Iran’s Startup Spring

As sanctions are lifted, can a burst of entrepreneurship succeed—and even transform the nation?
April 28, 2016, 10:30 AM UTC
Photographs by Aslon Arfa for Fortune

As sanctions are lifted, can a burst of entrepreneurship succeed—and even transform the nation?

The sun is streaming through the windows of a loft-like office where a half-dozen young tech entrepreneurs huddle over their MacBooks in sweatshirts and sneakers. They’re putting the finishing touches to PowerPoint presentations in preparation for a pitch meeting with potential funders, who are visiting from Germany and Austria. When the investors arrive, the entrepreneurs, most in their twenties, nervously take turns displaying graphs and figures that promise sharp growth for their new ventures. “Trello meets Slack on steroids,” notes one slide, describing a project-management platform that launched a year ago. Another predicts rapidly rising subscriptions for a remote-learning site.

With bean bag chairs scattered on the floor and a ping pong table next to the coffee machine, you could easily imagine this scene in Silicon Valley. But these startups are launching thousands of miles away. This is Tehran, a city that since the Islamic Revolution in 1979 has been associated in the minds of many Americans with stern-faced mullahs, women in black chador, and angry demonstrators railing against “the Great Satan.”

For an inside photographic look at Iran in transition, click here.

Yet the business equation suddenly changed last year as the result of Iran’s nuclear deal with the U.S., Europe, and the United Nations. Iran agreed to rid itself of enriched-uranium stockpiles and, in exchange, Western countries lifted many of the sanctions that froze Iran out of much of the world economy for years. No longer is the country’s plentiful oil banned from world trade; many of its financial transactions aren’t blocked any more. For the first time in years, American companies can do business in Iran through foreign subsidiaries (though many require Treasury Dept. licenses), opening the door to U.S. investment in a $400-billion economy. (For now, Congress has kept other U.S. sanctions in place, on the grounds that Iran violates human rights and supports terrorism.)

People gather at an outdoor cafe in Tehran.

The result of these changes has been a wave of business activity and optimism. Only days after sanctions ended in January, Iran’s President Hassan Rouhani raced to Rome and Paris to hash out multibillion-dollar deals for auto and ship manufacturing, new airplanes, modern railways, upgraded oil facilities, and much else. Since then, executives from Germany, France, Italy, Japan, Korea, and elsewhere have jammed Tehran’s hotels, which report being booked solid for weeks.

There are plenty of obstacles to new foreign business in Iran, as we’ll see. But for now, you could call this moment Iran’s Startup Spring. “We see a substantial inflow of foreign investors wanting to find opportunities,” says Saïd Rahmani, CEO of Sarava, Iran’s first technology investment company, who once worked for IBM (IBM) in the U.K. “If someone wants to invest in Iran, this is the right time to do it.”

It takes just a few minutes on the ground to realize that the revolution is far from dead and that many Iranians still deeply distrust America. When I land in Tehran in March, security police glance at my U.S. passport, then usher me into a private room to question and fingerprint me. (Iranians tell me they face similar treatment at U.S. airports.) In the terminal, the faces of the revolutionary leader Ayatollah Ruhollah Khomeini and his successor as supreme leader, Ayatollah Ali Khamenei, loom over Samsung and Huawei billboards. Their portraits preside over every restaurant, store, and office in the country.

Visitors at the Ayatolah Khomeini's shrine in Tehran. Visitors at the Ayatollah Khomeini’s shrine in Tehran.

In Tehran itself, one tower still has a 100-foot mural showing the American flag with skulls and missiles, and the words “Down with the U.S.A.” The U.S. Embassy remains shuttered 37 years after Iranians seized it and took Americans hostage for 444 days after the revolution, and even today, “Death to America” chants are a staple of Friday prayers.

In my government-run lodgings, tea is served in silver-plated pots bearing the logo of the InterContinental Hotel—the original proprietors, whose American managers abandoned the kitchenware when they departed Iran in 1979. That’s when the mullahs nationalized Western businesses, seized wealthy Iranians’ factories, and imposed strict Islamic rule. Even today, I am required to wear long, loose-fitting clothes and a cover-all headscarf during my visit.

But step inside the offices of the tech entrepreneurs, and you are in another country. The sunny loft space with investor presentations is headquarters for the startup accelerator Avatech. Founded in June 2014, with backing from Sarava, it mentors young tech entrepreneurs, helps them find financing, and trains them in how to launch a startup.

