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Monday, December 20, 2010

Angels and their earthly snags

There are hundreds of thousands of business angels in the U.S.; in Europe, they number about 100,000; in Russia, less than a thousand. American angel investors put up tens of billions of dollars in projects, investing several times the amount anted up by all venture funds put together. What tells angels apart from other venture investors is their deep knowledge of the field they bring their money in; they also put on the table their business experience, connections and inroads.

Angel investors form associations across all nations. This reduces problems of communication with innovators, enables angels to invest more money, and broadens the fields of investment. I would define two types of business angel associations: an online one, and a private club. Our Start Invest association is exactly a private club that brings together people with shared interests like syndicated investments in new projects.

All over the globe a regions-to-center principle of business angel integration prevails. Associations are formed based on entrepreneurs’ personal relationships; such regional alliances also typically include innovators and scientists who live close by. This ‘neighborhood’ pattern facilitates interaction greatly. The alliances then go on to forge national and international systems.

The difference between a business angel and a venture fund is even deeper; angel investors put up and manage their own money while venture funds work with other people’s funds. Therefore a business angel will do his utmost to ensure project success. An investment horizon is of little concern for him; if necessary, an angel investor will work on his project for eight or ten years, much longer than a typical three-to-five years. For his project to succeed a business angel may bring into play other angels, venture funds or corporate venture investors. In contrast to an angel, a VC fund may opt to even bar another fund from accessing its project (remember “the dog in the manger”?) A business angel rarely teams up with government; he doesn’t need any government funds as he’s an entrepreneur operating in small or medium-sized business.

I think, as private-public foundations spring up typical problems may arise, which would result in something different from what the planners hoped for. We have techno-parks, business incubators, private-public foundations; but angel investors need development in the right direction. Ironically, the root of the problem is that doing business in Russia is very simple, in spite of conventional belief. In mainstream sectors you can easily make 30-50% interest; making money in the stock market is an option, etc. As long as easy money is available, risking one’s capital on innovation projects is the province of those with deep knowledge in the investment fields. When, and if, traditional business yields less opportunity for a quick buck, entrepreneurs will look for other investment prospects. This is exactly the chance of attracting them into a business angel environment—given the correctly set system—and this is the way to having angels in each region multiply from dozens to hundreds or even thousands.

One of the major snags that need addressing is very few projects that we can evaluate. Another one is the quality of those projects available. Unfortunately, all the system of grants and funds that Russia has works to ensure the survival of scientists who used to literally starve in the 1990s and now must be rescued from extinction. Many fled overseas. They don’t flee today; instead they prefer to apply with the same project over and over and over again to a variety of funds to get grants and live off grant money rather than pushing for actual business results. In a comfort of their $20-30k, all they have to do is write formal reports.

There is also a so-called ‘translation barrier,’ a gap that stems from the innovator’s low literacy in business ABCs. Unless innovators are taught to understand that each scientific work has an element worth a certain amount of dollars, this gap cannot be bridged. Labs and universities tend to show reluctance in sharing their developments; distrust, lack of incentives and fear of change are all behind such ‘wary’ conduct. This is an across-the-board problem, to be tackled by the RF government and the Academy of Sciences. In my opinion, the ministries and the Academy should be motivated to not only increase numbers of scientific developments but also promote actual commercialization of those developments. Of course, the government could back the process by providing tax incentives.

To raise more investment, I think it’s worth repeating how important reasonable and systematic self-promotion is.

There still is a ‘missing link,’ the complete lack of a system to train managers for innovation projects. Unless this is firmly in place, nothing will change in Russia.

Drawing the line, I would like to emphasize that despite all the problems that Russia’s business angels face I strongly believe this country will eventually succeed in innovation.

Friday, December 17, 2010

A scientist to idolize? Penalize? Or incentivize?

I spent time recently thinking of the role of a scientist in today’s academia. Should he be revered and rewarded for simply what he is, with his Nobel prizes and titles he holds, or is he just an employee at a university whose well-being hinges on how well or badly he performs?

A debate is still going on in the U.S. regarding the right answer to the question. There’s a fact that seems to speak for itself. By giving their scientists the full and barely accountable reign over the university labs, with little or no stimulus to turn science into marketable products, University of Colorado has slipped from a leadership position in start-up creation to a mediocre one just above the 20th. In sharp contrast to it, by penalizing its professors and lab chiefs financially for not commercializing research results vigorously enough University of Utah has propelled itself from ranking 96th to number one in the U.S. for new start-ups. But if, for example, we speak of Russia, a very different culture, is this all so black and white? Is there a single answer to the above question?

Russia today faces an interesting dilemma. On the one hand, one of the greatest assets the Soviet Union and now the RF has built over the last 85 years is the scientific and academic foundations of this country, on which Russia can develop in the long run into an innovation economy.

On the other hand, the problem with this system is that it is consistently driven from the top down by macroinstructions under the political leadership of Russia to accomplish major goals.

This could generate huge amounts of resources dedicated to large-scale projects, enabling this country to accomplish great achievements. But today this resource needs to be shifted dramatically to adapt to a more market-driven, bottom-up type of structure so that professors, students, and individual labs and universities, are able to generate their own initiatives and ideas which can then percolate. 

So, how to change this structure of Russia’s major asset and in the process not to destroy the asset itself? In the U.S., the country has faced a similar set of problems but from a very different angle.

Traditionally, scientists were developing R&D and labs were getting federal support to do pure research, and very often business angels were close by those labs able to come in with their business experience and help promote commercialization strategies for new technologies.

