(Before the article itself I want to say big thanks to the following people for reading the draft of this article and sharing their opinions: Ronald Weissman from US-Software SIG, Band of Angels; Emma Arakelyan from US-Accenture; Harout Topsacalian from US-Newgate ventures and Classlink; Adam Mathias Bittlingmayer from Armenia-SignalN, ML/AI pioneer; David Sahakyan from US-Innovative Paradigms; Hambardzum Kaghetsyan from Armenia-RAU, Edgar Aroutiounian from Armenia-iterate; Vazgen Hakobjanyan from Armenia-Teamable; Nina Achadjian from US-Cota Capital, Hive Ventures)

In my previous article I covered the general picture of recent developments in Armenian startup ecosystem. I got many responses and I understood that writing about the startup ecosystem is bringing some small visibility across my connections. That inspired me to put together another article.

The whole technology entrepreneurship realm is new and the Armenian startup ecosystem is pretty young. There is a growing interest towards Armenian startups — some Series A stage startups got funding from Silicon Valley VC-s, and some early stage ones got to European accelerators. In my opinion for such a small ecosystem as Yerevan these are really fantastic achievements. But as the ecosystem is new there are lots of challenges. I would like to focus on ecosystem challenges that are facing especially early stage startups which are pre-seed fundable and have productized the idea.

Fundraising opportunities

The total amount of funds raised by pre-seed stage startups was less than $1mln during the past 3 years, while for instance in Bulgaria the same stage startups raised $12mln in 2014–2016, in Estonia the same stage startups raised $10mln only in 2016. The access to funding for pre-seed stage startups is very limited. The only funding opportunities for them are grants provided by Enterprise Incubator Foundation, World Bank, EU programs. These funds are very limited and during the past 3 years only 20–30 (8–10 per year) pre-seed stage startups got $15K–$50K funding per team. The idea stage startups literally have no access to funding (I call it micro-funding) in order to get around $15K for a few months run rate to build the prototype, test it with small customer base. Usually:

Cost of 3 engineers for 4 months in Yerevan ➕ Cost of small marketing expenses = $15,000

In San Francisco, or Berlin or London this would be 6–8 times higher due to high salary and office related expenses.

I think you only need two kinds of people to create a technology hub: rich people and nerds. They’re the limiting reagents in the reaction that produces startups, because they’re the only ones present when startups get started. Everyone else will move. — Paul Graham, YC

I think there are nerds in Yerevan, but the access to money is limited. So, potential solution might be establishment of angel networks, creating university linked funds to invest in student startups/side projects, establish 2–3 accelerators which will have funds to invest in startups.

Accelerators and incubators

There are very few accelerators/incubators in Armenia (just to name few of them MIC Armenia, IBM ISTC, EPIC) which support the bright teams to productize their ideas. Having limited resources is a barrier for them to accelerate/incubate many startups per year. In Armenia 20–30 startups are passing through an acceleration or incubation program per year. But in terms of generating a larger pipeline of fundable startups, this is just a small glass of water in a sea. In comparison in Bulgaria there are 8 leading accelerators and every year at least 100 early stage startups pass through such programs. On top of that those pre-seed stage startups receive $20K-$50K funding per team just in early stages of their startup life. In Estonia, there are 14 leading accelerators which accelerate 120–150 startups per year.

The potential solution might be:

establish 1 regional accelerator with regional partners;

encourage corporates through government incentives to create incubators on specific verticals;

fund accelerators with government and private funds: establish 2–3 accelerators with $500K–1M total funds, that will be able to accelerate and invest in around 30–40 pre-seed stage startups in 2 years.

Finding talent

There are 12,000 software engineers in Yerevan (1.4% of the population), and the number of engineering graduates per year is 1,500–2,000. In comparison in Estonia with 1.3 mln population there are 18,000 software developers and engineers (1.8% of the population) and in Bulgaria with 7.2mln population there are 52,000 software engineers (0.7% of the population).

Finding a senior level talent might be a challenge. IT sector is growing by 20–30% annually and around 400 IT companies are constantly hiring with good salaries. So, for an early stage startup with small funds it is a real challenge to find senior technical staff.

