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Very cautious optimism

Iraq hasn’t had a whole lot to celebrate over the past couple of decades. Scars from incessant internal, external, and foreign-caused conflict have left a strong mark on the 43 million people strong country. Just last year, the country was suffering from what seemed to be an interminable political impasse which, without diving into the details, stemmed from the country’s complex politico-ethnic makeup of Sunni Muslims, Shia Muslims, and Kurds. The long-awaited election of a new government seems to have ushered in a period of relative stability for 2023, but the underlying systemic issues remain unresolved.

Amidst the sometimes overwhelming tumult, the country has seen the quiet but steady rise of a startup ecosystem. Startups such as Baly (super-app), Miswag (e-commerce), and Alsaree3 (food-delivery) have all raised 7-figure rounds. Full-fledged incubators such as The Station and FiveOne Labs have sprouted throughout the country. Local VC funds such as Iraq Tech Ventures and Euphrates Ventures have started signing their first checks.

“Iraqi start-ups raised a total of $16 million from six deals in 2022 compared to $7 million from seven deals in 2021, according to Magnitt, a Dubai-based data platform on MENA start-ups.”- Source

Despite evident internal challenges that we’ll cover later, the country has decent demographic indicators which favor the rise of a startup ecosystem. Internet penetration stands at around 49% but is growing steadily, while the rise of smartphone ownership is making the internet more accessible to wider swaths of the population. Buoyed by oil wealth which perilously trickles down to the general population, the average Iraqi consumer has more buying power than its neighbor in Jordan.

The Iraqi market has proven attractive to foreign startups, turning the pressure up a notch for local ones. Important players such as Talabat (Kuwait) and Zoodpay (Switzerland) have started their quest to take a large slice of the Iraqi market, at a time when it is still almost void of any competitors. Observers say that competition between well-funded foreign startups and less-funded local ones should be interesting. The Iraqi market’s fragmentation, the Kurdish autonomous region in the north being the most potent representation of it, means local players have an intrinsically better understanding of the country.

“International players do not realize that Iraq is a big fragmented market, not one homogenous market. Every governorate and city requires different marketing, sales, payments, etc. In each region, there are different customer expectations. And thus, without access to knowledge of the local consumer landscape, it is hard for international players to penetrate the market.” - Rawaz Rauf, Euphrates Ventures

A potential solution to Iraq’s vices

The emergence of a startup ecosystem in Iraq can premise a cure for two of the country’s greatest ailments.

First, Iraq’s over-reliance on oil represents a considerable economic liability, as the government’s budget is dependent on the sometimes vehement fluctuations in international oil prices. As of 2022, oil represented 99% of the country’s exports, an untenable situation that puts the country at the mercy of macro geopolitical developments it often has no control over. Compared to its Emirati and Qatari peers, Iraq hasn’t developed a sovereign wealth fund, thus failing to trap the oil wealth for future generations. Oil addiction also severely hampers the ability to make necessary reforms.

“Lessening the treasury’s overreliance on oil revenues should be a top priority, but it is notoriously difficult to do: when oil prices are high, it is easy to forget that they may fall again, and when they are low, the government is in crisis mode and lacks the flexibility to institute necessary reforms.” - Crisis Group

Second, Iraq suffers from a massively bloated public sector, exhausting limited public resources in return for questionable results. Similar to other countries in MENA, the public sector remains the golden path for many university graduates, who rely on personal connections to get jobs. Not only does this leave the less connected on the side of the road, but it also perpetuates a culture of nepotism and subsequent corruption within the public sector.

This overbearing public sector discourages the Iraqi private sector by privileging state-owned actors, while also arguably making the success of a private enterprise dependent on one’s connections inside the government. The tremendous slice of the government budget allocated to the public sector also makes public investment less available for the private one, a detrimental feat considering that the most renowned startup ecosystems were kickstarted by public funding.

“State-owned enterprises are producing low-quality goods and products, and exhausting scarce government resources by paying salaries and providing subsidies for fuel and other raw materials. They may also have a negative impact on the private sector companies since many of them benefit from contracts with the government to be the sole provider of goods and services to government entities.” - Kapita

The growth of the Iraqi startup ecosystem, despite the burden represented by the public sector, might be key to changing Iraqi mentalities while simultaneously inspiring forward-thinking government legislation to support startups.

Sectorial opportunities

Given the public sector’s preponderant role in the country’s economy, many industries need to be disrupted and turbocharged by the potential tech represents.

As with numerous other emerging startup ecosystems, the most evident low-hanging fruit is in e-commerce/delivery. The rise in smartphone ownership and falling data prices, combined with the antiquated state of the Iraqi business sector, are making the sector attractive to local and foreign startups alike. The country’s most funded startups to date such as Baly, Miswag, and Alsaree3 all operate in the space. In the same vein, logistics is also a sector to look out for, given the country’s reliance on foreign imports and ensuing transportation needs.

