IRAN’S DIGITAL INDICATORS IN COMPARISON TO THE WORLD
Multiple parties in Iran, in both the public and private sectors, have invested in capital and research and development to construct and maintain the infrastructure that supports Iran’s startup ecosystem that makes the digital economy possible. These parties include communication service providers (CSPs), digital service and content providers, and hardware and software manufacturers.
In Iran, the innovation ecosystem represents one of the main components of the digital economy in recent years. A review of Iran’s global digital and innovation indexes and indicator ratings during the last 5 years shows very promising improvements.
Iran’s Network Infrastructure
According to the Ministry of Information and Communications Technology of Iran, the number of internet subscribers in 2020 was 70.6 million people. Internet penetration rate of 84% is well above the world average. Additionally, the smartphone penetration rate in Iran in 2020 was estimated to be 69% which is relatively higher compared to the global average (49%). This means 58.2 million people in Iran have smartphones in their possession.
Network Readiness Index
The 2020 Network Readiness Index (NRI) ranks 134 economies based on their performance across 60 variables. NRI applies a holistic approach covering issues ranging from future technologies such as Artificial Intelligence and the Internet of Things to the role of the digital economy in reaching Sustainable Development Goals.
Iran is ranked 79th in NRI 2021 out of 130 countries. Compared to Iran’s rank in 2016 (92nd), Iran has increased by 13 levels.
Global Innovation Index (GII)
World Intellectual Property Organization (WIPO) publishes an annual global innovation index. The Global Innovation Index (GII) ranks the innovation ecosystem performance of economies around the globe by analyzing 80 indicators, including measures on the political environment, education, infrastructure, and knowledge creation of each economy each year. The Global Innovation Index 2021 captures the innovation ecosystem performance of 132 economies. Iran is ranked 60th in GII 2021 index. Regarding the “Top three innovation economies by region”, Iran is ranked second in Central and Southern Asia.
The Global Entrepreneurship Index (GEI)
GEI is an annual index published by the Global Entrepreneurship Development Institute (GEDI) that measures the health of entrepreneurship ecosystems in 137 countries. Iran is ranked 64th in GEI 2019 index compared to 94th rank in 2015, showing a stable upward trend during the last 5 years.
IRAN’S DIGITAL ECONOMY
In the past decade, the digital economy has witnessed continuous growth in Iran. According to Statista, the share of the digital economy in Iran’s GDP has increased from 3.8% in 2016 to 6.9% in 2020. Although the average growth in this sector is higher than in other sectors of the Iranian economy, it is still far from its average value in the world economy.
According to the electronic card payment system of Iran (Shaparak), in 2020, the electronic purchases over Point of Sales, internet, and mobile phones in Iran have passed USD 42 B. (USD/IRR 260,000)
According to the Statistical Center of Iran, this amount is 34% of the country’s liquidity in 2020. This means that compared to 2019, the number of online purchases in Iran in 2020 has increased by more than 2.5 times.
According to the e-commerce Development Center of Iran, the total number of e-commerce units is estimated to be around 350,000.
In 2008, Iran’s Ministry of Industry and Mining took the responsibility for regulating and organize online shops and started issuing e-Namad licenses for e-commerce websites. Any company or individual that wants to sell its products/services online via its website in Iran should acquire the e-Namad, the official indicator for a trusted online vendor. However, a high share of these vendors is operating without this license.
According to the annual report published in 2020 by Digikala (one of the country’s leading e-commerce companies), the number of online shopping portals is estimated to be approximately 49,000, which has more than tripled in the past 3 years. Moreover, the total number of Iranian producers working with Digikala reached 152k in 2020.
The share of online retail of total e-commerce transactions in Iran increased from 2% in 2019 to 3.2% in 2020. This number is related to marketplace websites as well as social media. This upward trend, in addition to natural and gradual growth, has also been affected by the spread of COVID-19.
INTRODUCTION TO IRAN’S STARTUP ECOSYSTEM
Although the first incubator in Iran was established in 2000, the first wave of startups in Iran started after 2012, thanks to the initiatives taken by several universities, visionary individuals, and the return of foreign-educated Iranians. The movement was quite late compared with other developing countries such as India, but it quickly expanded and caught up with the latest technologies as more and more students, academics, entrepreneurs, government bodies, and domestic and foreign investors started to get involved.
In 2014, Several private and governmental investment and venture capital firms, as well as angel investors, accelerators, incubators, and science parks, were established to drive and develop Iran’s startup ecosystem. In terms of the number of startups, there were around 150 startups by the end of 2014.
