Article number 100 of the third Development Plan created the first generation of venture capital funds in Iran. This Development Plan was a temporary act which expired in 2005. After this act, there were no favourable rules for the establishment of a venture capital.
The second generation of venture capitals came into existence in 2015 by an amendment adopted by the parliament which added an article to the Knowledge-Based Companies’ Act. This added article is the same as the article number 100 of the Third Development Plan. These two generations have some differences.
The first generation vs. the second generation
The differences between the first generation and the second generation are in two areas: 1) resources and the 2) scope of activities.
1) The first generation could use budget allocation in the annual national budget. In the second generation, the resources are more market-based. The fund’s resources have been determined in article number 6 of the regulation.
Article number 6, financial resources for funds, are:
- Governmental grant or governmental participation.
- Investments and grants and facilities from banks and financial institutions.
- Investments and aid from individuals and legal entities, governmental and non-governmental companies, public and private institutions, municipalities and their affiliate and subsidiary companies.
- Investments and aids from scientific, technological, and research centres, universities, R&D units, guilds, and individual researchers.
- Profits that the fund earns from investments and interests from deposits in banks and financial institutions.
- Funds deposited to executive organizations.
- Innovation Fund’s resources in the form of facility and partnership.
- Absorbable resources through stock market instruments.
2) As I mentioned earlier, the first generation of venture capitals had a clear definition of their activities which was stated in article number 7 of the regulation. The second generation doesn’t have this article; the regulation for these funds doesn’t specify their activities. Also, in the first generation, each fund had a speciality. In the second generation, there is no mention of the specialist funds which means a fund can work in more than one field of research and innovation programs.
In order to reach a practical conclusion, I will summarise the important points:
- The first generation of venture capitals in the startup market was created in 2000.
- The first generation came into existence by a temporary act. Since the duration for this act expired, it is not possible to establish such venture capitals now.
- This generation benefited from vast financial aids from the government. They even have a special budget allocation in the national annual budget act.
- Besides their special budget, they can also use financial support from related governmental organizations.
- The second generation doesn’t have an allocated annual budget, however the government and the executive organisations can provide financial aids and facilities for them.
- Executive organisations are those that are related to the executive branch including governmental companies and non-governmental public institutions. By this definition, the “government” means the other two branches of governance.
- The second generation has more freedom of action. Their act and regulation don’t determine the scope of activities which means they can finance any type of startups they find profitable. Besides this statement, there is still an important argument in their freedom of action, which I will explain in the next part.
The act that created the first generation didn’t put any limitation on the scope of activities, i.e. they were not bound to serve “technology companies” or, as they were later called, knowledge-based companies. The regulation for the implementation of the act took the liberty of changing the scope of the original act.
The second generation came into existence via an amendment adopted by the parliament which added an article to the Knowledge-Based Companies’ Act. This type of legislation means that the second-generation VCs are relevant to knowledge-based companies. Again, the regulation took the liberty of changing the scope of the original act.
The sequence of acts was to create a pattern like this: first, encourage venture capitals to participate in the startup ecosystem; second, provide extra support for “technology companies”.
The sequence of regulations created an upside-down pattern merely because of unlawful changes in the original acts. In the sequence of acts, the Innovation Fund also makes sense. Using this fund, you can focus on that sector of the market that needs extra attention while the rest of the market is under control by the first generation of venture capitals. Due to unlawful changes that happened in the regulations, this fund overlapped with the first generation of venture capitals.
- Omran Mohammadi is a first-class attorney in the Iran Bar Association and master in international trade law. A version of this article was originally published by TechRasa.