Ecosystem Deep Dives is a weekly series in which I analyze and compare different start-up ecosystems from around the world. If you enjoy and gain value from my work, feel free to share and subscribe!

Fall from grace

Uzbekistan was one of the ancient Silk Roads’ nerve centers, hosting some of the world’s most historically-filled cities such as Samarkand and Bukhara. While the Soviets technically created what we now know as Uzbekistan, the country’s national identity is bound together by its Islamic heritage as well as historical figures such Amir Timur, the founder of the Timurid Empire who placed his imperial capital in Samarkand.

Following its independence from the USSR in 1991, Uzbekistan was led by strongman Islam Karimov until his death in 2016. His reign was marked by a plethora of human rights abuses, exemplified by the strange forced labor Uzbeks had to endure during the annual cotton harvest (a practice which has since been abolished). He was followed by his former prime minister Shavkat Mirziyoyev, who has embarked on a series of civil and economic reforms significant enough to earn Uzbekistan the title of “2019 country of the year”, from British newspaper The Economist.

While the country is far from being “free” by any accounts, reforms undertaken by Mirizoyev have heralded a new era of economic openness that have started to liberate Uzbek entrepreneurial fervor, and has led to a heightened interest by foreign investors who see Uzbekistan as a land of opportunity where everything is yet to build.

Today, Uzbek start-ups mostly operate in the Central Asian market, a relatively unstructured but untapped market where digital solutions are direly needed. Being the most populous country in the region, housing 35 million people, Uzbekistan could potentially become a regional start-up powerhouse, before eventually looking outwards.

Major players

The country of Uzbekistan itself is only 30 years old, and its domestic start-up ecosystem can only be described as nascent. However, Uzbek founders have started picking the “low-hanging fruits” sectors such as ride-hailing that often provide the first exits, and thus first liquidity, necessary to kickstart ecosystems in emerging markets.

Indeed, what can be described as the first generation of Uzbek founders have been focused on adapting proven business models to the local Uzbek market, laying the seeds for the ecosystem to develop further. One of these trailblazers can be found in the person of Akmal Paiziev, who has founded ride-hailing start-up MyTaxi and food-delivery start-up Express24.

The country’s fintech sector has started producing some local champions such as Click, which offers a variety of digital financial services to individuals and companies, as well as IMAN, a Islam-compliant fintech company with large scaling potential in Muslim emerging markets such as Indonesia.

Other “low-hanging fruits” start-ups include Billz (SME digitalization), uybor.uz (real estate marketplace) or asaxiy.uz (ecommerce) just to name a few.

As the ecosystem develops, more niche and global-minded start-ups are starting to emerge, such as Mohirdev, which helps Uzbeks learn coding skills, and Workly, a business productivity SaaS product.

Lastly, it’s been interesting to see foreign start-ups such as Zoodmall set up shop in Uzbekistan, a testament to the market opportunity and digital literacy of the Uzbek population.

Efforts to grow the ecosystem

The ecosystem is mainly focused in the capital city of Tashkent, with secondary cities far behind including Andijan and Samarkand.

The incubator scene has been dominated by the state-run IT Park, which today acts as one of the ecosystem’s key pillars. C.A.T Science Labs and Smart Water Labs include two of the other big incubators in the country. It will be interesting to see how international aid organizations, very present in the region, will make their switch to private sector support. In Palestine, the preponderance of aid orgs and NGO’s has led to the proliferation of a multitude of incubators/accelerators in Gaza and the West Bank. Their efficacy has been challenged, as their KPI’s aren’t necessarily aligned with the KPI’s of the founders they incubate.

The second pillar of the ecosystem has been universities, especially foreign ones, that have started to develop in-house entrepreneurship programs. The most prominent one is the Westminster International University of Tashkent and its InnoWIUT program. Other universities such as INHA and Astrum IT Academy are also notable.

Third, big Uzbek conglomerates have started dipping their toes into the ecosystem, either through incubation programs and investments. This includes the Uzcard fintech accelerator which aims to use its corporate resources to push Uzbek fintech start-ups to new heights.

Lastly, there have been locally-led efforts to kickstart the local VC scene, which was fundamentally non-existent. The creation of the Uzbekistan Venture Capital Association, which has the stated goal of lobbying for the industry and training future experts, could yield to interesting results. While the Uzbek government tried to launch its own VC fund, I believe fund of fund approaches (where the government finances the creation of new, private, independent VC’s) is more interesting. The training of competent VC fund managers, who could then access public funds to create local VC’s, could be very beneficial. That has worked fantastically in Greece.

Governmental changes

As stated in the introduction, Karimov’s death and the start of Mirziyoyev’s presidency has ushered in a new era of economic liberalization. Most of the planned changes can be found in the 2017-2021 Development Plan, which was recently followed by the Development Strategy of New Uzbekistan 2022-2026. Other plans for the future can be found in the Uzbekistan 2030 plan.