The potential solution I see to this is: in the short run create more hackerspaces, coding boot-camps.

Mentorship

Lots of startups in Yerevan may have a great product/idea, but lack the necessary mentorship; i.e. market experience, access to potential partners and knowledge to move a stage further. There is interesting culture of giving back in Armenia, plus we also have enough entrepreneurs and highly experienced people who are truly visionaries in terms of mentorship. But the only thing is that we do not have entrepreneurs with exits, who usually are keen to mentor, invest and grow new ventures. Also there is still some immature attitude towards mentorship.

The potential solution might be:

creating a platform to connect the startups with local and diaspora Armenian tech entrepreneurs;

organizing non-formal clubs inside universities to connect students with entrepreneurs;

engaging successful entrepreneurs in acceleration programs.

Access to global networks

Armenian pre-seed stage startups have very limited access to global networks. These networks usually give unbelievable value when the startups need to find the right partners or get access to specific niche markets. Lack of presence of campuses of top accelerators (500 startups, Techstars, Startup Bootcamp, etc.) is a big barrier to not having access to global networks, especially when we talk about experience sharing and partnership opportunities.

The potential solution might be a platform which will enable both the startups and the diaspora tech entrepreneurs to discover each other mostly for business development, advisory recruitment purposes.

Size of the market

The population in Armenia is 3mln which is a small market for startups. So simply said you can’t grow a big startup which is “interesting” and fundable for VC-s. This has a good side — majority of Armenian startups even don’t build solutions for local market, but they think global from day 1. But this brings to another major challenge: lack of knowledge of overseas markets and not having business presence in those markets.

The potential solution I see to this is supporting pre-seed stage startups to travel to their target markets to learn more about their potential customers and the environment in which they are thinking to dive.

Legal Challenges

The regulatory framework in Armenia is sometimes complicated for startups. Especially when it relates to financing tools (convertible note) and distributing shares among the shareholders and giving stock options to employees. Regulatory system and the government is taking some steps towards this. There are still several big challenges facing Armenian legal environment in terms of IP protection. They include but are not limited to the lack of approximation of the Armenian legislation on IP with the global standards. So, these laws are not assuring effective enforcement of IP protection legislation.

The potential solution might be establishment of a legal committee to do a research of best practices in the developed ecosystems and develop a roadmap to some level of convergence of these laws.

Startup events and meetups

Ecosystems flourish when ideas are shared. Ideas are more readily shared when startups physically meet up at events, when there are common physical locations where people often gather. There are lots of events in Yerevan: hackathons, startup pitching events, events for students, events for developers, startup meetups. Although the number seems to be “ok” but the number of events for pre-seed stage startups is not enough when they can network with potential investors and partners. Also, there is a scarcity of international events which could be a great opportunity in terms of exposing early stage startups to international markets and investors.

The potential solution might be joining the government resources, network of Armenian tech entrepreneurs and investors to bring 1 really big startup event to Yerevan. And with big event I mean an event which has big names.

Let’s sum up

Each ecosystem is a combination of various stakeholders like startup incubators and accelerators, successful startup founders, people with exits, consultants and experts, angel networks, funding organizations, mentors, idea sharing platforms, events, and all other infrastructural, resource and content support entities, government, etc.. Considering the current economic situation, in my opinion we have a great ecosystem in Yerevan. But we need a stronger startup ecosystem in Yerevan for a pre-seed stage startups to succeed. Strong startup ecosystem is key to economic growth of Armenia, when new business ventures are being established and new jobs are being created.

We must fight to nurture and invest in building a great startup ecosystem, because that is where startups will succeed. If we make it a priority, we can:

encourage decision-makers (government and large organizations with resources) to take more risks;

ensure that more investments and resources are available and accessible for entrepreneurs;

be attractive for startups from the region;

have couple of exits in the next few years;

….. And as a result, put not only Yerevan but Armenia on a global map of top startup hubs and lead to the development of Armenian Dream of building the “Silicon Mountains”

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You can also find me in Twitter @artashesvar.