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Taxation System and Absence of Ecosystem Frustrate Startup Business Development

IT field and Startup business representatives assert that taxes should be reduced and ecosystem (infrastructure, education, access to financial resources and so on) should be arranged to prevent outflow of successful projects and professionals from Georgia, as well as to draw foreign startups.

In the beginning was the word – in 1975 the Forbes magazine used the word of STARTUP to denote a growing company. In 1976 the Business Week published an article on “an incubator of startup companies, especially in the quickly growing high-tech field”.

Read the article HERE

What is a startup and why is it interesting?

There are several interpretations for this term on Investopedia (the world’s one of the advanced online sources for financial terms) that reads: “A startup is a company that is in the first stage of its operations. These companies are often initially bank rolled by their entrepreneurial founders as they attempt to capitalize on developing a product or service for which they believe there is a demand. Due to limited revenue or high costs, most of these small scale operations are not sustainable in the long term without additional funding from venture capitalists”.

The age of a startup company is also a disputable issue. How old should be company to name it a startup company? GeoLab principal Sandro Asatiani noted that startups are mainly associated with  new-technology companies – new companies that have not arranged even a business model. There is no standard definition for a startup company. Some experts assert that a startup company may be of 3-5 years old, but if you seek a business model for 5 years, this signifies the startup has failed, Sandro Asatiani said.

The GeoLab principal has also overviewed necessary factors for creating a startup company and explained a certain structure for financial sources:

A university/vocational school that prepares a person for startup efforts is one of the main components.

Moreover, Angel Investor – a person who gives the first financial support to the startup; Accelerator – an environment that helps us in accelerating efforts; Venture Investment (with high risks) – a new small enterprise, in which a considerable part of ordinary shares goes to investors’ ownership. Based on these sources of financing, if the startup justifies or the Exit transaction is carried out, i.e. the company is sold for expensive price (hundreds of million), or if a startup is transformed into a valuable company, it will not be considered a startup anymore and the people, who have invested money in this company, will start receiving profits from this company.

A business incubator is a constituent part of the startup’s ecosystem and this activity is mainly carried out by the state. The business incubators provide  financial assistance, consultations and other services to startups. There are also crowd-sourcing platforms, where a person can find required financial resources for implementing a startup”, Sandro Asatiani said.

The government’s decision to prioritize innovative technologies has stimulated the founders of Association of Technological Startups of Georgia. The association was founded about two months ago with the aim to make their voice hearable to the Authorities in the decision-making process, because the one thing is what the Authorities see, while another issue is what the private business discerns.

David Sichinava, a representative of the Association of Technological Startups of Georgia pointed out that the field of information technologies embrace its own peculiarity. The products developed in this sector are not confined by frontiers. Consequently, if Georgia does not introduce tax preferences, it is very easy to relocate successful projects to an offshore zone.

“Our objective is not to go abroad. We want to create the ecosystem in Georgia. A person with interesting startup idea should have determined the whole action plan – where to make a prototype, where to get the first financial support and so on. Regretfully, this horizon has not been clarified in our country.

Even if one has a wonderful idea today, there is no guarantee that his/her product will finally reach the Silicon Valley.

At this stage the Authorities should set tax preferences as soon as possible. Today we are losing resources. If somebody is successful, they immediately leave for foreign countries”, David Sichinava noted.

Georgia has not developed the ecosystem. Therefore, if any foreign company decides to invest in the Georgian startup, they will request the Georgian startup to get incorporated in some developed countries, for example, in the USA.

Irakli Qashibadze, head of the agency of innovations and technologies of Georgia, refers to one of the Georgian startups, that finally was incorporated in the USA and at this stage this company trades in secondhand automobiles by online system. The businessman has employed 200 persons in Georgia as part of this project.

Members of the Georgian Association of Technological Startups assert that Georgia has the chance to become a regional hub for IT innovations if the country carries out due reforms in the IT sector. This message should be delivered to developed countries, while the country ranks 24th in the Doing Business report among 189 countries and 6th in terms of business establishment simplicity.

