Closeup: Iran's hyped startup scene

I walked out of the Avatech office as bright late afternoon sun shone on the engineering campus at Tehran University. Stray cats were sniffing for leftovers beneath trees where students sat eating lunch.

The security guard at the university’s main entrance generally allows in women only if they strictly abide by dress codes - no shawls, only scarves; no short manteaux; no open-toed shoes. But tell them you are going to Avatech and you are let in without question.

Avatech is often described as Iran’s leading startup accelerator, which means it gives support and advice to fledging companies with a new business idea, especially in the tech sector. As such, Avatech has attracted the attention of the Wall Street Journal, New Yorker, Washington Post and the Financial Times, among others.

The atmosphere at Avatech is different from the ones at Tehran offices of ten years ago where secretaries in dark clothes pored over paperwork. It has a vast open lounge where I overheard conversations in English about trips abroad or upcoming presentations. Energetic young people in colourful attire walked around with Starbucks mugs and MacBook Airs.

Avatech’s first round of startups, beginning in October 2014, graduated the likes of Reyhoon (online food delivery), Navaar (audio books) and Taskulu (a project management platform). The second round, in progress when I visited in August and September 2015, had ten startups including a stock photo website, a cafe management app and an Iranian version of Etsy, which sells handmade products on its website. The groups were at their desks writing reports, discussing or coding, trying to build prototypes for ‘demo day’, when they would present their work to investors brought in by Avatech.

The ten had been chosen from 20 hopefuls to spend six months training and to receive minor funding in return for 15% of their shares. Avatech also takes on the cumbersome process of registering their business.

Avatech is funded by Sarava Pars. Sarava is one of many firms to launch an accelerator for startups in Tehran, leading some in the sector to speak of ‘accelerator fever’. Aside from Avatech, there is DMOND, affiliated with the Amidi Investment Group, TrigUp, affiliated with the leading technology company FANAP, and Setak, connected to Sharif University of Technology.

However Sarava is Iran’s most talked about venture capital firm. The story of its CEO, Said Rahmani, has come to symbolise the promise of the Iranian startup scene. Rahmani came home on a trip on behalf of Naspers, the South African internet and media group, but decided to stay and is said to have raised more than $10m from local investors. Sarava’s portfolio includes online retailer Digikala, ANetwork, an online advertising company, and Cafe Bazaar, Iran’s answer to the Google app store.

Digikala, founded by twin brothers Hamid and Saeed Mohammadi, employs 900 people. In September, they moved into brand-new headquarters, a multi-storey office in Attar Street, north Tehran, a far cry from their humble beginnings.

The twins were once students who saved up to buy a camera. Not finding a Farsi review and retailing website, they set out to make their own. Today, Digikala delivers laptops, kitchen utensils and handicrafts on the same day (in Tehran) - unimaginable ten years ago.

When I visited Attar Street in September, the brothers apologised for the noise as movers delivered furniture to the sounds of hammers and electric screwdrivers. The brothers are softly spoken, reserved and generally well regarded. Saeed continued working at his laptop while Hamid answered my questions.

I asked about the role of Sarava, which stepped in to finance Digikala after a foreign investor kept out for fear of sanctions. “It wasn’t just about financial investment, but how they helped us grow,” he said. “Said Rahmani’s experience was necessary in our rapid expansion.”

As economic sanctions against Iran started easing, some major global investors moved to Iran, and others may follow. This trend will create bigger competition for Iranian startups, but Mohsen Malayeri, an entrepreneur and Avatech’s managing director, is not worried.

The 30-year-old graduate of the Eastern Mediterranean University in northern Cyprus said the foreign investors could not easily capture the Iranian market. “Competing with local entrepreneurs isn’t easy,” he said. “Iran, as an emerging market, has its own challenges. Local entrepreneurs can better understand and deal with those challenges than foreign entrepreneurs.”

Malayeri also pointed out that current Iranian startups are already in pole position: “If global brands and top e-commerce companies want to operate in Iran, I am sure they will struggle to compete with startups like Digikala, because Digikala has already been able to dominate the market. Digikala is an established brand and it has built trust with its customers. They follow global standards and are doing very well in the Iranian market, so it’s hard to beat them.”

