Armenia can become a leading tech hub and sell ideas to the world - co-founder of the venture fund Formula VC Grigor Hovhannisyan

YEREVAN, March 14. /ARKA/. The startup ecosystem of Armenia is experiencing rapid growth. Just a few years ago, venture investments in the country were minimal, but today Armenian startups are already attracting multi-million dollar funding and operating in global markets. What is the secret of such success? What challenges do Armenian tech companies face? And does Armenia really have a chance to become a leading tech hub? Grigor Hovhannisyan, co-founder of the venture fund Formula VC, spoke about this in an interview with the ARKA news agency. 

"ARKA" - How do you assess the level of development of venture funds in Armenia? 

G. Hovhannisyan - The startup ecosystem in Armenia is moving from the Seed stage (when it becomes clear that the business model is viable - ed.) to the active growth stage - Series A. That is, over the past year, more and more startups have emerged that are moving into the "major league" - Series A and attracting investments. And with the development of startups, the venture system of Armenia is also developing. Five years ago, 1-2 funds operated in Armenia and the amount of investments was minimal. Now there are already 5 venture funds that are actively investing. If several years ago it was difficult to attract $200-300 thousand from Armenian investors, now about $1 million can be collected only in Yerevan. 

"ARKA" - What are the main challenges that Armenian startups face when entering international markets? 

G. Hovhannisyan - The main problem of startup founders is that they have a poor understanding of the markets they are entering and do not quite understand how to work with clients. It turned out that the main direction of Armenian startups is business-to-business (BtoB). Therefore, it is necessary to take into account the specifics of business operations in each country, region, and the mentality of people. The one who is better acquainted with the market where he is going to sell his products succeeds. 

"ARKA" - Earlier in an interview with the "ARKA" news agency, you said that you invest only in those startups of Armenian origin that are aimed at global markets. Are there any criteria? 

G. Hovhannisyan - Yes, we invest in globally scale startups that have no regional restrictions. The main market for global startups is North America and Western Europe. Most global products are developed there and distributed around the world. BtoB startups start working in America, because it is easier to work with large corporations there. For example, in our portfolio there is a startup that deals with cybersecurity, it has clients in 130 countries. There are no borders for them, because everyone uses email, and security is in everyone's interests. 

"ARKA" - Using your experience in venture funds, can you determine which startup will work and attract investment, and which will not? What are the selection criteria? 

G. Hovhannisyan - Since the fund invests at early stages, the first thing we pay attention to when making a decision is the founders of the startup. They must be familiar with the market or area where they are going to launch their product. Secondly, they must have the qualities that allow them to make their way in a business where competition is very intense. Thirdly, we pay attention to the potential market - is it large enough, growing and stable. It is important that it has growth potential. Fourthly, we look at the product itself - how competitive will it be. 

"ARKA" - As you have already said, startups in the field of cybersecurity are in demand. What about fintech? 

G. Hovhannisyan - Fintech is not particularly developed in Armenia, in order to develop, the right atmosphere is needed. In Armenia, the banking system is very conservative, so it is very difficult to even test fintech products. This is a market that falls under regulation. Therefore, we almost do not work with fintech. But there is another promising area - artificial intelligence. In Armenia, before AI became very popular, there were already several successful companies that were engaged in this and they were good at it. 

"ARKA" - So, cybersecurity and AI are the main areas in which you invest today? 

G. Hovhannisyan - There are not many startups in the field of cybersecurity, but they are all successful. And AI is integrated almost everywhere today. One of our latest investments is in solar panel management systems. AI increases their efficiency from 5% to 10%. But globally, the development potential today lies with those startups that are technically difficult to make. 

"ARKA" - In addition to financial investments, how does the Formula VC venture fund help its "godchildren" startups? 

G. Hovhannisyan - We have been working in this field for 8 years. A large network of partners and investors has been created, many from Silicon Valley and Europe. We introduce them to startups that have investment potential. With the help of this network and accumulated knowledge, we make life easier for startups and try to prevent mistakes. Startup founders treat us as mentors, and come to us with any questions and problems. 