Wooing foreign investors inside Tehran’s Avatech.

The number of Iranian startups has rocketed, from almost none at the beginning of this decade to at least 400 in Tehran alone, according to TechRasa, a local equivalent of TechCrunch, which tracks the sector. These startups occupy a tiny portion—less than 1% of GDP, by some estimates—of Iran’s oil-dominated economy. But their impact is potentially huge. If they succeed, they could foster a different vision of what the country could be, and help reverse years of brain drain, in which millions of bright Iranian youth have left, many for the U.S.

In some ways, the business revival taps into centuries of Iran’s commercial dealings with the West, which virtually skidded to a halt with its 1979 revolution. The country has a surprisingly Western flavor, at least among its business people, which takes many visitors aback. “Clients come in, and are amazed just sitting in a place like this,” says Bahador Baradari, 31, a director of Gravity Partners, a Luxembourg-based consulting and investment company working in Iran, as we sip iced lattés in Tehran’s hip Sam Cafe, with the sounds of Frank Sinatra playing in the background.

Another scene inside Avatech.

Two-thirds of Iran’s 80 million people are younger than 35 and their share of the population is growing. Iran’s youths are better educated than any generation before them. (Today the country has the biggest proportion of engineering graduates in the world.) They’re also vastly more connected to the outside world than their parents’ generation—despite being raised under sanctions.

The effect has been profound. “This generation, the post-revolution generation, we don’t accept extremism,” says Saeed Mohammadi, 36, co-CEO of the ecommerce platform Digikala, Iran’s most successful startup. “We want practical solutions, not slogans,” says Mohammadi, who was born five months after the 1979 revolution. “And there are lots of us. We have a lot of potential. We have the potential to revolutionize this country within a decade.” Votes from the younger generation helped the country’s current president, the reformist Rouhani, squeak into office in 2013.

Entrepreneurs like Mohammadi have done what Khomeini would’ve considered apostasy: They’ve found their role models in the West and in the private sector. “For my dad’s generation, their whole goal was to get a job in a government organization,” says Mohammadreza Azali, 28, co-founder and editor in chief of TechRasa, which launched last July.

Twin brothers Hamid and Saeed Mohammadi co-founded Digikala, a successful Iranian startup.

Azali, who says his father is an engineer at a state-run oil company, was set to move to Boston in 2014, until he discovered the startup community, and decided to stay. “I had a chance to work in the national oil company,” he says, but he didn’t want to work in a traditional state-run enterprise. “This generation is free. We do what we want.”

So what do they want? In brief, the opposite of the conservative religious constraints they have known their whole lives. “Whatever is trendy in the U.S. is trendy in Iran,” Azali says. Officially, much of that is restricted, either by U.S. sanctions or Iran’s tight censorship, which blocks many websites and all forms of sexual innuendo.

Iranians have mastered unofficial workarounds. Virtual Private Networks, or VPNs, are widespread, allowing millions to access blocked sites like Pinterest and Twitter. As a measure of the absurdity, even the supreme leader, Khamenei, has a Twitter feed, with 206,000 followers. And about 35% of Iranians have Facebook accounts—an astonishing figure, considering that the government officially blocks Facebook. Azali says he and his friends are now hooked on Game of Thrones, which they download using iTunes gift cards that Iranians buy abroad and sell back home. They find music through Spotify, and favor hip-hop, indie rock, and “anything that is hot right now in the U.S. or U.K.”

A worker at Digikala, a successful startup referred to as the "Iranian Amazon" A worker at Digikala, a startup referred to as the “Iranian Amazon.”

Indeed, Iran’s talent for workarounds has drastically shaped its new business culture. Economic isolation created both duress—and opportunity. Sanctions have bred a generation of DIY experts, who have created their own services and products to replace ones to which they had no access. Hence there are substitutes for Amazon and Groupon, and an alternative Google Play, called Café Bazaar, which launched in 2010 and now hosts thousands of developers.

When Rouhani won the presidency in 2013, he allowed all Iranians to install broadband in their homes. Last year 3G and 4G services expanded from one mobile operator, to all three. The country now has an estimated 40 million smartphones in use. That includes millions of iPhones, even though Apple has no distribution in Iran; middlemen ship them in from abroad. In the luxury Modern Elahieh shopping mall in North Tehran, there’s an ersatz Apple (AAPL) store, complete with a Genius Bar.

