Iraq’s First Space for Entrepreneurs

Last week, I was privileged to spend time in Baghdad at The Station. The Station is the first co-working space for young entrepreneurs in Iraq. As the first such space, it actually serves as more than its mission statement implies. It is a networking center, a place to practice English, a cultural center, and—only slightly exaggerating—the new center for Iraq’s young “hipster” class.

Interacting with the young Iraqis in this environment is incredibly encouraging. These young Arabs are cosmopolitan, have characteristic youthful optimism, and have a sense of mission—improving not only their lives, but also their society through an entrepreneurial revolution.

There are some differences between The Station and an analogous American coworking and collaboration space. An American space would have a significant number—if not a majority—of its nascent firms working on some kind of “app,” or mobile device application. Iraqi entrepreneurs aren’t in that space not because they can’t code (or learn to), but because the business model behind these apps isn’t viable. Iraq has very limited means for electronic payment transfer and therefore no working e-commerce. Pre-paid “scratch cards” are the only wide-scale means to move monies onto an electronic system. Iraqi banks issue credit cards, and in theory they do allow for routine electronic payments—but no one seems to actually know anyone who has made the system work. Without the free movement of cash, working out a business model for an app is difficult. This is not to say that an in-app advertisement model, or selling the data collected in the app, couldn’t be viable. But it makes life much more difficult.

Therefore, most of the projects represented at The Station are analogue. I met booksellers, travel agents, small manufacturers, and staffing agencies. Despite clear structural problems in the economy, young Iraqi entrepreneurs are finding spaces where opportunity exists and where they can contribute.

That said, even in these spaces, these young Iraqis encounter significant obstacles. Almost all the obstacles fall into one of two categories—too much government, or not enough of it.

In the “too much” category, the Iraqi government is bloated, inefficient and infected with graft. As one (exhausted) small business owner put it, “Every small detail is a challenge”. Interactions with the Iraqi government that should be routine are instead incredibly complex. The most challenging of these for the young entrepreneurs appeared to be Iraqi customs and tariffs. Some of the small manufacturers had attempted to generate an international customer base, but were unable to guarantee timely delivery because of the unpredictability of the delay in getting their products through customs. It was a commonly held belief (almost certainly correct) that bribes would have to be paid to get their products through customs—bribes that these fledgling companies couldn’t pay on their shoestring budget (leaving aside the fact that they shouldn’t).

In the “too little” category, several of the entrepreneurs pointed to weak—or non-existent—enforcement of intellectual property and copyright law. This affects graphic artists and designers and those attempting to establish a brand, directly. These artists have little recourse against duplication and counterfeiting of their products. And booksellers struggle to make legitimate sales at the publisher’s cover price when there is an extensive gray or even black market of high-quality reproduced books throughout Iraq—including many sold on the famous Mutanabbi street.

In short, these entrepreneurs are almost finding a gray space in which they can work. They want to remain legal and compliant, but to interact with the Iraqi government involves a level of time, pain, money, and insistence on bribery that highly encourages them to avoid such contact. So it appears that they attempt to largely remain below that threshold. A number of the young entrepreneurs brought up that if they wished to take their project to the next level, they were painfully aware that they would have to partner with someone with a “wasta” (prestige and power) to help smooth over government interactions.

But speaking of partnering, what these entrepreneurs most lack access to is capital. When I asked them the question, “Could you put together a business plan, work out a valuation, then go to rich Iraqis and sell them a stake in your company to get operating cash?” I was met with laughter. There is no understanding of such a partnership in Iraq, and—frankly—the legal protections for such a partnership are weak. But without mechanisms for young entrepreneurs to get access to the frozen capital in Iraq that is not being put to work, the progress of the private sector will be much slower than it might otherwise be. To put it bluntly, we have an environment in which all startups must bootstrap and self-finance. And while these make for admirable stories for those who successfully emerge, it serves as a significant barrier for those whose model simply doesn’t permit them to work on the side in order to finance their new venture. Likewise, those who are unable to find side work have little opportunity.

So I left The Station with very mixed emotions. The energy and enthusiasm of these young Iraqis is contagious. But their optimism is quite tamed by a realistic assessment of the obstacles to progress. Iraq requires many changes, not only in laws and regulations (and enforcement of the same), but also in culture. Until there exists a community of educated funders—angel investors—who can recognize viable business models (or at least promising ones), then access to capital will continue to be a limiting factor to the Iraqi private sector—which Iraq so desperately needs to escape its dysfunctional dependence on hydrocarbons.