BAKU, Azerbaijan, September 1. New mechanisms have been established in Azerbaijan to regulate the activities of venture funds to finance startups, Head of Corporate Law Department of the Innovation and Digital Development Agency (IDDA), Turkan Hajiyeva, said during her speech on the topic "Development of the digital and innovation ecosystem in Azerbaijan: new legislative opportunities" organized within the framework of the educational session "Digital skills for the media", Trend's correspondent reports from the event.
According to her, traditional banking and financing mechanisms are not always available for startups that have high potential but also carry high risk.
"Traditional banking and financial access mechanisms are not fully functional for startups. Because banks and insurance organizations usually require collateral or other security during financing. Startups do not always have the financial resources to provide such security," Hajiyeva noted.
She pointed out that although state support mechanisms exist, the limited volume of grants creates certain difficulties in financing large innovative projects.
"The funds allocated in the form of grants are smaller than in a number of other countries. This does not allow creating sufficient financial access for large innovative ideas that apply artificial intelligence and high technologies," the department head emphasized.
According to Hajiyeva, the need for financing also changes during the development stages of startups.
"At the initial idea stage, startups usually start operating with initial support from family and relatives. Later, they can use certain state support mechanisms. However, most local startups are able to pass the initial grant stage in some form. The main problem arises at the stage of testing after the development of a minimum viable product (MVP)," she explained.
According to her, one of the most effective financing mechanisms at this stage is venture financing.
"One of the most ideal financing mechanisms for startups that have an idea, are at the stage of developing a prototype, or have already developed an initial prototype is to attract funds from external investors. This is carried out through venture financing, unlike the state support mechanism," Hajiyeva said.
She underscored that technological failure in innovation projects should also be accepted as a possible outcome.
"Innovation activity is an area where there is no guarantee that an idea will always be successful. Technological failure is also one of the possible outcomes of the innovation process," the head of the department noted.
Hajiyeva also noted that based on this approach, the legal basis for venture financing and crowdfunding activities in Azerbaijan has been formed.
According to her, relevant amendments have been made to the law "On investment funds" regarding the activities of venture capital.
"Along with traditional investment funds, mechanisms have been created that can attract and implement investments more flexibly, attracting funds from a special category of accredited investors," Hajiyeva clarified.
She highlighted that when developing new mechanisms, the protection of investors' interests was also taken into account.
"We approach this from the aspect of protecting investors' interests. Not every investor can place funds through a venture financing instrument or manage those funds. Because there are sufficient financial and systemic risks in this area," she stressed.
The official further said that within the framework of the new approach, not only the organizational and legal principles of venture funds, but also issues related to their investors and investment instruments have been regulated.
"Improvements have been made in three main areas: who should be the investors of venture funds, how should the investment instruments of the funds be determined, and how should the flexibility of these instruments be ensured," Hajiyeva noted.
According to her, a specific investment mandate for the activities of venture funds has also been determined.
"Venture funds must direct at least 70% of their capital directly to the innovation ecosystem through funds raised from professional investors. These funds should be invested in startups, residents of the Technology Park, companies with innovative ideas and meeting the established requirements," the head of the department said.
Hajiyeva added that the goal is for venture funds to become an investment instrument that actively participates in the development and sustainable formation of the innovation ecosystem.
She noted that the time-consuming processes of buying and selling securities, formalizing them, and documenting them through the deposit system necessitated the creation of flexible mechanisms in venture investments.
"The technological field is developing very rapidly. In cases where attracting foreign investment or a rapid investment phase is necessary, a flexible mechanism is needed. Therefore, we have formed mechanisms that can operate more quickly and flexibly," said Hajiyeva.
According to her, within the framework of the new operating regimes, free-reporting venture activities and licensed venture activities have been determined.
Hajiyeva said that the creation of free-reporting venture funds doesn't mean that they will operate completely unsupervised.
"In relation to these funds, all the heavy identification and prudential requirements that the Central Bank applies to licensed funds won't be applied to the same extent. A simplified declaration mechanism is applied to these funds as long as the volume of managed assets is up to 50 million manat ($29 million)," she noted.
The official noted that this mechanism involves declaring the direction of activity to the Central Bank after the fund is established.
"A venture fund declares its activities to the Central Bank after determining its legal and organizational form and necessarily indicating the phrase "venture capital fund" in its name. The prudential requirements applied to other licensed funds do not fully apply to these funds during the period when the volume of managed assets is up to 50 million manat," Hajiyeva said.
She added that independent reporting venture funds must involve an external auditor at least once a year and submit the results of the audit to the relevant authority.