In 2015, there was a surprising growth in the number of startups reaching an estimated number of up to 400 startups in Tehran alone. This shows an impressive 150% growth rate in the number of startups in Iran’s startup ecosystem.
The second wave of Iranian startups appeared in 2016, with companies working in other sectors such as Financial Technology (Fintech), Insurance Technology (InsurTech), Video-on-Demand (VOD), and messaging apps. Among them, the Fintech vibe in 2016 turned into an emerging trend in Iran’s startup ecosystem.
The third and current wave started when the US withdrew from the Joint Comprehensive Plan of Action (JCPOA) in 2018. This has caused a deterioration of the business environment for startups in several areas. Subsequently, the growth of startups in the country has slowed down since 2018 due to a sharp decline in domestic and foreign investment in the field of startups. However, restrictions can turn into opportunities, and this is what happened in Iran. In the absence of international players, Iranians saw the opportunity and started to clone and localize the international platforms and services.
Between 2014 to 2020, the two institutions of the Vice Presidency for Science and Technology and the Ministry of Communications provided support for startups through different policy measures.
Throughout these years, the government has also tried to help entrepreneurs by easing the regulations and tax laws for early startups through a “knowledge-based firms” plan. The government has supported VCs and accelerators by providing venue spaces on university campuses. Pardis Technology Park aka. “Silicon Valley of Iran,” which also hosts many entrepreneurs, was funded by the government to help the tech sector.
Particularly, since 2019, after sanctions were re-imposed and to improve the concept of self-sufficiency, governmental support for startups has increased sharply. The support included funding through loans and direct investments (through the Iran National Innovation Fund) and other incentives for building startup support facilities such as accelerators, innovation centers, and innovation factories. These policy measures resulted in rapid growth in these centers between 2019 to 2020.
GOVERNMENT’S SUPPORT TO IRAN’S INNOVATION ECOSYSTEM
Iran’s Science, technology, and innovation (STI) policies are categorized into 3 waves:
Wave 1: Developing higher education and scientific publications (from 1990)
Wave 2: Developing research and emerging technologies (from 2000)
Wave 3: Transition towards innovation and a knowledge-based economy (from 2010)
Looking at the current wave, wave 3, Iran National Innovation Fund (INIF) was established in 2011 to assist non-governmental institutions and companies in the commercialization of innovation by providing financial support and services. INIF works as one of the key intermediary agencies under the direct supervision of the Vice Presidency for Science and Technology. The INIF’s services are classified into Loans, Credit Notes, investments, and empowerment.
As illustrated the below figure, considerable support was provided through loans. Moreover, since 2019, there has been a sharp increase in fund allocation. The total financial support in 2019 and 2020 sums up to 87% of the total allocated funds in the past 5 years.
In the figure below, the INIF loan allocation in the period of 2018-2020 by type of application is presented. Working capital has the most considerable share in the total load allocations.
The government has also tried to help entrepreneurs by easing the regulations and tax laws for early startups through a “Knowledge-based firms” plan.
A Knowledge-Based Firm (KBF) is an entity that engages in the development and application of invention or innovation and commercialization of R&D outcomes in higher technologies with a high added value, including designing and production of goods and services. In Iran, the number of KBFs has increased from around 3,000 in 2016 to more than 6,300 in 2021. There are strict criteria for admitting a company as a knowledge-based firm; among the total 26k applications for KBFs, only 24% have been accepted.
Historically, each KBF provides jobs for an average of 35 people. The total number of employees for KBFs grew from 86k to 227k in 5 years.
Many KBFs are active in different fields, including information and communication technology, healthcare, biotechnology, agriculture, and energy.
In addition to the formation of knowledge-based firms, there is another type of company under the support plan of the government, which officially came into existence in Iran in 2017 and was named “Creative Company.” The main activity of creative companies is in art, creative industries, culture, and digital services.
Creative companies use creativity, innovation, and new business models in offering new products and services. However, the growth and development of their products and services are not based on advanced technology. The total number of creative companies in 2021 has reached 1,412.
SOCIO-ECONOMIC CHARACTERISTICS OF STARTUPS
The following analysis of Iranian startups is based on a questionnaire that was completed and submitted by 347 startups in Elecomp 2019 (Iran’s Market of Electronics and Computer Products and Services):
Demographic analysis of startups founders
The socioeconomic information shown below refers to the age group of startup founders. 62% of the founders are aged between 25 and 35 years.