Inside an unauthorized Apple store in Tehran.

Even the most ardent anti-imperialist voices in Iran are aware of the dire need for Western business. On the national state-run TV one night while I was in Iran, the supreme leader told a meeting of the ruling clerics’ governing body, the Assembly of Experts, that Western companies were stalling on their investment promises, and that “we have not seen anything tangible from these delegations visiting Iran.”

Yet despite the impatience, there is also deep wariness about whether increased Western presence might undercut Iran’s revolutionary precepts. Conservatives admit that already, the youth’s fondness for U.S. culture poses real challenges to their authority. “We do have a weak point when it comes to bringing up our children,” says Abdullah Ganji, managing director of Javan newspaper, the mouthpiece for Iran’s hardline Islamic Revolutionary Guard Corps. “Iranian youth have an Eastern core. But they have Western dress, they speak in a Western manner, they act Western,” he says wistfully, sitting in his office, which has portraits of Ayatollah Khomeini on the walls. “We have a lack of alternative options for young people.”

Abdullah Ganji worries that Western influence will erode revolutionary values. Abdullah Ganji worries that Western influence will erode revolutionary values.

For now, the odds of a trend reversal do not look high. “There is this crazy momentum starting in Iran,” says Vahid Jozi, 30, who launched a data-analytics company, Kimlik, in Tehran in December. Jozi, a dual Canadian-Iranian citizen, launched four tech startups in Canada. He arrived in Tehran last June on vacation and quickly decided it was the best place to launch his next company, seeing key advantages in Iran’s low wages and large numbers of skilled people. “The return I get investing one hour in Iran is higher than almost anywhere else,” he says.

In Iran today, the link between startups and political reform is surprisingly clear. In 2011, a company called launched Aparat, a website that allows Iranians to upload video—similar to Google’s YouTube, which Iran’s government blocks. (Google itself also blocks people who try to log on from Iran.) Today Aparat is the sixth most popular website in Iran, according to Amazon’s tracking service Alexa. It has about 25 million unique visitors a month and more than six million videos are viewed daily, according to SabaIdea’s CEO, Mohammad Javad Shakouri Moghadam.

Days before Iran’s February parliamentary elections—a crucial test of the reformists’ ability to stand up to the conservative clerics—a video appeared on Aparat, showing the former President Mohammad Khatami, a liberal, appealing to Iranians to get out and vote. The video went viral, for good reason: Khatami has been banned from speaking in public since 2009. The government quickly ordered Aparat to take it down, but it was too late. Reformists won all 30 parliamentary seats in Tehran, a sweep that Iranians told me was thanks to Khatami. The video was “one of our biggest hits,” Moghadam says, and helped boost the popularity of Aparat, whose subscriber numbers increase between 200% and 300% every year.

Symbols of antipathy to the U.S. coexist with signs of a yearning for a Western lifestyle. The Persian text read "Iran will not deal with America even for a second" Symbols of antipathy to the U.S. persist. The Persian text reads “Iran will not deal with America even for a second.”

He says he is planning to expand into the Middle East and Indonesia, using a network of producers creating original content. Yet he credits Aparat’s success to sanctions. “We never would have started this had there been YouTube in Iran,” he says.

A similar need motivated Digikala’s Saeed Mohammadi. Back in 2007, he and his identical twin, Hamid, both avid photographers, were researching which new camera to buy, and found no information available in Iran. So the brothers, both engineers, decided to create a homegrown version of Amazon. They quit their jobs and sold Hamid’s car, and registered their company as co-CEOs. With $20,000 in savings, they began selling digital cameras and mobile phones online. They now offer thousands of products. Nine years on, Digikala is estimated to be worth about $500 million.

When I drop by Digikala, the company has just moved into glassy new headquarters in North Tehran’s upscale Vanak neighborhood. The Nikon camera that inspired their startup sits on a table outside the top-floor conference room, which has a panoramic view of the Alborz mountains. By summer, the twins plan to launch a marketplace platform on Digikala, with Iranian businesses paying a fee to appear on it—a potentially huge boost in revenues for the company. And they say that since the nuclear deal in January, they have begun negotiating with investors from Britain, France, and Germany.

Iranian celebrate Chaharshanbeh Soori, a traditional "fire feast", on the streets in Tehran. Celebrating Chaharshanbeh Soori, the “festival of fire,” on the streets in Tehran.