“This combination of connectivity and low-tech retail has provided the perfect environment for e-commerce businesses to fill the gap. Apps can help retailers advertise their products online, providing better reach for brands that might otherwise only gain recognition in their local communities”. - Source

Following the path of optimizing the Iraqi business infrastructure, financial services represent another potent pain point to be solved by startups. Two specific fintech sectors in which startups could intervene are the digitization of the country’s largely cash-based economy and access to credit, which are both key to powering increased buying power in a growing economy. The Iraqi Central Bank has also moved forward with issuing multiple licenses to a variety of fintechs in the country, paving the way for e-payments.

The greentech sector is also particularly pertinent to the country for obvious reasons. The Iraqi electricity grid is highly imperfect, rendering the need for alternatives evident.

“Faced with 18 to 22 hours of electrical grid blackouts per day, soaring oil prices, and price hikes in generator-supplied electricity, people are desperate for sustainable energy solutions. The average personal income is $600 per month, and generator power charges range between $200 to $600 for 10 Amperes of power. So, substituting generator-fueled energy with solar power makes financial sense.” - Wamda

Startups such as KESK and Green Shaov are taking a stab at the issue. The green tech sector could typically be an area where the government invests its oil revenue, in order to safeguard future generations’ economic and energy needs.

Obstacles to overcome

While steadily growing, the Iraqi ecosystem still faces tremendous obstacles to its growth. As stated above, the country’s longstanding political quagmire and economic uniformity mean that the flourishing of local startups requires a breadth of reforms.

The country’s business legislation is outdated and is currently unsuited for startups. For example, foreign shareholders can’t own more than 49% of an Iraqi company (except in Kurdistan), which represents a substantial hurdle for an ecosystem where local VC money is more than scarce. This law should be changed to facilitate foreign VC investment into the country, with the first order of business being to attract VC’s nouveaux riches from the Gulf. In 2021, Iraq received 1% of the total VC funding disbursed in the region.

Iraqi founders are also at pains to find the relevant human capital to recruit, not because Iraq lacks talent but rather because the country’s academic curricula don’t prepare graduates for jobs in the digital market. The solution could be two-fold, combining an update to the country’s academic curricula and the creation of Platzi-style startups offering online courses teaching courses about the digital economy.

The country’s angel investor pool is still small, despite the fact that Iraq doesn't lack rich individuals. Rather, those rich individuals are unaccustomed to the way of investing in startups, which often involves taking a minority stake and patiently waiting 5-10 years for a potential exit.

Lastly, the country’s political system is an evident hindrance to the flourishing of startups, even though founders do have very limited ways to make that change. Similar to the Lebanese, Iraqis have long been asking for the dismantling of the country’s pernicious ethnoreligious based political system.

“The massive Tishreen protests went to the heart of the reason why. They called for an overhaul of the ethno-sectarian apportionment system (muhasasa), which has reinforced a venal elite’s grip on state institutions after every election since 2005” - Crisis Group

A trap to avoid

Due to its youth and its geographical location, the Iraqi ecosystem has been a prime target for foreign aid organizations which, as we explored here, have recently switched their focus to private sector development rather than pure NGO activities. While arguably essential to kickstart the first incubators and startup initiatives, Iraqi startups should view foreign aid money as a crutch to start, not as a permanent way to sustain themselves.

Doing so will come at the risk of creating a lethargic ecosystem, funded by grants and competitions. Iraqi founders, creating startups in the true sense of the word, should seek private VC funding as soon as possible. Reliance on foreign aid money can be detrimental, as it has arguably been for aid-infused countries around the world.

“We see many strong founders with exciting ideas that fail to build a business around them due to the ambiguity around funding. Founders with no path to funding end up resorting to building cheap technology infrastructures with an overreliance on freelancers within key functions of the business. The end result is a shaky operating model built up on weak technology that falls apart as soon as the company scales.” - Ali Al Suhail, Iraqi Angel Investor Network

Conclusion

Iraq’s newly-born startup ecosystem represents a much-needed way to diversify a one-trick pony economy. With the diversification of the economy comes the diversification of opportunities, opening new doors for Iraqi talent previously bound to their wasta score.

The country’s demographic indicators all point to a myriad of sectors to be transformed by tech startups. The “startup” genie is out of the bottle, which means that Iraqi legislators will likely be faced with more and more demands to update business legislation and simplify an overbearing bureaucracy. In my opinion, this bottom-up approach to policy change is more likely to succeed than waiting for a visionary changemaker to come to power.

Iraq has rich regional neighbors who all host trigger-happy sovereign wealth funds as well as dynamic private VCs. The success of the startups having raised the ecosystem’s first big tickets would be a great push to attract more foreign VC money. Local investors will need to be educated by the ecosystem’s pioneers in order to kickstart a vibrant local VC scene.

Talent is evenly distributed, opportunities are not. Iraqi has just as much startup talent as any other country. It needs to be irrigated to flourish.

The Realistic Optimist provides weekly, in-depth analyses of some of the most relevant stories in our now-globalized startup world. Subscribe below to receive it directly to your inbox and don’t hesitate to share it with your colleagues :)

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