The ecosystem development requires combined efforts and a chain of decisions should be taken to reap real results. It is necessary to promote local small business. It will be wonderful if various companies enter the market – this will bring both business and knowledge and contacts with the external world. It is also necessary to set tax preferences for big multinational companies to enable some giant companies like Facebook or Amazon to set up their regional head-offices in Georgia.

Regretfully, foreign citizens have no information even about the location of Georgia. If the Authorities prioritize this direction, we should send a message to the foreign countries – If you are interested in making investments in IT field, we will support you with due platform and environment.

It is very simple for IT business to cross the border – members of small companies will take their laptops, cross the border and the company will be in Georgia”.

The association member Zaza Sichinava explains that Georgia should be detected on the global IT map. He refers to the example of Estonia and points out that Estonia has developed an ecosystem that enables foreign Angel Investors and venture foundations to make investments in Estonia, where good ideas are generated.

“In the IT world Georgia is a less-known country. We have not developed the necessary indicators that investors need. If we develop a infrastructure with businessman-oriented taxation system and the opportunity of drawing financial resources, our country may become a regional hub – Russian, Ukrainian or other citizens may arrive in Georgia to do their startups. If we take first steps in the Region to develop this ecosystem, it will be possible to attract think-tanks and professionals to Georgia and we will not let domestically incorporated companies leave for foreign countries”, Zaza Sichinava said.

Another member of the association David Eliashvili noted that the loan-issuing model does not justify in this field because of high risks and even the business sector avoids financing startups because of the same reasons. Therefore, it is impossible to draw foreign investments.

“The issue of financing startups for the Georgian business will remain a difficult issue unless investments have drawn from abroad. We should establish the traditions that dominate the developed countries.  For comparison, an interested body plans to invest 10 million USD in implementing 10 projects and only one project may bring real profits, conditionally – 100 million. How many companies with similar financial potential exists in Georgia to take similar risks?”, David Eliashvili noted.

Ilia Ghlonti, director of Ihub Tbilisi, the center for development of innovations and entrepreneurship, said that a new generation of IT specialists should be grown up, foreign capital should be drawn and an ecosystem should be developed to promote the startup business sector in Georgia.

The GeoLab principal also thinks that the education and growing up new IT specialists are of crucial importance: “We do not know where a talented person will be born, maybe in Zestaponi a young man lives with the potential of Zuckerberg. Without due environment, where he/she would receive due education in a due infrastructure, we will not receive real results and benefits”.

Irakli Qashibadze, chairman of the agency of innovations and technologies of Georgia, assures that Georgia has huge potential for developing a knowledge-based economy. The government provides financial support to the science, increases efficiency of commercialization of IT projects and is ready to foster beginner enterprisers – the agency of innovations, the agency  for entrepreneurship development are the mechanisms that promotes startups and provides required infrastructure for their development.

We have already adopted a virtual zone law that exempts exports-oriented companies, which operate from Georgia and develop IT products, from certain taxes.

At this stage, we are developing a law on innovations. It is wonderful to reduce taxes and adapt the taxation system to this field, but we should also take into account that in Israel, for example, companies moved to the country through growing the number of  qualified specialists”, Irakli Qashibadze noted.  Irakli Qashibadze has also commented on TechnoPark Georgia: The Authorities puts major investments in arranging the infrastructure to increase the number of IT specialists, the process of training specialists is underway – 120 specialists were trained, another 120 specialists are being trained at this stage. Georgia has already unveiled 7 laboratories. The Education Ministry plans open 12 vocational schools, in addition, in the country, jointly with the agency of innovations and technologies. The process will be continued – modern laboratories should be constructed in all cities and Georgia will become a hub-country, one of the leading countries worldwide.

„At this stage, the works for arrangement due infrastructure has moved to active phase. Along with PR, it is important what kind of environment can we offer to foreign companies. Our environment has attracted many Ukrainian and Russian startups. At the same time, we should not rule out that Facebook may buy a startup from Georgia, as well as the team that implements the chosen project. One may leave, others will arrive here, but the main thing is that Georgia will start shining on the global map of IT sector. The agency is successfully developing a network of mentors. Heads of various companies, high-ranking officials are united in the network and they act as small investors in various projects. This network will promote involvement of businessmen in Angel Investment schemes that is of vital importance in the ecosystem formation process”, Irakli Qashibadze noted.