Venture Capital: Armenia Needs to Develop Military-Industrial Complex

By Stepan Altounian

In my last op-ed published in Asbarez in November, I argued the we, as a nation, need a comprehensive defense plan.

The events that have unfolded in the past several months, as well as the humbling response from Asbarez readers whose comments suggest a clear consensus that Armenia needs a domestic military-industrial sector if the country is truly going to prosper and be safe for future generations. And most important, repel the next Azeri attack and restore Artsakh’s territorial integrity.

If this is what we want then we need to stand on our own two feet and build a country where we will not fear our enemies. Instead, our enemies must gain new respect for our ability to defend ourselves against any and all aggressors.

What is the plan for development of the military-industrial sector? It is interesting that the National Security Strategy of the Republic of Armenia which is posted on the Diasporan Ministry website addresses the need for a military-industrial complex. It is quite informative. But as the saying goes “Don’t talk the talk if you can’t walk the walk.”

In the case of our homeland we need to crawl before we can walk. This is where the Diaspora in collaboration with entrepreneurs in Armenia, and with the support of the Armenian government can be of incredible value.

Can you imagine the formation of venture funds with $50 million to $100 million plus in capital? This money can be used to invest in seed and startup funding for a new military-industrial complex that could become an entirely new business sector for Armenia. A sector that will not just be dedicated to Armenia’s defense, but a sector that could sell state-of-the-art defense technology to other countries.

It may be useful to look at the Israeli example. There are approximately 70 venture funds currently focused on Israel. These funds utilized the resources of the Jewish Diaspora and in the past 20 years they have achieved such success that they now are considered the second Silicon Valley. They are leaders in both military and electronic technology with worldwide sales. There is no reason the same cannot happen for Armenia.

What is next? How do we start? The Armenian Diaspora has two valuable resources that can help.

The first is money. There are many Armenians working in the venture fund industry. Some of them manage multi-billion dollar funds. They should be the ones who put these funds together. They have the expertise and know how required. And do not forget, Armenians have always been successful when it comes to business. An investment in a venture fund is like purchasing a stock or mutual fund. There is an expectation one will receive a return on investment (ROI). Therefore, these are not charitable donations that are tax deductible.

Who could invest in a venture fund? That depends on the fund managers. I would think the fund managers will first enlist seven figure commitments from wealthy high profile and widely respected Armenians. These investors will set the example for all of us. Due to investment restrictions, small investors would not be able to participate.

However, Limited Liability Company (LLC) partnerships can be established that raise hundreds of thousands of dollars from smaller investors. These LLCs could then invest in the main venture fund. How can any Armenian argue against investing in a venture fund that could result in a sizeable return on investment and at the same time build Armenia’s military defense system?

At tax season, LLC Investors would receive a K-1 form which is an Internal Revenue Service tax form issued annually for an investment in a partnership. The purpose of the Schedule K-1 is to report each partner’s share of the partnership’s earnings, losses, deductions, and credits.

The second is talent. Though Armenia’s technology sector is growing at 30% per year, it is more of an outsourcing industry. They primarily develop websites, apps, robotics and third party software. But that is where the money has been and how they currently make a living. There are many Diasporan Armenians working in high technology who can provide expertise and advice to help entrepreneurs jump start this new industry. Venture funds will then make it financially more attractive to refocus a sizeable portion of the technology sector toward development of the military-industrial complex.

How hard will it be? I actually believe raising the money will be the easiest. Especially due to our loss in the recent war. Everyone is a patriot and wants to do something. More importantly no one wants a repeat of this latest disaster. A much more difficult challenge will be for the venture fund managers to determine which companies offer the highest likelihood of success. AND they need buy-in from the Armenian government.

It is conceivable there will be more money available than businesses to invest. The fund managers will likely need to identify technology entrepreneurs in Armenia and promote this new opportunity. Therefore, they will perform a strategically critical role in helping to develop the future security of Armenia.

The time is now. Let us hope these new funds will become a reality and spur the development of the Armenian military-industrial complex.