Regarding the educational level of the startup founders, the most widespread educational qualification is a Master’s Degree (40.6%). It is found that 92% have earned at least a university degree, and approximately 12% have earned a Ph.D.
According to the research, the comparative analysis of the distribution of the founders by gender shows that only 10% of the founders are female.
Business analysis of startups
Regarding the growth stage of startups, about 40% of surveyed startups were in the growth and revenue generation stage, 14% were in the stage of coming up with a Minimum Viable Product (MVP), and only 3.5% were considered mature and after growth stage.
Looking at the life cycle of the startups, approximately half of the surveyed startups have the aged 1 to 3 years, and 8% were less than 3 months old.
Regarding the number of employees, 43% of the startups have less than 5 full-time employees, and only 9% have more than 30 full-time employees.
The most common types of financing sources for startups are as follows:
- Founders’ resources;
- Donations from family and friends: contributions from relatives or friends of the entrepreneur that finance the capital of the startup while not entering into its company structure;
- Equity crowdfunding;
- Equity financing: investments by external investors, among them Venture Capital, business angel funds, and accelerators;
- Government financial support;
- Bootstrapping by other projects/revenue lines;
- Finally, the use of bank loans, the traditional source of financing.
In particular, the survey included a question to indicate the financing sources they have benefitted from. As shown below, the most common way of financing for startups is personal financing, followed by VC resources. The frequency distributions are analyzed below.
Startups and entrepreneurs, especially in Iran, are facing different challenges. In the figure below, a number of these challenges are rated by the surveyed startups in Iran. Rules and regulations were considered the most challenging, followed by raising funds and governmental policies.
In another question, startups were asked about the types of governmental support they have benefitted from. Their responses are illustrated in the figure below. It is worth mentioning that 75% of the surveyed startups received no support from the government.
In the absence of a reliable and official source of information on the number of startups in Iran, the total record of startups registered on the Ecomotive website is considered as a basis for analysis on the sector diversification of startups.
EFFECTS OF SANCTIONS ON IRAN’S INNOVATION ECOSYSTEM
During the past couple of years, especially since the US withdrawal from JCPOA in May 2018, the startup business environment has transformed in several areas.
There is this belief among ecosystem players in Iran that sanctions, among all the challenges, have somehow accelerated the growth rate of Iran’s startup ecosystem. Being cut off from the outside competitors has bought time for startups to grow in a safe space with easy competitors, making them ready for the time when the doors to Iran’s market open to the world.
Looking in-depth, one of the main reasons why sanctions helped many local tech companies in Iran grow leads down to the banned payment systems and online transaction methods. This was the golden gate for Iranian entrepreneurs to create their localized version of these business models with in-house solutions for transaction methods. Companies and startups were forced to collaborate with other national companies, which empowered the infrastructure of Iran’s tech world.
Sanctions have also triggered the spread of the culture of entrepreneurship in Iran, forcing aspiring entrepreneurs to take action in their own hands and build startups according to local needs. During 2019-2020, government-backed bodies, including National Development Fund and National Innovation Fund, provided government-backed plans for supporting startups, allocating loans and grants to existing and emerging startups. However, the size of these allocated funds may be comparably small to make a major difference considering the size of the Iranian startup ecosystem and the required initial investments.
However, sanctions have also caused several main obstacles for Iran’s startup ecosystem. The domestic and foreign appetite for investments in Iranian technology startups has reduced substantially since 2018 because of the perceived high risks due to the country’s political and financial challenges. Even domestic investors have preferred to wait or to engage in less sensitive investment opportunities.
An additional issue is the lack of licensed access to many European and American hardware and software solutions due to the imposed US sanctions in May 2018. These restrictions take a serious toll on technology startups as many of their products run on European and American IT machines, platforms, and applications.
As a result, Iranian startups will not have proper access, if any, to European and American products as well as service providers, the international market, or get exposure to international players to perhaps be acquired by them or to become their partners.
Likewise, foreign companies – such as customers and suppliers – cannot buy or integrate Iranian startups’ products into their solutions out of fear of violating US sanctions, even though they only cooperate with the startups within the private sector. Therefore, unlike many other nations, Iranians have their local version of international startups. The marketplace business model is getting most of the traction in the country as it is empowering many businesses and individuals. Here is an infographic of some well-known Iranian startups and their international equivalent.
