The qualitative evolution of the Uzbek startup ecosystem

Our expert Otabek Arzykulov in his author's column reflects on the qualitative evolution of the Uzbek startup ecosystem over nearly eight years. From its nascent beginnings, marked by the challenges of securing investment, to the vibrant landscape of today teeming with innovative projects and robust support structures, Arzykulov charts the remarkable journey of transformation.

Otabek Arzikulov is a systems analyst with a background in the digital economy, developed technologies, and methodologies for Gazpromneft in Russia. He is also the author of analytical articles for the "Economic Review" and scientific articles on various topics.

The qualitative evolution of the Uzbek startup ecosystem

Nearly 8 years ago, I had the opportunity to delve into the study of the startup market in Uzbekistan for the first time. At that time, the sector was in its infancy, but there were already interesting projects and solutions being implemented by enterprising individuals. Due to the absence of a fully developed startup ecosystem in the country, entrepreneurs faced the acute challenge of finding sources of investment for their business projects. In an attempt to ease the lives of startups, I undertook the exploration of this problematic area with the aim of formulating an optimal recipe for seeking and attracting investments. This effort gave rise to the article “Ghosts of Startups Wander in Uzbekistan in Search of Funds for Their Ideas”.

Since then, significant changes have occurred in the startup ecosystem: the market has been filled with new innovative projects in various industries, various acceleration programs have emerged, and most importantly, venture capital has become more transparent and supportive of new ideas. Moreover, venture investments are not only undertaken by local funds, foreign investors also show interest in the development of local businesses.

Government involvement in shaping the ecosystem

2022-2023 Investments by Uzbek venture Funds. Source: AloqaVentures

A distinctive feature of the local venture capital market, compared to global experience, lies in the fact that our market is shaped by both private and government capital. Confirmation of this is the launch of the National Venture Fund UzVC by the Resolution of the Cabinet of Ministers of the Republic of Uzbekistan in 2020, aimed at the development of the venture capital ecosystem in the country. In addition, the UzVC fund’s activities are directed towards the following objectives:

• Improvement of the regulatory framework of the venture ecosystem.
• Acting as a liaison between the private sector and the government.
• Development of the business incubation and acceleration system.
• Enhancing financial literacy in venture financing.

Based on the Resolution, the initial charter capital of 15 billion sums was also formed, allowing the fund to become a key player in the local ecosystem. Foreign specialists with international experience are recommended for the management of the fund. As of today, the fund’s portfolio consists of 8 startups, 7 of which are actively involved in the local economy.

Banking experience in venture investing

Banking capital has also shown initiative in shaping the startup ecosystem in Uzbekistan. A trailblazer in this field is JSC “AloqaBank”, which launched its venture division, AloqaVentures, in 2021. As of today, their cumulative investment in startups has reached nearly $2.5 million. The fund collaborates with 22 projects in various sectors, including artificial intelligence, fintech, adtech, and medtech. It is noteworthy that AloqaVentures is interested not only in local startups but also seeks solutions beyond the Republic that would be applicable to the national economy.

The fund’s statement highlights that investments in foreign startups have enriched the Aloqabank ecosystem with fresh perspectives and innovative solutions. AloqaVentures also played a pivotal role in facilitating Zypl.ai’s expansion into the Uzbekistan market. Leveraging its own strategic resources, the investor helped solidify the startup’s position in Uzbekistan and cater to the burgeoning market demand for advanced AI solutions.

For the year 2024, the fund has formulated ambitious plans: to expand the investment portfolio to 35 projects with a total amount of $5 million.

Collaboration for results

In addition to seeking ready-made solutions for investment, funds set goals for expanding and instilling a venture financing culture among entrepreneurs. Specifically, to achieve this objective, the platform Plug and Play Tech Center, IT Park Uzbekistan, and AloqaVentures have announced a strategic partnership. Within this collaboration, startups participated in an acceleration program, culminating in entrepreneurs presenting their solutions to leading funds and corporations in Central Asia.

Following the first cohort of the Plug and Play accelerator, 10 Uzbek startups successfully completed the program. Among them were Royal Taxi, Mohirdev, Uysot, Didox, Sugurta Bozor, Tass Vision, Jobster, Beautify, Prep.uz, and RubyFleet. During the program, Mohirdev and Didox secured investments from AloqaVentures: $250,000 and $175,000, respectively.

This fruitful collaboration also allowed startups to undergo training through the Innovation Journey program in Silicon Valley. During the summit, entrepreneurs explored cutting-edge technologies, participated in discussions, and engaged in networking sessions — these accumulated knowledge and connections established will enable them to create high-quality products and services across various economic sectors.

Foreign partnerships also benefit the national venture UzVC. Since 2021, UzVC has been jointly financing startup projects with Sturgeon Capital. The London-based Sturgeon Capital has long specialized in emerging markets and already has startups from Uzbekistan in their portfolio. In 2020, they invested $150,000 in the company BILLZ during a seed round.

Robin Butler, a partner at Sturgeon Capital, shared his optimistic forecast regarding the venture market in Uzbekistan:

"In the next 10 years, there exists a substantial long-term opportunity in Uzbekistan to foster the emergence of local champions capable of capturing the trend of technology adoption among the young and increasingly affluent population. The market will require time to mature, and startups that grasp this reality and can efficiently attract and retain clients will thrive."

Qualitative transformations over the past 8 years

My initial encounter with the Uzbekistan startup market in 2016 inadvertently leads to the desire to compare the state of the market then with the present. Instead of concluding the article, I will outline the key aspects of the qualitative transformation of the startup ecosystem:

• Today, the market demonstrates transparency with venture capitalists openly sharing their investment portfolios and transaction information available in public sources, allowing startups to assess themselves objectively.
• The government and banking capital play a pivotal role in shaping the venture ecosystem, acting as locomotives in enhancing financial literacy.
• Acceleration programs provide extensive opportunities for startups, offering quality advisory services and valuable advice for business improvement and scaling.
• There is an increasing venture culture in business operations. Startups learn how to interact with investors, and investors no longer perceive startups merely as borrowers or hired executors.

Summarizing these transformations in a single phrase, I would formulate it as follows: In 2016, startups sought venture capitalists, and today, venture capitalists are ready to expand horizons for startups.