Caren Firouz / Reuters Inside an Internet service provider in Tehran, February 2011.

The Electronic Republic

How Sanctions Could Damage Iran's Startup Scene

Over the past two months, Iranian cyberactivities have moved up the list of grievances against the Islamic Republic. In October, U.S. President Donald Trump warned of Iranian cyberattacks in his speech decertifying the Joint Comprehensive Plan of Action. Less than a month before, the U.S. Treasury sanctioned 11 Iranian entities for “malicious cyber-enabled activity,” and the security company FireEye claimed that a hacker group known as APT33—likely working for the Iranian government—had been conducting cyberattacks against U.S. and Saudi aerospace firms since at least 2013. Likewise, over the course of two weeks between August and September, Apple and Google removed Iranian apps from their online stores, joining a host of other companies that deny services in compliance with U.S. sanctions regulations.

Iranian-sponsored cyberattacks are the sinister side of the tech scene. But there is another side as well, and the same policies that protect U.S. institutions from malicious attacks also prevent the Iranian public from taking advantage of such services as hailing taxis on their phones and ordering clothes and food online. That leaves a gap that Iranian firms are struggling to fill.

BALANCING ACT

The evolution of Iran’s tech startup scene—characterized by fluctuating levels of government support and investor interest—has been complicated. According to last year’s Science, Technology, and Policy Review published by the United Nations Conference on Trade and Development (UNCTAD), the Islamic Republic’s Science, Technology, and Innovation policy has undergone three waves since the 1990s. The first two, from 1990–2000 and 2000–2010, involved improvements in higher education and scientific publications, and an increase in the number of research labs and efforts to develop new technologies. The most recent wave, according to UNCTAD, is a “transition towards innovation and a knowledge-based economy” characterized by new regulations to support knowledge-based firms, increase competition, and protect intellectual property rights.

Iran’s shift to a “knowledge-based economy”—though still in its nascent stages—combined with a lack of competition resulting from international sanctions, has allowed entrepreneurial activity to surge. Since 2010, Iran has created an Innovation and Prosperity Fund to help build urban technology complexes, inaugurated an Intellectual Property Market through which entrepreneurs can sell their patents, and ratified a law on the elimination of barriers to competitive production. These efforts have paid off. Last year, Iran’s Security and Exchange Organization granted licenses to five venture capital firms—Sarava Venture, Arman Development Fund, Partian Venture Capital Fund, Royan Persian Health Fund, and Yekom Arman Fund—which took Iran one step closer to Supreme Leader Ali Khamenei’s goal of earmarking 20 percent of government revenue for knowledge-based organizations by 2025.

Raheb Homavandi / Reuters A woman tests an iMac at a store in Tehran, January 2011.

Iran’s sixth Five Year Development Plan, which covers 2016-2021, likewise obligates the Central Bank to pay at least ten percent of the resources of banks and government financial and credit institutions to the newly established Employment and Entrepreneurship Fund for Veterans. It also aims to equip recent graduates with entrepreneurship skills by offering private-sector employers two-year insurance exemptions if they participate in an internship program for recent graduates.

These initiatives have increased confidence among some entrepreneurs, as recent high levels of entrepreneurial activity and a surge in patent applications indicate. But the country is starting from a low base for such activity, even for the region. So, although policy changes have boosted confidence in the country’s ability to protect intellectual property rights, the newness of these policies, combined with continued barriers to foreign investment—barriers that regional leaders like the UAE and Qatar do not face—still give entrepreneurs in other countries an edge. In 2015, the country ranked 14 out of 14 countries in the MENA region (and 94 out of 130 countries evaluated) for entrepreneurial activity but nevertheless claimed the top spot worldwide for growth in the sector, according to the Global Entrepreneurship Index published by the Global Entrepreneurship and Development Institute.

RESISTANCE ECONOMY

Increased government investment in the private sector might sound like a bad thing to those who fear that the Islamic Revolutionary Guard Corps has outsized influence in the sector. After all, the IRGC—known outside Iran for its involvement in nuclear weapons research and involvement in regional conflicts—remains a primary stakeholder in many private companies. And contracts for projects in an array of sectors, from education and trade to construction and agriculture, are often awarded to IRGC companies and their subsidiaries. 

