Azerbaijan’s fledgling tech sector needs help to compete

Azerbaijan’s fintech darling, GoldenPay, was recently granted an indefinite license by the country’s central bank to operate as an electronic money institution.

Since it was founded in 2008, GoldenPay has been a pioneer of digital payments in the country, inspiring others to build creative digital solutions as well. Now, relative newcomer Epoint has received a fintech license just three years after its launch, which will inevitably catalyze further development in the sector at a faster pace.

As an entrepreneur who has lived in Azerbaijan all my life, I can tell you the growth that we have seen in the past two years has been incredible. Baku now hosts major tech events such as the InMerge Innovation Summit and the Startup World Cup, which rival and even exceed the caliber of tech events taking place in other tech hubs around the region. The country is also now home to several incubators and accelerators, and is even seeing the beginnings of venture capital companies taking root.

But in the same way that a teenager having the beginnings of a fuzzy beard does not yet mean they are fully grown, we are also still in the midst of our own development in this sector. Where GoldenPay once walked so that Epoint could run, both services are still largely serving the local market in Azerbaijan (though Epoint does also operate in Ukraine).

To help Azerbaijan move past this adolescent stage of its startup economy, we need a success story that puts us on the international map and brings more talent into the ecosystem. Just look at the app company Masquerade in Belarus. When it was acquired by Facebook’s parent company (now called Meta) in 2016, along with a few other startups in the local ecosystem, Belarus began to build a name for itself as a hub for tech and innovation.

If Azerbaijan truly wants to attract more international startups and investors, this is the kind of thing we need to see here as well. One of the greatest advantages on our path to becoming a strong international hub is geography: Azerbaijan is a natural gateway between Europe and Asia. In an attempt to leverage this, the government has funded a number of infrastructure projects, following the same sort of ethos displayed by Kevin Costner’s character in the Hollywood movie “Field of Dreams”: if we build it, they (foreign investors) will come.

For example, technology parks such as Sabah.city aim to bring together innovation pioneers such as universities, research labs and, ostensibly, startups, which will no doubt make good use of the fiber optic cables provided through the Digital Silk Way internet project. Additionally, foreign organizations can take advantage of waived taxes and streamlined work permits if they are interested in establishing their businesses in a local technopark.

But promises such as these are weighed down by the realities of running a business operation on the ground. Firstly, for founders of startups such as myself, incentives such as reduced or waived taxes on income do not help much when you are potentially looking at years of runway before reaching the point at which profitability takes off.

But more importantly, the legislation around taxes, limits on transfers of money to non-relatives and foreign currency exchange restrictions slow us down and prevent us from being able to work with foreign vendors.

For local businesses dealing in nascent or niche industries, this hinders our ability to shop around for the right partners. Similarly, it is a major deterrent to established multinational companies, which expect greater flexibility.

So while we should absolutely forge ahead with these infrastructure projects, we also need legislation and regulations that can meet in an appropriate manner the needs of an innovation hub operating on an international stage.

In the past few years we have seen the establishment of local and foreign incubators and accelerator programs such as Startup Wise Guys, SUP.VC, and NEXTSTEP Innovation Center. Players such as these are crucial to a healthy tech ecosystem, especially considering the funding environment over the past two years (startups that participate in accelerator programs have been shown to raise more from investors).

That being said, having spent a lot of time working with local startups I find that too many of them focus on vanity metrics or ambitious moonshot ideas that lack a product-market fit (a problem I would partially attribute to the lack of local success stories they can look to as examples).

Encouraging the growth of local tech with no guardrails in place is not going to put our country on the map; if anything, it is making it harder for those with real potential to gain the support they need.

If instead of widespread support for all startups we went deeper with those companies that really had a chance to make it, I think the time and resources would be better spent. While this might sound like I am being discouraging, the reality is that most startups do not make it past their first five years. If we want to be taken seriously, therefore, we have to get serious about what it takes for startups to thrive in the long term.

With this in mind, incubators and accelerators should put greater emphasis on helping startups achieve a market fit before scaling them up. Later, when we have achieved the kind of high-profile successes that can act as a flywheel for investment — which is not too far in the future; there are some excellent startups poised to breakout — then we can also start playing with the more ambitious, moonshot ideas, like they do in Silicon Valley.

Another reason why I believe so firmly in the need for a national-turned-international success story in Azerbaijan is that I have seen a number of startup founders here get so caught up in the influence and authority they build, they fail to keep reaching for more. Instead, they stagnate and eventually fizzle out; the problem with being a big fish in a small pond is you forget about the ocean.

Startups that want to target foreign markets will eventually need foreign investment. But it is hard to convince folk outside of your own, small ecosystem to invest in your business if they have never heard of your early investors.

Because our incubators and accelerators are still relatively new, they lack the kinds of connections that offer startups tangible support and credibility outside of Azerbaijan. Without any connections to local businesses, for example, even if a startup has an innovative idea, it has to start from scratch when seeking end users who could benefit from its implementation while also offering valuable feedback.

What is more, similarly nascent venture capital companies are getting tangled up in bureaucratic delays, which is stranding startups in funding purgatory. When the time to market is so slow, most will not survive. To help them make it past this, admittedly challenging, stage of development and growth we are going to need more outside connections.

To that end, it is worth noting the areas in which we are getting things right. For example, the Digital Development Agency’s “Roadshow” initiative gives promising local startups the chance to showcase themselves at major events worldwide.

In October, I attended the TechCrunch Disrupt conference in San Francisco along with local startups Recepta, Adviad, Polygraf and IOMETE. Opportunities such as this to pitch, connect and network with founders, venture capitalists and other ecosystem players from around the world are priceless.

Azerbaijan’s startup ecosystem has incredible potential but for it to truly flourish we need to focus on creating the right environment for long-term success. This includes legislation that lowers the barriers to international vendors, a focus on nurturing a select few high-potential companies, and fostering better connections between accelerator programs and local businesses.

By building a stronger foundation for international recognition, we can evolve into a tech powerhouse that is capable of competing on the global stage.

• Ayaz Ahmadov is founder and chief executiveof Dosty, an app that helps pet owners navigate ongoing and emergency care.