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Limited Capital is Creating "Blocs" in Iran's Start-Up Ecosystem

Limited Capital is Creating "Blocs" in Iran's Start-Up Ecosystem

Iran’s start-up ecosystem has continued to grow and develop since it burst onto the global tech scene in 2015. Incubators and start-up accelerators, including MAPS, Avatech, and DMOND Group have established a strong presence and helped instill best-practices that borrow from those of Silicon Valley. Some of the most prominent Iranian universities, including Shahid Beheshti, Islamic Azad University, University of Tehran and Sharif University have launched or are developing their own start-up incubators.

At the heart of the incubators and accelerators, a community has emerged that helps inspire new founders through events and outreach. Iran Startups and Roshdino host regular entrepreneurial meetings where start-up veterans share their expertise with local audiences, while Hamfekr Tehran coordinates weekly networking events hosted by a different start-up every week across various cities. The local community is not totally detached from the international scene, with Startup Grind having hostedsixteen events in Tehran, and Seedstars World—a start-up competition for emerging markets—holding its second Tehran-based event this month. Several conferences held outside of Iran, such as iBRIDGES series, were created specifically to link foreign investors with the Iranian start-up scene. Publications like Techrasa and Techly collect news on the start-up scene. An ecosystem is coming together with amazing speed.

Yet, despite the positive momentum and the energy and ingenuity of Iran’s start-up founders, the ecosystem is not immune to the larger challenges of the Iranian economy. Sanctions-related constraints and uncertainty around the corporate legal and policy framework for early stage investments obstruct local and foreign investors. This introduces risk above and beyond the inherent uncertainty when investing in a nascent sector where business plans are speculative and there have yet to be any IPOs or exits.

Nonetheless, capital has begun to follow into the eco-system, with a handful of adept foreign firms making early-stage investments. The largest activity has come from Pomegranate Investment, a Swedish fund that has raised EUR 60 million earmarked for investments in tech and consumer-focused sectors in Iran. Pomegranate has invested in Sarava Pars, a VC fund with investments in Avatech in addition to start-ups including Digikala (Iran’s answer to Amazon) and Café Bazaar (an Android marketplace). Sarava has also received funding from UK-based Kingsway Capital.

Competing with Sarava is Rocket Internet, a publicly traded German company that replicates successful online businesses and adapts them to emerging markets. Rocket has four start-up ventures currently operating in Iran. Some of these are direct competitors with indigenous start-ups, such e-commerce site Bamilo and Snapp, a taxi app. The entry of Rocket into the Iranian market in 2013 had a positive effect in jump-starting local entrepreneurs by enticing them to move quickly with their own ventures to not only fill remaining market gaps but to also create competitive alternatives to the apps Rocket was launching.

Sarava and Rocket have played a major role in fostering and funding the start-up ecosystem in Iran, but the early dominance of these two players may become a liability as the Iranian ecosystem seeks the next level in its development.

While Sarava has gained an international reputation, based on its early success investing in Iran’s most promising ventures, its success has meant that it receives the lion’s share of attention from foreign investors looking for exposure to early-stage investments in Iran. Meanwhile, smaller and less established VC funds are overlooked and have yet to raise significant foreign capital. Even with Rocket’s track record, many treat Sarava as though it is the only game in town.

Subsequently, the concentration of capital and market share within the portfolios of the two biggest and competing players in Iran’s start-up scene has led to a situation that more or less prohibits collaboration among different ventures. While many investors are warned to heed domestic politics when looking to invest in Iran, the start-up ecosystem is rife with politics of its own. Many of the start-ups funded by Sarava and Rocket Internet compete directly for market share. This makes it difficult for non-competing ventures on either side to collaborate where synergies in technology development or marketing might be possible.

Given the impact on the ecosystem, founders are calling out for more options. “Iran’s start-up ecosystem is in need of foreign investors and many more venture capital players to generate a more diversified structure”, says Pedram Assadi, the founder and CEO of Chilivery, a food delivery platform. Assadi says more funding choices are needed “to prevent the creation of start-up blocs.”

Unless more sources of capital emerge, the start-up ecosystem in Iran risks becoming comprised of inward-looking blocs of isolated start-ups, which prioritize intra-network rather than inter-network collaboration. Moreover, the concentration of capital in two blocs also affects how ideas and expertise are shared. The pool of experienced local mentors advising Iran’s start-ups is inherently small, but it is further limited when those associated with the competing blocs are effectively precluded from working with start-ups outside their network. As a result, innovation is hampered even further.

Better access to capital will change incentives. Founders will benefit when new investors are forced to seek out innovative projects in their earliest stages rather than simply deciding to pour more capital into the saturated competing networks. Competition has its merits, but reducing the control of the blocs will open the door to collaboration among ventures and would stimulate overall growth. Innovation thrives when there is a surfeit of investors always seeking the next big thing, as the successes of Silicon Valley show.

But even in the face of the current challenges, Iran’s ambitious founders are not discouraged. Until the funding environment improves, the focus will remain on the product, and many new companies are bootstrapping or using crowd-funding platforms to fund development. Hady Moslehi is one of the co-founders of Ronak—a self-funded software start-up that recently launched a team-to-team messaging app called Nested, which placed third in this month’s Seedstars Tehran competition. He insists that the “most important issue remains how to build a product that users love.” If Iran’s founders can get that right, the investors will surely follow. 

 

Photo Credit: Avatech

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