Modern economic competition is no longer determined only by industrial potential, but also by knowledge and its effective use, in other words, the utilization of intellectual capacities. The knowledge economy makes possible and realizes what the industrial era considered impossible. Naturally, the solutions brought by the knowledge economy lead to the formation of new trends in markets. More competitive opportunities such as faster growth prospects, more flexible globalization compared to the industrial era, and others attract the attention of investors. From this perspective, investors are directed to markets or sectors that promise greater potential and profit. Thus, the conditions of the Fourth Industrial Revolution, as the locomotive of the knowledge economy, drive the innovation ecosystem forward and increase opportunities for value creation. Naturally, this situation is accompanied by an increase in attracting investments to the innovation ecosystem.

In recent years, venture capital (VC) has become not only a financing tool for startups but also the main driving force of the global wave of innovation. The indicators confirm this: according to KPMG’s “Venture Pulse” report, global VC investments reached 368 billion dollars in 2024, which means more than a 5 percent increase compared to 2023. It is observed that despite uncertainties in the world—geopolitical tensions, economic difficulties—investors pursue new ideas. In other words, investors are increasingly interested in risk capital in order to expand their financial resources.

According to the distribution of VC investments in the world, the largest share, as always, belongs to the United States and the American continent as a whole. Here, billions of dollars directed only to artificial intelligence show how the market is changing.

In 2024, the volume of VC investments in the U.S. and other American countries reached 221.7 billion dollars. Europe, however, is relatively more conservative—the 62-billion-dollar investment reveals both the potential and the limitations of the region. In the Asia-Pacific region, VC investment amounted to 78.8 billion dollars. China and India remain the main players in the region’s innovation ecosystem.[1]

One of the remarkable points in the world is the sharp increase of interest in the field of artificial intelligence. In 2024, the majority of mega-rounds (investments over 100 million dollars) were directed specifically to artificial intelligence startups. The rapid increase in the value of Open AI, Anthropic, and other “new generation” technology companies is also a result of this.

As for the Caucasus and Central Asia region, the VC market here is at the stage of formation. In Kazakhstan and Uzbekistan, the startup ecosystem is being formed with the support of state programs and international funds, but the volume of VC investments is still at the level of hundreds of millions of dollars.[2] In Georgia and Armenia, technology initiatives are also increasing, but the volume of capital remains limited.

The Dynamics of Venture Capital Development in Azerbaijan

Azerbaijan is emerging as a new player in this sphere. In recent years, with the establishment of industrial parks and techno parks, the activation of startup incubators, and other state support, an innovation ecosystem has been forming in Azerbaijan. However, the volume of investment is not yet sufficient to act as a locomotive for the market. In the local market, investors’ interest is mainly directed toward digital solutions, agricultural technologies, and energy efficiency. At the same time, Azerbaijani VCs are also showing interest in global markets.

Against the background of the development of the innovation ecosystem in recent years, the institutional foundations of venture capital in Azerbaijan have begun to take shape. If in the 2010s the financing of startups was mainly limited to state grants and international donor programs, since 2022 the establishment of local VC funds can be considered the beginning of a new stage.

 The Caucasus Ventures fund[3] started operating in Azerbaijan in 2022 and in a short time focused on startups in the “pre-seed” and “seed” stages in the region. According to the Global Startup Ecosystem Report (GSER 2024), the fund alone made 15 investments in 2023. This is significant both in terms of the formation of a venture capital culture and in providing startups with access to sustainable financial resources at an early stage.

Another important event in Azerbaijan was the establishment of the INMerge Ventures fund[4], announced in 2024. Presented within the framework of the Baku INMerge Summit, the fund’s initial capital amounts to 4 million US dollars, and its main goal is to provide systematic support to startups in Azerbaijan and the region. In addition, the “Baku ID” (Baku Investment Day) program[5], established by Sabah.Hub[6], plays a major role in the development of the investment environment. These initiatives can also be considered as examples of the integration of the corporate sector into the innovation market.

At the same time, the expansion of angel investor networks is being observed in the country. For example, the Technovate–SABAH Angel Investors Club[7] and the newly established Divida Angel Club[8] create opportunities for individual investors to enter the startup market. This mechanism increases the commercialization opportunities of startups by providing them not only with financial resources but also with mentorship and business experience.[9]

“In 2025, the Central Bank of the Republic of Azerbaijan submitted a draft law on ‘Venture Financing’ to the government.”

In addition, the Innovation and Digital Development Agency (IDDA) has begun financing innovation projects based on the regulations approved by a Presidential decree. This can be evaluated both as steps aimed at the formation of a legal and institutional environment and as the enhancement of financial accessibility for startups.

However, a number of challenges remain in the ecosystem. Existing investments are mainly focused on the early stage; for startups in the growth stage, the volume of funds is limited. Furthermore, instruments accepted in international practice such as tax incentives, cooperation mechanisms, and ESOP (Employee Stock Option Plan) have not yet been fully implemented.

As a result, although venture capital in Azerbaijan is still in its early development stage, the establishment of funds, legislative initiatives, and the expansion of angel networks in the last three years show the potential of the ecosystem to become a competitive center in the region in the future.

It is evident that Azerbaijan’s venture capital market is still at the initial stage. But at the same time, this also means great and diverse opportunities. Through the attraction of foreign investors, the continuity of state support, and regional cooperation, the country may turn into an innovation hub in the region in the coming years. Global experience shows that such transformation may not take more than a few years. The main point here is that the ecosystem should be supported and a favorable environment created for international capital.