Startup projects will contribute to increasing the innovation share in GDP to 5% by 2024 | FinReview
23 June 2020

Startup projects will contribute to increasing the innovation share in GDP to 5% by 2024

The Kazakhstan startup market has been actively developing since 2018. While the ecosystem is still in its infancy, startup projects have already been actively introduced into the national economy, and they often take a leading position in international competitions. This is facilitated by investment funds established in Kazakhstan, which are invested in start-ups, as well as platforms such as incubators and accelerators, where entrepreneurs can develop and work out their ideas. Now the share of innovative products in Kazakhstan’s GDP is about 1.4%. However, in the next five years, startup projects may significantly enhance innovation activity in the country.

Kazakhstan strives to get to the top 30 leading countries of the world. To achieve this strategic objective, the development of science and innovation is a priority. For example, the Ministry of Investment and Development encourages large industrial enterprises to introduce elements of Industry 4.0. This way, they intend to facilitate the economy transition to digitalization.

However, the experience of Western countries such as Germany, France, Canada, the United States, as well as Eastern countries such as China, Japan, and Korea, shows that small enterprises and start-up projects remain the main suppliers of innovation and new ideas. As a country with a commodity economy, the development of innovations will reduce the dependence of Kazakhstan’s GDP on world oil prices, which this year already showed a record decline over the past twenty years. Therefore, the government creates the basis for the innovation ecosystem – opens technology parks and innovation hubs, allocates investment funds to support innovation, develops venture capital financing.

Nevertheless, the startup ecosystem in Kazakhstan is still at an early stage of its development

A global study of startup ecosystems undertaken by the international agency Startup Genome (USA) covered 150 ecosystems around the world including the city of Nur-Sultan. According to its methodology, their life cycle consists of four milestones of development:

  • Activation;
  • Globalization;
  • Expansion;
  • Integration.

This study has shown that the Nur-Sultan startup market is at the stage of life cycle activation. This result also characterizes the market situation in the country as a whole.

It was not until 2018 that the Kazakhstan startup market began to actively evolve. That was the time when the country adopted the Law “On Venture Capital Financing”, which regulated this market. Legal innovations have simplified the conditions for the formation and operation of venture funds. Whereas in the past, the Funds needed to establish a legal entity with a defined charter capital and a structure consisting of a board of directors and an executive body, as well as regular reporting, now they only need to execute a venture fund contract.

This event gave an impetus to financing the market of new technologies. Therefore, in order to attract them to startup projects in the same year, modern technology parks and innovative hubs were created, including FinTech Hub of the Astana International Financial Centre, Astana Hub, QazTechVentures, Tech Garden.

How does Kazakhstan’s startup ecosystem form?

Techno-parks are one of the means of stimulating and developing the national economy. They are particularly effective for mono-industry regions in dire need of diversification and new technologies.

The distinctive feature of techno-parks is the availability of business incubators, where young companies are provided with equipped office and production facilities on preferential terms. During the “growing up” period, the company needs to build up the potential for further independent functioning and development.

Nowadays, more than 40 technology business incubators operate in Kazakhstan. The complete startup eco-system map can be found on the MOST incubator website. Besides MOST itself, there are nFactorial, Astana Hub, TechGarden, Impact Hub, Astana Business Campus and others. To launch and develop startups, they run various incentive programs, including incubation and acceleration programs, as well as a tracker school, where participants are trained to develop their own businesses and raise funds. These programs are in high demand among startuppers. For example, Astana Hub International Techno-park is already 100% full – by the end of 2019, there were 233 start-ups, and the acceleration program included 91 projects.

Another important component of the startup ecosystem development is venture financing, which is a long-term, high-risk private investment provided to new technology companies. QazTechVentures provides this form of support for innovation activity in the country. In November 2019, together with its Singapore partner Pavilion Capital, it established the Quest Ventures Asia Fund II with a capitalization of 50 million US dollars. These funds are already being used to finance projects by launching an acceleration program.

In addition to the development of IT startups, FinTech Lab “regulatory sandbox” has also been created in Kazakhstan to support FinTech projects

Nowadays, the FinTech-market represents an actively developing segment of technological progress, which increases its influence every year. For example, in 2017 its volume increased 7 times compared to 2015, and 24 times – compared to 2014, reaching 17 billion tenge.

The market will undoubtedly continue to grow and rapidly change the structure of the financial sector. Currently, according to various estimates, about 75% of banking clients prefer mobile applications as the main means of communication with the bank.

Therefore, as part of an integrated approach to the development of the financial system in Kazakhstan, the Astana International Financial Centre was established, functioning on the basis of common law, one of the advantages of which is the most favorable conditions for venture capital investment. As early as in January 2018, AIFC’s regulator of financial services – the Financial Services Regulatory Committee – launched the first “regulatory sandbox” in the Central Asian region called FinTech Lab. The created environment allows companies to test and develop innovative financial products and services under a special regulatory regime.

Another important feature of the FinTech market development is the launch of an incubation and acceleration program for start-ups based on AIFC’s FinTech Hub implemented together with international partners such as VISA, Seedstars and Startupbootcamp. About 120 startups have already received support under these programs.

For example, 146 companies from 33 countries took part in the Fintechstars acceleration program in 2018. Among them, 10 best projects were selected (6 from Kazakhstan and 4 from Russia, Ukraine, Georgia and Nigeria), each receiving 20,000 US dollars of investment funds, as well as the opportunity to work with an accelerator team, the access to webinars, seminars and technical solutions from Seedstars partners.

Examples of successfully implemented Kazakhstan’s startup projects

“Smart” glasses, programming gadgets, child tracking service, legal specialists selection service, electronic wallets, financial aggregators are only a part of successful start-up projects created by Kazakhstan citizens.

For example, the startup project ORBI Prime, which produces the world’s first “smart” glasses for recording panoramic video. The project attracted 3 million US dollars of investments and reached pre-ordered goods worth 350 thousand US dollars.

Another example is the Robo Wunderkind project, which produces robots that can be independently assembled and programmed to perform any actions. The company’s products are sold almost all over the world, and the attracted investment funds have already exceeded 500 thousand US dollars.

In the FinTech-sphere, an example of a popular project is Lendex’s cross-border retail lending service for clients in Central and South-East Asia with a target audience of 500 million people. Through the created platform, crypto investors can issue microcredits to proven borrowers in national currencies. The service has already attracted over 1 million US dollars of investment funds.

Among the successfully implemented FinTech projects is also a mobile application “Rakhmet”, which allows you to pay for your purchases via smartphone. For two years of functioning, 1.5 million Kazakhstan citizens became active users of the application performing more than 600 thousand transactions each month. The investment funds attracted by the company exceeded 5 million US dollars.

The full map of FinTech projects can be found on AIFC’s FinTech Hub website.

How do startup projects affect the national economy?

The main effect is the growth of innovative entrepreneurship. By developing and implementing technological solutions, startup projects not only stimulate business activity in the country, but also support the real sector of the economy. For example, in the countries of Eastern Europe, the USA, China and Japan, the share of innovations in the GDP structure exceeds 20% due to the developed startup market.

In Kazakhstan, this figure is only 1.4%. Nevertheless, given that the startup market, which is still in its infancy, is already growing rapidly, innovation activity in the country may increase significantly in the coming years. At least in the next five years, innovation will reach 5% of GDP.

Another economic effect of the startup eco-system development is the increased availability of venture capital. In 2019, Kazakhstan managed to take 89th place in the ranking of the Global Competitiveness Report published by the World Economic Forum in terms of “Venture Capital Accessibility”, despite the fact that two years ago the country was only on 102nd place.