Yet for many Iranian tech companies, it might not be easy to land big investment. That much became clear on the sunny morning in March in Avatech’s offices, when entrepreneurs pitched their startups to a delegation of about 20 seasoned German and Austrian investors. The group, representing medium-sized businesses, had spent days touring factories and companies in Iran in search of investment prospects, and the meeting was their last stop before heading to the airport.

To the startup execs, their presence felt crucial—concrete proof that the nuclear agreement might finally pay off with an influx of foreign capital. “We need money and we need experience,” says Mohammad Rashidi, 27, CEO of Faranesh, a remote-learning platform he founded in 2014, as part of Avatech’s first batch of trainee entrepreneurs. He says Avatech’s program was essential in a country with “no knowledge at all about how to create a startup or raise funds.” Two years after launching, he says, Faranesh has two million students for its 600 online tutorials, and plans to begin offering courses later this year for the national university entrance exam.

Still, Rashidi acknowledges that sanctions have cost Iran’s start-ups valuable time. “There is a huge gap between what is happening here and in Silicon Valley. We are ten years behind.” The German and Austrian investors expressed just such doubts to me. “People do not yet have the feeling and mentality that matches Western business standards and ethics,” says Andreas Mach, founder of Alphazirkel International, a Munich-based family enterprise organization, who led the delegation. “This is the biggest obstacle.”

Visitors to the Ayatolah Khomeini's shrine in Tehran take selfies. Visitors to the Ayatollah Khomeini shrine in Tehran take selfies.

In one presentation, Reza Rezaee, co-founder of Namlik, argued that Tehran’s gridlocked traffic—with millions trapped for long periods during their commutes—provided a perfect opportunity for his company’s curated audio content (or “Flipboard for audio,” as one slide put it). “We offer content that’s already been produced,” Rezaee told the group. “There’s no copyright infringement problems?” asked one investor. “This is Iran; we don’t have those problems,” Rezaee replied. He explained that Iran has no copyright laws. “You will get them,” said the investor.

There are plenty of other worries, too. For months, Iranians have followed the U.S. primaries, wondering whether a new president could cancel the nuclear deal, as the Republican frontrunner Donald Trump has vowed to do. And investors worry that Iran might break the deal, triggering fresh sanctions.

Even now, conducting the simplest transactions in Iran remains intensely complicated. It is almost impossible for Iranians to make or receive international payments, and foreign visitors need to bring thousands of dollars in cash to pay their bills, since there are no international bank or credit-card machines in Iran. Because U.S. sanctions remain in place, no international bank has dared open for business in Iran, for fear of being prosecuted in the U.S., as BNP Paribas was last year; the bank pleaded guilty to criminal charges and agreed to pay a $8.9 billion fine for doing business in Cuba, Sudan and Iran. “It traumatized the banks,” says Ardavan Amir-Aslani, a French-Iranian lawyer in Paris, who has recently negotiated French investment deals in Iran. As a result, he says, “nothing is moving.”

Visitors outside the Khomeini shrine.

Until the remaining sanctions end and investments flow, Iran’s newer startups like Faranesh and Namlik could fail, or be sidelined when the U.S. companies that they replicated finally enter Iran themselves. Moghadam, the CEO of SabaIdea, for example, says his social-media platform Cloob—similar to Facebook—has lost about two-thirds of its users in the past few years, as millions of Iranians began signing on to Facebook itself.

Like many crowding the hotels across Tehran, the German and Austrian investors who met the startup entrepreneurs say they were fired up by talk in Europe about an untapped, well-educated market of 80 million people, with urgent needs to fill after years of sanctions. But at the tail end of their stay, many felt there are still too many risks, including the fact that the nuclear deal with the West could fall apart, and that even if it doesn’t, Iran imposes steep import and export taxes, considerably raising the cost of doing business in Iran. There is also little reliable data about companies on which to base their investment decisions. “Iran does not have the rules and regulations of international business,” Mach says. Despite that, Mach says that when those rules are in place, and when the U.S. sanctions are lifted, Iran’s large, skilled population—better educated and more numerous than any country in the Middle East—will be a magnetic draw for Western companies. “I foresee a good future,” he says. “But it will take longer than we think.”

A version of this article appears in the May 1, 2016 issue of Fortune with the headline “Startup: Iran.”