Dagestan — The Next Hot Tech Hub?

by Olivia Goldstein

In September, Silicon Valley’s global incubator “Plug and Play Tech Center” partnered with an unlikely match — Russia’s volatile republic of Dagestan. Plug and Play Tech Center (PPTC) is a business accelerator specializing in growing tech startups. Their global network includes over 300 tech startups and nearly 200 investors. PPTC will provide Dagestani tech startups with training and mentoring; access to their network; and support in finding investors. In 2012 PPTC, in conjunction with the Global Venture Alliance startup catalyst, opened a business accelerator in Moscow. Now PPTC, with the support of Summa Group investment company, is expanding outside of Moscow to other locations. As one of the most unstable and dangerous regions of the world, can this alter the image, economics, and security of Dagestan? Despite its rich oil and gas reserves, Dagestan’s economy remains weak and unstable due to rampant corruption and organized crime that withhold the economy from growing. However, there are still opportunities for startups to grow in Dagestan. Many entrepreneurs and investors see innovation as a solution to violence and instability. For example, despite a coup d’état and military takeover, an entrepreneurial revolution is rising in Egypt. Younger generations are turning to innovation as a means to help stabilize their country and adapt to post-revolution life. The tech savvy younger generations are building startups from the ashes, in some cases quite literally. Likewise this outlook may spread to other unstable regions with a large percentage of young people, such as Dagestan. Instead of young men joining jihadi circles, they may turn to innovation and business. This will require social and financial investment from local and federal authorities in order to encourage youth to study Science, Technology, Engineering, and Mathematics (STEM), while at the same time working to recruit domestic and foreign firms to Dagestan. Does location matter? In terms of funding, the short answer is yes. Not only is Dagestan at a disadvantage because of its instability but also because most venture capitalists (VC) are attracted to small-businesses in developed and easily accessible cities. VCs pursuing startups in non-conventional regions, such as Dagestan, will likely expect frequent one-way flights to Makhachkala. Thus, opportunities for funding appear slim for Dagestani tech startups. Additionally, if the entrepreneurs in Dagestan fail, they may relocate elsewhere. Entrepreneurs with few alternatives and options available are not willing to continue to take on more risk. If this is the case, Dagestan may face a “brain drain.” However, all is not lost given how interconnected the world is today. If Dagestani tech startups produce viable, practical, and marketable products it may appeal to Dagestani diaspora investors. These investors may be more inclined to invest due to their ethnic ties particularly since profits from the project will be recycled into the development of Dagestan’s local economy. Plug and Play Tech Center’s name recognition and connections may attract more investors as well. Unlike the U.S., one of the major difficulties Russia faces is a lack of mentors. Big businesses in Russia are primarily in traditional sectors. Tech entrepreneurs are far and few in-between in Russia, particularly outside of Moscow. Plug and Play’s opening in Dagestan provides great potential for access to mentors, since the incubator will foster the right ideas that may lead to greater opportunities for success. As mentioned above with the proper federal government support, Dagestan may see an increase in venture activity. The best example of government-supported innovation in Russia is the high-tech hub Skolkovo. However, startups outside of Skolkovo struggle with high taxes and significant year-end losses. Therefore, the Russian government should continue to create an environment where private capital can flourish. This includes amending laws to allow for greater foreign investment opportunities and solving tax-related problems for startups. If nothing else, the federal government should see this as an opportunity to deter young men from joining extremist groups and causing further chaos in the restive North Caucasus. While unlikely as it is for investors to rush to Dagestan for new investment opportunities, there is potential for success. If the incubator can attract diaspora investors, it may help build credibility and stability for future projects. In addition, the incubator should connect with the regional and federal government to ensure sustainable innovation-led growth. Overall the Plug and Play team appears optimistic about their new location, and the incubator is the first innovative step in solving Dagestan’s economic and security problems, which are so closely entwined.

Olivia Goldstein is a special contributor to the Political Developments Research Center (PDRC). She is a Program Associate for Innovation and Capacity Building at a nonprofit in Washington, DC. Her academic and professional work focuses on Russian geoeconomics and business.