The fact that some of Iran’s largest tech companies have adopted language used by the IRGC may raise red flags. For example, Digikala, an e-commerce startup—whose board of directors met in June with the minister of industry, mines, and commerce to discuss opportunities for regional development—claims to be the largest online store in Iran committed to implementing the policies of the "resistance economy," a term the IRGC often uses to refer to the development of domestic industry. In theory, however, the main point of the resistance economy—self-sufficiency—covers a wide range of activities, many of which are entirely outside the sphere of the IRGC. Iran’s shift to a “knowledge-based economy” has allowed entrepreneurial activity to surge.

So far, it appears that government involvement and public-private partnerships have mostly served to give entrepreneurs greater technical and financial capital with fewer regulations and more IP protections. Notably, the Law of Support for Knowledge-based Companies and Institutions and Commercialization of Innovations and Inventions stipulates that knowledge-based companies (which include many tech start-ups) are exempt from paying taxes. A number of accelerators, including two of the largest—Avatech and DMOND—have partnered with local universities to sponsor hackathons, create co-working spaces, and host startup camps.

Although the IRGC remains entrenched in many traditional sectors of Iran’s economy, startups represent a new sector whose leaders are eager to gain access to international markets and foreign funding; entrepreneurs are willing to take advantage of government reforms aimed at increasing domestic competition but are unlikely to jeopardize foreign investment by reaching out to entities considered detrimental to real private-sector growth, even by the country’s own political leaders.

Meanwhile, at the provincial level, members of parliament—especially those from districts with high unemployment—have a vested interest in ensuring that private-sector revenues directly benefit their constituents. Abdolreza Mesri, a parliamentarian from Kermanshah, speaking shortly before the third “Tic” entrepreneurship event that took place in his district in July, expressed the importance of tech accelerators in reducing unemployment. He even voiced his disappointment at the 18 percent interest rate for entrepreneurs to start their own business, asserting that the conditions of production and competition were unfair. Such statements suggest that startups—if given the opportunity to overcome these barriers to entry—will play a positive role in diversifying a private sector still monopolized by a small group of actors. 

Reuters Iranian President Hasan Rouhani speaks at a ceremony commemorating Ayatollah Khomeini in Tehran, October 2017.

OPEN FOR FOREIGN INVESTMENT

About a month after Apple and Google pulled Iranian apps from their stores, European business leaders, venture capitalists, and policy makers showed their willingness to explore opportunities in Iran at the 4th Europe Iran Forum held October 3-4. The event was largely informational, but Helga Schmid, representing the European Union’s foreign policy service, took the chance to reaffirm Europe’s strong commitment to all parts of the JCPOA. European business leaders discussed collaboration in everything from smart transportation and tourism to financial services and retail. Leaders from Iranian private equity firms discussed working with European investment companies to expand access to venture capital. Days after the event, the Italian asset management company Azimut announced an agreement to acquire 20 percent of Mofid Entekhab, the largest independent asset management company in Iran, to facilitate foreign investor access to Iranian capital markets.

Meanwhile, South Africa’s MTN, Sweden’s Pomegranate, and the Isle of Man’s Indigo Holdings have invested in the tech sector, which they consider particularly attractive because of high Internet penetration and mobile phone usage, limited competition from major digital platforms, and untapped potential spurred by years of isolation. These firms work in conjunction with—and serve as a counterbalance to—Iranian government influence. Notably, the company that owns Snapp, a ride-hailing mobile app, is funded by Irancell, a joint venture between the state-run Iran Electronics Industries and South African telecommunications company MTN.

Foreign companies have already shown a willingness to invest in Iran, despite the threat of U.S. reprisal. This willingness will likely continue, especially if the United States fails to distinguish between hostile actors and entities that contribute toward genuine private sector diversification. In the days before and after Trump’s decision to decertify the JCPOA, leaders highlighted the security and economic benefits of the deal, with the European External Action Service reiterating on October 16 that the EU remained “committed to the continued full and effective implementation of all parts of the JCPOA.”

Iran’s tech scene is growing, aided by a wealth of highly skilled innovators and new policies that foster genuine private-sector competition. But the uneven implementation of these policies, combined with uncertainty over access to foreign funding, has held Iran’s startup ecosystem back, especially in comparison to regional powerhouses such as the UAE and Qatar. Continued economic reforms at home and rising confidence among investors abroad—a trend stalled by a reevaluation of the JCPOA in the United States—are what Iran needs to succeed as a regional powerhouse in tech innovation.

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