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Russia Is a Treasure Trove of Technological Innovation

But Russians still have to learn how to commercialize it

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This post first appeared on Russia Insider


No joke - Confucius did say “Study the past if you would define the future”. So while examining start-up tech opportunities here in Russia, the path trod by Israel came to mind.

In the mid 1970’s the chief scientist of Israel was General Itzhak (Yatza) Yaakov, and the state of high technology R&D was dismal with a huge brain drain disappearing mainly to the USA. Until then Israel used the Soviet template for its R&D centers. Perhaps because many of the scientists and academics who came to Israel since the 1940’s were from Eastern Europe and USSR. Entirely financed by the government or donations, they were stodgy, unimaginative, clinging to the status quo of fundamental research just like their Soviet counterparts. Transitioning research into something commercially useful was not even a secondary thought.

General Yaakov, an MIT graduate, made what was a most unpopular decision, and stirred up incredible antagonism within the academics of Israel. He made it simple; they would receive matching government funding for projects only when and if they secured funding from the private sector. If a company thought a technology was worth investing one dollar into, then the Israeli government would add one dollar, no more, no less. Even attempts on his life occurred in the months following, but he stuck firmly to his principled plan.

From that foundation, the innovative, globally acknowledged “startup nation” is a game changer for Israel and far beyond. In 2001, he was honored and named the “father of Israel’s high technology” in Tel Aviv. Recently Putin said, “We must learn from Israel”, is a truth at several levels including high tech startups.

Towards the tail end of the 1980’s I was appointed the first non-Russian member of the presidium of the Academy of Technological Sciences of the RSFSR, which shortly thereafter became the Russian Federation. The role was to examine an array of R&D projects, and determine whether they were transferable and of commercial value. What we found was a treasure trove of mostly fundamental research much of which was closely held and classified by the USSR.

Upon filtering against sets of technology transfer and commercial validators, we determined that a few had potentially game changing real world applications. Then came the deep due diligence, researching the old Soviet patents and trying to meet the inventors. What we found was that the patents were applied for and issued not to the scientist(s) that developed the innovations, but to the appointed apparatchiks who were managing the Institutes at the time of their application; they were useless for our or any purpose. The chaos of perestroika and the disappearance of government subsidies to these Institutes further scattered researchers and scientists, effectively freezing what might have been helpful commercial and economic developments for Russia at that time.

The 1990’s was mostly a lost decade for high technology R&D in Russia. The priorities for people and the budget were survival, not financing anything without immediate returns. As Russia’s economic and political, outlook stabilized and improved, it was apparent that to be competitive the country had to make the effort, budget and planning to enable Russia’s innovators to develop locally. The country felt the losses of a severe brain drain through immigration to friendlier climes for innovative R&D and their related start-ups.

Several programs started independently of the Kremlin throughout Russia in the early 2000’s, some supported by private capital, some with foreign governmental aid. All experienced similar difficulties, which were that it is very rare to find a scientist or innovator who is also a businessperson.

Similarly to find at that time in Russia business and financial people willing to risk uncertain returns over long term development timespans. Long term was from six months to one year, more than that was not interesting, realistic or taken seriously. Financing high tech start-ups in Russia was an uphill battle, to put it mildly.

The physics of demand and supply finally did come into play during the first half of this new millennium largely through the efforts of interested visionary individuals like Kendrick while based in Nizhny Novgorod. He founded Marchmont Capital Partners, LLC, in 2005 as an investment advisor for regional innovation driven entrepreneurs and advised the University of Nizhny Novgorod. Since then, Kendrick has focused on using his experience in developing regional innovation eco-systems to create a systemic national approach to commercializing regional high tech projects into global markets.

The integration of venture capital (VC) and private equity (PE) in a systematic, businesslike manner to get the best market results from Russia’s innovators is where he played and plays a key role. Through his efforts and others, the field finally found traction and acceptance from other players as well who began to “get it”. Some of the now established players for startup financing are the Russia Direct Investment Fund (RDIF), and through to brokerage firms like Rye, Man & Gor (RMG). The array of firms now providing everything from seed capital to IPO’s is growing, and include Sberbank, Altair, Runa Capital, Maxfield Capital, United Capital Partners, Inventure Partners, Leta Capital and several others.

Skolkovo was and is Russia’s version of Silicon Valley. Since its inception in 2010, like any government idea it went through several difficult periods in its growth curve. This often happens when an essentially simple idea is fleshed out by committees on paper with all the bells and whistles, and then expected to be built, staffed and duly inspired by a set date.