“Regarding the results achieved in the field of development and liberalization of the economy, it should first be noted that the main economic reforms were to ensure macroeconomic stability, reduce inflation, reduce and simplify the tax burden, diversify economic sectors, create a favorable climate for business, improve infrastructure, develop rural economy, economic integration, and digital economy. Due to the reforms carried out in 2017-2021, 23 free economic zones operate in Uzbekistan today. They have implemented 453 projects totaling 2.6 billion USD and created about 36,000 jobs. Appropriate benefits and preferences were provided to attract foreign investors to free economic zones.” - Eldor Tulyakov, Executive Director of the Development Strategy Center.

The government is also planning on giving an augmented importance to the digital sector, which has lagged as a result of Soviet-style economic planning.

“By maintaining stable growth rates of it is planned to reach 4,000 US dollars GDP per capita and join the group of countries with “upper-middle income” by 2030. In this regard, the development of the digital economy is also defined as the main “driver” with an increase in its share by at least 2.5 times by the end of 2026. Moreover, it is planned to expand the volume of the software products industry 5 times, and software export – 10 times, up to 500 million US dollars, the level of digitalization of production and operational processes in the real sector of the economy, in the financial and banking sectors to 70% by the end of 2026.” - Farrukh Khakimov, Head of Department at the Development Strategy Center.

Despite these efforts, Uzbek founders are still confronted to an administrative quagmire. Corruption and nepotism still plague public life, which evidently hurts the development of the ecosystem. With that being said, the situation has undoubtedly improved in recent years.

Uzbek advantages

While extremely nascent and still hindered by a variety of factors we will explain later, Uzbek founders have a couple of elements on their side.

The first is the Uzbek human capital, with an almost 100% literacy rate (a positive part of Soviet heritage), combined with a relatively young and tech-savvy population.

In my opinion, one of the biggest advantages Uzbek founders have is momentum. Indeed, the economy is going through liberalization, after decades of being gridlocked by Soviet-inspired leadership. This opens up new windows of opportunities in virtually all sectors of the economy, which need to make the transition to the digital world, but it also provides a formidable boost to Uzbek talents, who can finally express their creativity through start-ups. That enthusiasm combined with the rapid digitalization of the country and the Silk Road-inherited Uzbek entrepreneurial spirit, provide the ingredient for exciting things to come in the Uzbek start-up space.

This forward momentum and huge disruption opportunity explains why a small number of foreign firms such as UK-based Sturgeon Capital have started taking a stab at a few Uzbek start-ups.

“Now Uzbekistan is distinguished by the rapid digitalization of the economy from an artificially low base. With a large young population and growing penetration of smartphones and the internet, the country is poised to create a significant amount of value in tech businesses over the next 5-10 years. This is what makes us happy and that is why we are investing at this early stage to find and create the best technology companies in Uzbekistan.” - Kiyan Zandieh, CEO Sturgeon Capital

Still work to do

Just as with civil liberties, which have improved but still are far from up to par, the Uzbek ecosystem still has a lot to work on before achieving scale.

Lack of funding is cited by Uzbek founders as the most common barrier to their development. While factors of this include a low-density of local VC’s and unadapted fundraising laws, one must not forget that low levels of early-stage investment often correlate with a low level of “investable” start-ups. Therefore, efforts have to be made on the quality (and scalability) of Uzbek start-ups, while providing early-stage funding mechanisms to help founders fail. French public investment bank BPI is a good example of such a mechanism.

“Based on this, the main challenge for the development of startup industry in Uzbekistan is in decreasing the gap between early startups and venture capital funds that focus on mature startups. This gap can be effectively decreased only by creating a large number of business angels as an institution for systemic financing of early stage startups. This class of investors will not be formed without government support and subsidies for potential business angels.” - Dilshod Zufarov, Chairman of Venture Capital Association of Uzbekistan

Gender diversity is also a severe problem in the ecosystem, with only 12.7% of founders being women but more aggravatingly, 34.8% not employing women. A dominant patriarchal culture is mostly to blame.

Lastly, a significant amount of red-tape and administrative tasks still have to be cut and simplified in order to make the ecosystem more dynamic and attractive to foreign investors. Some observers also say that the ecosystem works in siloes, with different ecosystem actors not collaborating enough.

Conclusion

The period of economic liberalization ushered in by President Mirziyoyev has undoubtedly contributed to the emergence of a true Uzbek start-up ecosystem.

It faces many problems typical to early-stage ecosystems, which can obviously be alleviated by public and private initiatives, but ultimately fall in the hand of one factor: time. Time is needed for Uzbek founders to fail, exit and share their resources with the next generation of founders, effectively starting the crucial feedback loop developed ecosystems thrive on.

Ecosystem Deep Dives is a weekly series in which I analyze and compare different start-up ecosystems from around the world. If you enjoy and gain value from my work, feel free to share and subscribe!