"ARKA" - Chairman of the Board of Directors of ABBYY David Yang is confident that Armenia has the potential to become the second Silicon Valley. Do you share this opinion? 

G. Hovhannisyan - Armenia has potential, that is why I am involved in startups (laughs), although it is impossible to completely recreate Silicon Valley somewhere in the world. But the fact that technology can become a leading industry in Armenia is very realistic. It is a matter of focus and a little risk. 

"ARKA" - Armenia lags behind the West in technological development. What global trends that are relevant in the world will be popular in Armenia in 5-10 years? 

G. Hovhannisyan - Our entire ecosystem, since the 1990s, has been formed in very close connection with Silicon Valley. Basically, we are lagging behind due to the small number of people involved in the field. At the same time, we have a fairly large percentage - almost 10% of the population, working in the IT sector. But the problem is that although Armenians are known as good entrepreneurs, they are not very willing to enter the startup and IT spheres. 

"ARKA" - Because of the high risks? 

G. Hovhannisyan - Yes. Also because it is easy for good specialists to find a high-paying job in Armenia and not take risks. 

"ARKA" - Do you have plans to create accelerators or develop educational programs for startups? 

G. Hovhannisyan - We have been doing this since 2018. But the last couple of years have been too busy with the fund and have been a little distracted from this area. Discussions with partners are currently underway. We hope that by the end of this year or next year a program will have been developed that will ensure an influx of new startups. 

"ARKA" - Do you have statistics on what percentage of startups invested in by the Formula VC venture fund have been successful? 

G. Hovhannisyan - Of the 22 startups we have invested in over the past 4 years, only one can be considered a failure. On average, investments begin to pay off in two years, and the capitalization of all companies included in the fund's portfolio has exceeded $500 million. 

"ARKA" - Which startup do you consider the most successful?

G. Hovhannisyan - So far, the highest valuation belongs to EasyDMARC Inc, which specializes in email security, which raised $20 million in a Series A financing round organized by the New York company Radian Capital. But overall, they are all successful. There are companies that have very serious technological breakthroughs. 

"ARKA" - So, this is a long-term game: you can invest now, and see the result in 10 years? 

G. Hovhannisyan - On average, it takes 5 to 7 years to find out whether a startup has "taken off" or not. For example, in our portfolio there is a startup Quantum Computing, which is engaged in scientific developments, but the largest companies work with them. That is, until quantum computers are used everywhere, we do not know how successful this startup is. Or another example - the guys developed next-generation car radars using AI. They are already working with huge corporations. In a year or two, we can hear that they are already "worth" a couple of billion dollars. 

"ARKA" - The Formula VC II fund, which at the end of February invested $30 million in about 40 tech startups, brought together investors from 20 countries. How do you convince foreign investors to invest in startups of Armenian origin? 

G. Hovhannisyan - Now it is quite easy. That is, we simply show our results. The only thing that gets in the way is the country's image of Armenia. That is, if a foreign investor simply googles or watches the news, then naturally, he gets information about the war, politics, and so on. 

"ARKA" - And money loves silence... 

G. Hovhannisyan - Yes, money loves silence. But even in this case, we can persuade, because we show progress compared to the nineties or noughties, when everything was terrible in Armenia. So those who are ready to take risks, invest. Unfortunately, venture funds or startups are perceived as something incomprehensible by uninformed people. But this is an area that has virtually no boundaries for development and growth. For Armenia, this is the most critically important industry. We do not have enough land to grow due to the agricultural sector, there is no logistics to export large volumes of products. Tourism is a very unreliable area. 

"ARKA" - But we can sell ideas... 

G. Hovhannisyan - Yes, we can sell something that does not require resources from the country. At the same time, the productivity of each person who works in this area is tens of times higher than the national average. And we must remember the multiplier effect of this area for the entire economy of the country as a whole. -0-