Is DigiKala Really Worth 150M USD?

How big can an internet company get in Iran?

Startup World Report recently published a report listing the top internet companies in 50 different countries around the world. This report went viral after it was published in TechCrunch and the Economist.

This all started a few months ago, when I was approached by Bowei, Shane and Andrius from the World Startup Report, to provide information on Iran’s startup scene. World Startup Report collects data about each countries startup scene by asking that countries active players. DigiKala was announced as the most valuable company in Iran with the estimated valuation of 150m USD.

After the report went viral, it started trending with Iranian Twitter and Facebook users. A lot of commentators were awe-struck and shocked by DigiKala’s estimated valuation and deemed the data unbelievable and far from reality.

A similar reaction was seen a few months back when the CEO of DigiKala announced an annual revenue of $120M . This figure raised a lot of eyebrows, resulting in many questions and much doubt from a lot of people. It appears that the majority of the Iranian community do not fully believe in the power of Internet companies yet, despite the recent exponential increase in the number of Internet and mobile users in Iran.

Because the majority of the business activities are still controlled by government and semi-government sectors, the majority of investments in the country are still being done by traditional investment companies, where traditional valuation methods are more widely used. As a consequence, valuing a technology startup, particularly an Internet one, is not very common. On the positive side, the technology venture capital industry in Iran is just getting started. Investment firms like Sarava have started investing in tech startups by doing due diligence using best global practices. But how could Digikala worth $150M?

Comparing Similar Markets

The most common reaction from Twitter users after seeing the valuation was: “Iran is not Silicon Valley”. There is undoubtedly much truth in this statement. A much better indicator for evaluating startups in Iran would be comparing them to their counterparts in other emerging markets such as Turkey, Brazil, Russia or India. Turkey is a particularly good example because of the vast demographic, cultural, and educational similarities between the two countries, as well as the similarity in internet and mobile penetration. The most dominant e-commerce company in Turkey is Hepsiburada. In 2011, This company had an annual turnover of $260 million, twice that of DigiKala today. At that time Hepsiburada was valued at an estimated $1 billion. That is a staggering seven times the current estimated value of DigiKala! In comparison, DigiKala’s valuation no longer seems out of the ballpark.

There is no doubt there are many other variables that cause DigiKala’s much lower valuation compared to Hepsiburada. One of those variables could be higher level of risk in Iran. Another could be a very different level of technology adoption.

Lack of Statistics and Transparency

The uncertainty surrounding DigiKala’s valuation has its roots in a much deeper problem with the Iranian cultural and business environment, in which venture capitals and internet companies are not willing to reveal their investment activities and valuations.

There are surely many other successful internet companies in Iran that may even potentially have a higher valuation. But startups are like football players. Their value does not show until they are traded in the market. In Iran there have only been rumors on the investments raised by Digikala, CafeBazaar and Anetwork.

The Revolution in the Internet Economy of Iran

Iran’s online businesses and startups are entering a new chapter. Despite the fact that Iran ranks among the bottom 5 countries in the world for internet speed, internet penetration is increasing dramatically (highest in the region), and the new Rouhani administration has solid plans to speed things up even further. There are also some interesting trends in regards to mobile penetration in Iran. Smartphone users are increasing rapidly. With 120% mobile penetration, it is estimated that the number of smart phones exceeded 12 million. Rightel, the only 3G provider, will have its exclusive contract expired in couple of months, paving the path for faster speeds being in the hands of millions of users. These factors will soon cause a revolution in the number of Iranian startups and successful business stories.

Supporting National Champions

Success breeds success. Nobody can ignore the significant impact of Maktoob’s acquisition by Yahoo! in 2009 and its the subsequent change in their startup scene and internet economy. We all should support our entrepreneurs who are creating these success stories. We should be proud of these founders like we are proud of our national football champions. These entrepreneurs highly improve the business environment, create economic prosperity and increase our competitiveness in the region.

There is a rugged and treacherous road ahead, but once Digikala goes IPO, there will be a turning point in the Iran’s internet economy.