The first few years of Skolkovo was Murphy ’s Law at work, but despite such growing pains and very steep learning curve, it has since 2013 started yielded growing numbers of successful start-ups. The difficulties experienced with patents and IP thanks to one of the startups, appropriately named “online patent” (https://onlinepatent.ru/), and working together with Ruspatent does everything online quickly, including national and international searches and filings. Much of the heavy, burdensome paper nightmare inherited from the Soviet Union has been made digital mostly thanks to these new startups. They have made a significant mark in the lives of Russians, improving qualities of time, efficiency and effort geometrically.

Currently, there are more than 100 business incubators and accelerators in Russia, which support small companies at their early startup stages. Most incubators based at Universities or work in close cooperation with the academic world. Typically, startups get consulting services, as well as, office space in incubators. Skolkovo is the largest and perhaps due to its deep pockets the best appointed which already incubates more than 1,000 domestic and foreign startups from its campus in Moscow. Worth mentioning are some of the other equally effective and inspired ones:

The Business incubator in the Academy of National Economy established in 2010.

The Business incubator in the Higher School of Economics established in 2006.

The Incubator "Ingria" Industrial park St. Petersburg established in 2008.

The Business incubator in Lomonosov Moscow State University established in 2004.

The Business incubator in Plekhanov Russian University of Economics established in 2009.

Lobachevsky University UNN Student Business Incubator established 2007.

Since the start of this year, several companies launched venture funds, including AFK Sistema's “Sistema Venture Capital”, which has already raised $154 million. Kaspersky Lab should start investing in seed-stage startups both in Russia and globally, making investments between $50,000 and $1 million. Gazprom Media also announced their innovations fund.

Today Russian startup trends, while still growing at early stages, generally track with tendencies worldwide. Many deal with deep learning, neural networks and artificial intelligence. There are strong efforts in the fields of cyber security, data security, storage and data transfer. Russia, well known for expertise in cyber security, not just as represented by Kaspersky Lab, but recent startups like Onsec. Biometric security, such as face, voice or retina recognition is also an area of distinct strength among Russian startups.

R&D, innovation and startups do not lend themselves well to operating in an uncooperative vacuum. Since the sanctions of 2014 significant inroads have been established enhancing two-way investments and trade between Russia and India, China, Israel and others in the area of high technology startups. This sudden disconnect from the USA and Europe and that comfort zone was a needed jolt to embrace the alternative opportunities of MENA and Asia.

The governments of Russia and China have agreed to and signed a joint Russia-China Venture Fund last year. The Russia-China Investment Fund (RCIF) has already conducted through the Russia-China Business Advisory Committee, more than 60 projects. The initial high tech projects estimated at a Yuan equivalent of $100 million in fields related to manufacturing, agriculture, infrastructure and mining.

Russian startups are increasing their presence in India as well. One of the first visible startups is a crowd-sourced courier service Dostavista that raised $800,000 to launch its services in the major urban areas of Mumbai, Delhi and Bangalore, with technical support from Russia. Similarly, the Russian holding Sistema JSFC intends to invest in Indian startups to develop its presence beyond telecoms. The company has already launched an 3.4 billion Indian Rupee fund called Sistema Asia Fund (SAF).

It is worth noting that the above developments have a common factor in that investments in local currencies were on the agendas. It is felt that by using local currencies and not the US Dollar or Euro, would increase the number of projects over the long term, and expand the scope of investment instruments in business relations between Russia, India, China and beyond.

There has been a noticeable increase of interest from asian investors during 2016 on how best to investigate and engage with this growing startups market in Russia. According to OPKO Russian Market Partners, several Asian companies over the past six months have asked them to organize and manage small due diligence teams sent into Russia, some for several months, looking at specific projects and to immerse themselves in appreciating the warp and weft of negotiating successful outcomes directly with innovators.

Several positive results are happening, surprise at the lower cost of operations in Russia compared to other countries, and the efficiencies of infrastructure, human resources and taxation that they did not expect to be so advantageous. Equally, some Russian innovators are also looking to establish their projects outside of Russia, while maintaining ownership and control. While this is still very early days, it is a positive step in diversifying the Russian commercial footprint in directions other than raw materials and energy on the world business stage. It is also worth mentioning that the MOEX has a facility to allow for the listing on early stage startups to enhance attracting funds at critical stages.

All in all, Russia is quickly implementing what works best globally and can be realistically integrated into smooth, profitable operation locally.

 

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