIA.

Steps are being taken to provide startups with convenient financing tools. The country currently has three venture funds: in 2022, with the participation of IRIA, the PAŞA Holding group, and private investors, the Caucasus Ventures fund was established, and in 2024, the SABAH.fund and INMerge Ventures funds were created. Several years ago, a cooperation agreement was also signed between Israel’s largest venture company, OurCrowd, and the Azerbaijan Investment Company (AIC).

Unfortunately, despite these efforts, the domestic startup ecosystem, still at an early stage of development, cannot yet boast any significant achievements, let alone a meaningful level of industry capitalisation through venture structures.

“There are significant difficulties in Azerbaijan regarding startups’ access to financial resources: in 2025, 22 startups attracted investments totalling just over $2.622 million,” said Farid Osmanov, Chairman of IRIA, at a conference reviewing the organisation’s activities over the past year. “The volume of financial resources is still insufficient, and work in this area continues.”

According to the head of IRIA, special attention should be given to mechanisms that improve financial accessibility for startups at early stages of development. Another major challenge lies in the legislative sphere, where improvement and refinement of the relevant regulatory framework for venture activities are needed. The head of the agency noted that work on legislative initiatives, the development of investment funds, and financial instruments is at its final stage, while there are also plans to expand the activities of the specialised technopark.

The plans outlined by IRIA undoubtedly deserve attention, and their implementation is a matter of utmost importance. But what, until now, has hindered the expansion of venture financing for domestic startups, the inflow of international capital and know-how, and the entry of innovative projects onto the global stage through cooperation with world vendors and technology companies?

The answer is complex, but it is appropriate here to focus on the basic, structural reasons: gaps in legislation, weak tax incentives, and underdeveloped international cooperation. For instance, the recently published 2025 White Paper by the American Chamber of Commerce in Azerbaijan (AmCham) states that the current corporate legislation in Azerbaijan does not provide the necessary mechanisms to attract investments into startups, including venture capital, direct private investments, and business angel funding.

The report emphasises that the legal forms of business entities provided under the Civil Code — primarily limited liability companies and joint-stock companies — are geared toward traditional, static business models and are not suited for modern startups that require rapid growth, multi-stage investment rounds, innovative development, and flexible capital management. According to the report, these legal constraints force Azerbaijani startups to register in foreign jurisdictions to secure investments, which in turn impedes the formation of a domestic venture capital market. AmCham experts believe that Azerbaijan needs to create a new specialised organisational and legal form to support startup capitalisation, as well as significantly improve the regulations concerning joint-stock companies.

Overall, the sector requires an acceleration of legislative reforms and administrative mechanisms. In Azerbaijan, a draft law on venture financing had been in development for many years, and only last year was it submitted for government approval; the process of forwarding it to parliament for adoption is still not complete. Administrative processes for the full localisation of startups within specialised platforms are moving just as slowly. In October 2024, the official opening of the Azerbaijan Innovation Center took place within the Absheron Valley Innovation Cluster, yet no significant progress has been observed in developing the cluster’s infrastructure so far.

Equally important is the creation of a transparent regulatory environment for innovative companies. Greater transparency and broader information on the selection criteria that grant local startups access to government grants and venture fund resources are necessary. Among the priorities is the establishment of a special fiscal regime for venture companies and startups in Azerbaijan: given the high-risk nature of this sector, the current conventional taxation system does not appear effective.

As an example, neighbouring Armenia can be cited, where venture financing and startup development benefit from highly liberal legislation. The personal income tax rate for IT specialists was reduced to 10% long ago, and the corporate tax for software companies was cut to 0%. As a result, by 2022, approximately 23,000 specialists in programming and systems integration were employed in Armenia’s IT sector, developing digital products in artificial intelligence, cryptocurrencies, and blockchain systems, attracting hundreds of millions of dollars in investments.

Notably, all major Armenian software companies (such as Picsart, DeepCraft, Krisp, Service Titan) are subsidiaries of international vendors and primarily carry out local development as subcontractors for global projects. In most cases, the partners of Armenian startups are large U.S. businesses based in Silicon Valley, often with participation from entrepreneurs of Armenian descent.

And, apparently, this partnership is expanding. In November last year, reports emerged that Apple would soon send an official delegation to Armenia to explore opportunities for direct investments and project launches in the fields of AI, semiconductors, and technology education. In recent months, Armenia has held similar negotiations and received positive signals from Google, AWS, Meta, OpenAI, and a number of American venture funds. Against this backdrop, it is unsurprising that Armenia ranks 54th in the 2025 Global Startup Ecosystem Index, rising three positions compared to 2024.

Kazakhstan, Azerbaijan’s Caspian neighbour, is also performing quite well: the country has more than 20 private venture funds, around five angel clubs, and over 1,500 officially registered startups, with venture investments reaching $130 million in 2025. And this is far from the limit: last year, the Kazakh government made a historic decision to create a special fund with $1 billion in capital to support local startups through venture funds.

Startup and innovation financing is also developing relatively well in Uzbekistan, where venture funds have invested $145 million over the past five years. Recently, due to reduced fiscal burdens and the creation of specialised clusters, this sector has also been growing dynamically in Georgia, where venture capitalisation has exceeded $28 million.

Venture financing in the Baltic countries reaches hundreds of millions of euros. Thanks to liberal legislation, a preferential tax environment, and a relatively low-cost labour market, global digital companies invest heavily in the region, facilitating the transfer of technologies and know-how. According to the Global Innovation Index 2025 report by the Portulans Institute (USA) and the World Intellectual Property Organisation (WIPO), Estonia ranks 2nd in the world, Lithuania 35th, and Latvia 39th in this area.

By contrast, Azerbaijani startups face significant challenges, including a severe shortage of venture capital—particularly at the growth stage—limited access to mentorship, and difficulties entering international markets. Due to restricted investment opportunities and an underdeveloped venture ecosystem, Azerbaijan ranks 120th out of 139 countries in the Global Innovation Index 2025 under the “Venture Capital” indicator, which measures the volume of venture investments in startups and new business ideas. In the “VC Investors Deal Count” category, the country ranks 110th, reflecting a very small number of investors willing to provide risk capital, while in terms of “VC Investor Co-Participation,” Azerbaijan ranks 111th.

These figures underscore the need to accelerate the legislative process in Azerbaijan and to implement the business environment reforms announced in recent years, including adopting tax incentives to attract venture capital and increase the number of startups.

Equally important is the rapid implementation of the Concept of Digital Development of Azerbaijan, approved by presidential decree in January 2025. The document outlines multiple priorities, including the digitalisation of public administration, improvement of the e-government system and other state information resources, and the accelerated introduction of digital technologies such as Smart City systems, IoT, AI, and more.

Successful implementation of the Concept is expected to create opportunities for broad startup participation in digital projects through public-private partnerships, thereby laying the foundation for the expansion of venture financing in the country.