Sarava has an array of links with others in the world of startups. Malayeri and his friend Shayan Shalileh - who now runs another Sarava company, ANetwork - began in 2010 with an internet business venture called Khavarzamin. Rahmani, Shalileh and Malayeri are all members of the Iranian Entrepreneurship Association, which has spawned Iran’s Startup Weekend, launched in September 2012, Iran Web Festival and Iran’s Mobile Festival.

“They were the first to really notice the potential and get moving,” one entrepreneur told me. “Think of a large piece of farmland being sold off. The person who sets up the first real estate agency in the area, and has the biggest front door display, will get most of the customers.”

In July 2014 the Economist valued the top three Iranian start-ups as Digikala at $150m, Aparat at $30m and Cafe Bazaar at at $20m. When I pressed CEOs for accurate, up-to-date figures on their revenue or worth, the responses were vague. Hamid Mohammadi, CEO of Digikala, insisted the company was worth much more than the World Startup Report estimate, on which the Economist’s rankings were based.

Some companies keep their financial data private, for fear that the current favourable tax treatment for ‘knowledge-based’ businesses may change. One entrepreneur told Tehran Bureau, “As a knowledge-based company the government tells us that we are exempt from paying taxes, but they are barely consistent so we do not share data.” The phrase danesh bonyan (knowledge-based) appeared during the presidency of Mohammad Khatami (1997-2005) and has been picked up by the Rouhani administration as part of Iran’s effort to produce a ‘knowledge economy’, especially when faced with a brain drain.

Creating a viable tech sector by strengthening ties between universities and industry is one way to engage with Iran’s educated elite, or so the argument goes. And this is one path where the interests of firms like Sarava align with the office of the vice-president for science and technology, Sorena Sattari.

Part of Sattari’s brief is to encourage innovation, and one way to link industry and academia is for universities to allocate space for privately-owned startup accelerators. Speaking to a group of academics and administrators in September, Sattari noted that “startup founders are a family to the knowledge-based economy” and “universities must move towards establishing accelerators […] which will pave the way for a knowledge-based economy”.

But some university-affiliated tech companies are struggling to stay afloat. “Currently the thinking is that ‘technology’ only means startups, and everyone else is stranded, as always,” said an executive at a university-based hardware company that designs integrated circuits for telecommunications applications.

The Rouhani administration’s efforts to implement changes in the academic and tech sectors are limited both by external realities, including decades of sanctions, and domestic structures. As an example, startup founders and investors agree on the need for new, robust legal frameworks for e-commerce. Here, the administration is listening. “We are being invited to more meetings regarding regulatory frameworks for e-commerce,” said Mohammadi of Digikala.

But there are other things the government could do. “Officials are noticing that if they want internet businesses to work and make money they can’t keep filtering our websites,” one CEO told me.

Despite such obstacles, efforts on the part of the private sector and government are garnering results. Among at least two other investment firms looking at the tech sector are Iratel Ventures, a recently launched arm of the telecoms company Pars Iratel, and Griffon Capital, an asset management firm.

Other than Aparat, notable non-Sarava startups include NetBarg, an Iranian version of sites like Groupon, the international e-commerce marketplace, as well as Sheypoor and Divar, two Craigslist-style classified advertisement sites. Another player on the way to market is Bamilo, an online shopping website launched jointly by Berlin-based Rocket Internet and MTN, the South African telecoms company with a 49% stake in Irancell, Iran’s second largest mobile phone operator.

The buzz is very much centred in Tehran. Despite the notable engineering schools outside the capital in Isfahan and Shiraz, there has been little development nationally of new partnerships between university and industry.

I have met only two people from the provinces working on their companies in Tehran, both affiliated with Avatech and both critical of a lack of resources at home. “We have events in my hometown, but you have to live in Tehran to really develop an idea,” one told me.

The only team not from Tehran in Avatech’s last batch of ten startups said they had feared having nowhere to sleep and had struggle to secure dormitory rooms. They are developing bitvam, a social network that offers interest-free loans.

Walking the Avatech hallways, I was struck by the energy and enthusiasm of young people. But would they become successful businesses in the long term?