DEMOGRAPHY OF IRAN’S STARTUP ECOSYSTEM
The infrastructure to create a successful innovation ecosystem includes investment, networking, training, and supporters. The support centers help the ideas of entrepreneurs and innovative companies to grow. In Iran, the main startup support centers are as follows:
- Science and technology parks
- Venture capitalists
- Co-working spaces
- Accelerator and innovation centers
In this section, the characteristics and estimated number of these centers in Iran are presented. The following map presents an overview of the estimated number of key players in Iran’s startup ecosystem by 2021.
1. Science and Technology Parks
According to the Ministry of Science, Research and Technology, as of Nov 2021, there are 49 Science and Technology Parks across the country. There is at least 1 STP in each province, and some provinces, there are more than 1, namely; Tehran (12), Razavi Khorasan, Semnan, Markazi, and Hormozgan with (2) STPs each.
2. Venture Capital
is a form of financing investors provide for small businesses that are believed to have long-term growth potential. Venture investment in Iran is mainly made by venture capitalists (VC), corporate venture capital (CVC), venture capital funds, research and technology funds (RTF), angel investors, and crowdfunding. As of Nov 2021, it is estimated that there are 85 venture investment companies in Iran. RTF is a non-governmental organization that provides services for startups and knowledge-based firms, including loans, credit notes, free consulting and mentorship, and direct investment. There are a total of 61 registered RTFs.
3. Co-working spaces
Most accelerators and innovation centers in Iran provide co-working space as one of their main services for their startup teams in the program. However, there are co-working spaces that provide space open to the public and freelancers as well as admitted teams to their acceleration or incubation program. As of Nov 2021, the total number of independent co-working spaces in Iran is estimated to be 56.
4. Incubators in Iran
The first incubator in Iran was established in 2000. The number of incubators has had significant growth in recent years. According to the data gathered for this report, by Nov 2021, the total number of incubators in Iran is estimated to be 240.
Incubators may have a general focus or specialize in a specific industry depending on stakeholders’ areas of interest. 35% of incubators in Iran are specialized in different industries.
The incubators in Iran are mostly affiliates of Science and Technology Parks (61%) and Universities (25%).
The dispersion of the 240 incubators in Iran is mapped in the figure below. The incubators are mostly located in the center and west of the country. However, there is no province with an incubator. The capital city of Tehran, with 32 incubators, has the highest share in the country.
5. Accelerators and innovation centers in Iran
Among startup support mechanisms in Iran, accelerators are of paramount importance. Since they increase the chance of survival of startups. This issue is an emerging topic in countries like Iran, which has experience less effective incubators, science parks, etc. Accelerators in Iran are mostly private sector bodies. Accelerators are growing both quantitatively and qualitatively. The first accelerator in Iran, Avatech, was established in 2014. Along with that, the first wave of establishing accelerators in Iran started in 2016. According to the data gathered for this report, by Nov 2021, the total number of innovation centers and accelerators in Iran is estimated to be 162. 69% of accelerators in Iran are specialized. The figure below presents the share of specialized accelerators in different industries.
The innovation ecosystem has been considered one of the main components of the digital economy in recent years. In this report, the digital economy and Iran’s startup ecosystem were reviewed.
According to global indexes, namely Global Innovation Index, Global Network Readiness Index, Global Entrepreneurship Index, and UNCTAD B2C E-commerce Index,
“Iran’s rank’s shown promising improvement in the past 5 years.”
Additionally, some digital economy indicators, such as internet penetration, reached 84% in 2020, which is relatively high compared to the world average of 56%.
According to Statista, Iran’s digital economy share of GDP rose from 2.2% in 2012 to 6.9% in 2020. Moreover, Iran’s ratio of the real value of e-commerce to GDP (oil excluded) reached 25% in 2020.
The government, as one of the key players in Iran’s startup ecosystem, established Iran National Innovation Fund (INIF) in 2011 to assist non-governmental institutions and companies in the commercialization of innovations by providing financial support to knowledge-based firms (NBFs), mainly in the form of a loan. INIF’s loan allocation to Knowledge-based firms has helped to create 8,371 new jobs and help maintain approximately 79k jobs during the past 3 years. The total financial support of the government increased from USD 9 M to USD 217 M in 2020.
“The initiatives are a good start and reflect a drive from the government to expand the innovation ecosystem.”
They help reach a standardized definition for startups and form part of a move toward a digital economy.
Iran has made considerable progress in providing opportunities to support the growth of the digital economy and innovation ecosystem in the country. This type of support has resulted in a clear rise in the number of institutes and corporations engaging in Iran’s startup ecosystem and the proliferation of players in the funding and support space in the country.