“That doesn’t matter, Avatech serves more as a startup dealership, overvaluing its companies and trying to sell them off,” a local critic charged. A participant at Avatech gave a different answer: “They teach you things here in six months that would take you three years to figure out on your own. They also teach you how to market yourself, and find you investors.”

To look at what is happening across the sector, one can attend Tehran’s many startup events. One of the biggest 2015 events was SeedStars World, a competition for emerging markets present in 50 countries last year.

The organisation hosts competitions around the world and top picks will be flown to Switzerland to compete with one another in March. This year, SeedStars World came to Tehran with regional managers John Chehaibar and Igor Ovcharenko as hosts for an event held at Avatech headquarters.

Chehaibar said in December SeedStars’ mission was to find the best startups in emerging markets, and to do so, they have their local ambassadors. “In Iran, the Iranian Entrepreneurship Association (IEA) played that role,” he noted. “And currently Avatech is one of the few active accelerators in Iran that we got a chance to work with.”

Chehaibar added that the competition in Tehran was not limited to a handful of entrepreneurs. “Through our ambassadors we were connected with venture capitals like Sarava,” he explained. “We visited tech parks in Tehran and Isfahan. And IEA helped us spread the word about our event to startups from all over Tehran.”

During the 2015 competition in Tehran, four of the six judges were from Avatech/Sarava. The winner was also from Avatech. Edwin Baboomian, the CEO of the company was featured on Iran’s youth magazine, Hamshahri Javan, alongside Steve Jobs and two other Avatech hopefuls - all wearing black turtlenecks.

Chehaibar said he had been struck by the Iranian entrepreneurs’ confidence: “They look at big companies like Facebook and Amazon, which don’t work in Iran, and believe that by building local versions of such services, they can easily take over the Iranian market, which is a fairly large market. On one hand, this is good because it gives them ambition. On the other hand, it does suggest that they are underestimating the competition and the difficulty of scaling the businesses they’re just starting to build.”

Chehaibar believes that unless Iranian tech sector professionals outside Iran move back to their homeland, the environment will not change significantly. An Iranian-American startup founder agreed: “Some Iranians in Europe with finance and business backgrounds have gone back, but tech professionals in Silicon Valley have yet to do so.”

Next to Mohammadi of Digikala on the SeedStars judges’ panel was Vahid Jozi, a 30-year-old entrepreneur who started his first startup at 19 in Canada and has since advised a handful of startups. Jozi is a mentor at Avatech and an advisor at Techrasa, a company founded by his brother Alireza Jozi. Techrasa, a website covering the Iranian startup and entrepreneurship ecosystem, was one of the two organisers of SeedStars event in Iran beside Iranian Entrepreneurship Association.

Next to Mohammadi of Digikala on the SeedStars judges’ panel was Vahid Jozi, a 31-year-old entrepreneur who started his first startup in Canada and has since advised a handful of startups. Wearing tight jeans and slicked back hair, he had one of the ‘looks’ common at these startup events.

Jozi told me his qualification for being a judge in Iran was that he had been investing since he was 16. “Really, I was just here on vacation and they asked me to come, so I did,” he said.

“I came here and I wanted to stay for five weeks. It’s six months right now,” he added in December. “I really don’t have a lot of responsibilities in Canada. And I decided to stay, help a bunch of companies, help some of the accelerators and investors. We in North America are maybe a decade ahead of what’s going on in emerging markets like Iran.”

“There are very few people with international startup experience... There are maybe 20 and I’m not even kidding. In the city of 15 million there’s only 20 of us.”

International startup experience however is not clearly defined in the startup ecosystem of Tehran, and can mean anything from owning a green card to studying abroad. One of the only Silicon Valley veterans to go back to work in Iran is not so sure what this will lead to. He left Iran after a year and thinks it is too soon to say if we are seeing the foundations of a knowledge economy: “Iran is a dynamic place with great engineers, but money makes the rules, not ideas or intellectual property.”

Denise Hassanzade Ajiri contributed additional reporting. The Tehran Bureau is an independent media organisation, hosted by the Guardian. Contact us @tehranbureau