The problem today is that new technologies are so sophisticated that business angels are not sure how to evaluate the market potential of any particular new technology, especially in some very advanced sectors. Therefore new creative mechanisms have been developed in the U.S., such as proof-of-concept centers, which can be used to promote commercialization.

At its root, though, there’s deeper change that needs to take place in the United States and, I think, in Russia, and that is to create specific incentives for universities, professors, students and labs to all become very market-driven. There should be a combination of factors.

In Russia there needs to develop a competitive attitude that can allow for university rankings based on specific key performance indicators (KPIs). For example: how many new start-ups are generated by any particular university? how many products are created? how many jobs are created? how many patents are issued? how much investment is attracted to add on investment into projects? There needs to be developed an assessment of KPIs not only for regions but also individual universities within the regions; how they compare to one another from region to region, and, going even deeper, how different professors and laboratories perform against one another in generating commercial ideas.

Of course, this idea in itself is rather complicated and will have many people supportive of and opposed to it. Any changes that can be made to the Academy of Sciences’ structure may prompt people established in their lives to resist those changes. But if Russia is to succeed in its development as an innovation economy, there definitely need to be motivation mechanisms created from budgetary and other means to incentivize professors and labs to think in terms of how to commercialize their products.

Setting such mechanisms means choosing different approaches to academia. If we look at the examples in the United States of different university systems, several universities have experimented with plans to increase laboratory budgets for those professors that are able to initiate a greater level of commercialization of their ideas. But the reverse is also true; for those professors and labs that fail to commercialize their products or develop any new commercialization strategies, their budgets are cut.

In Russia, I believe, there clearly needs to be a merit-based system of budget allocations for those labs and professors that are able to show the greatest results. There are always going to be certain sectors and certain priorities for the RF government, which may or may not be driven by commercial interests, but for those areas where commercialization into domestic or global markets is possible Russia should use every budgetary means to motivate its academia and research labs to think in terms of commercialization.

So, while there hardly is a single answer to the question of how to treat a scientist, this is clearly an area where both Russia and the U.S. share a common need to improve their commercialization strategies. That’s true, the U.S. has a head start by many years, or some say decades, but as technology changes so quickly being replaced by new technology, this means that Russia has every opportunity to catch up pretty fast.

Tuesday, December 7, 2010

Clusters are no blusters unless set up by busters

Prof. Daniel Isenberg from the U.S.’ Babson College challenges governments’ drive for innovation clusters by saying top-down cluster strategies "may perversely dull the entrepreneurial spirit rather than sharpening it" ( I found his viewpoint interesting to dwell upon—and pretty arguable, too.

In today’s modern economy it’s absolutely clear that any country that wants to succeed should push itself forward towards being driven by innovation and creativity.

In this environment many different countries and cultures, it seems to me, have tried to replicate Silicon Valley. But repeating the success of the famous cluster is very hard to do because Silicon Valley is as much a philosophy of life and the reflection of a culture as it is a simply successful structure of innovation.

So it’s not possible to just recreate an innovation culture through infrastructure. Many countries and regions have tried and failed in this effort. Why?

I think it’s hard to follow Mr. Isenberg generalizing about whether creating an innovation cluster is good for the economy or not. One has to look at an individual culture and its approaches to economic modernization.

Talking specifically about Russia, I think this culture requires a top-down strategy to lead the people and to motivate the nation to modernize. Russian business culture, in my opinion, expects some initiative from the top coming down, and I think, for the Russian government to simply be passive would be incorrect. I think Russia in particular needs this type of leadership, more so than other countries that have a much longer history of self-starting entrepreneurship.

In a situation like Russia’s leaving the initiative to create an innovation economy to the free market will take too much time.

Opportunities come and go in Russia; Russia has a habit of opening and closing, like in a pendulum. And over the last 20 years I’ve seen several cycles of this. Right now we’re in a very positive open cycle. If this cycle is able to generate enough interest and attract enough people it could propel the process forward to the next 20-30 years, which really could result in a critical mass of people being involved in a diversified, innovation-driven economy.

For this there should be a strategy: how to link together different segments of very different geographical and industrial locations in Russia. For example, in Nizhny Novgorod there’s a strong automotive sector—should this be a basis for an automotive cluster? I’m not sure, but it should definitely be a basis for a manufacturing cluster that could make automotive components and sell them across Russia. Are there any strong institutions in this region which can contribute to creating a new generation of auto components? Yes. But the different factors need to work together. If these different players are not brought together and given an opportunity to work in a collaborative way, they might not do that on their own.

How can any regional government do that? It can create infrastructure like special economic zones; it can alter tax structures; it can encourage private investors to risk their money on hi-tech investments; it can encourage academic institutions in a Russian region to be more market-driven and therefore attract students from across the country that are excited about being involved in innovation. So there are concrete steps a government can do to encourage the right type of people to come to the region and develop their businesses and lives there.

I understand Mr. Isenberg’s concern; there’s a risk of having cluster residents lulled into a false sense of financial security, which will be a disincentive to their development as they may view government, which pulls all triggers, as a safety net and an insurance against their business failures.

That’s true, but a lot hinges on how a cluster is formed. As far as I understand, the innovation cluster in Skolkovo, Moscow, for example, is driven by a public-private partnership between the RF government and a privately owned company, Renova, the investor in the development of the Skolkovo Foundation. The government seeks to reduce risks for private investors and ensure start-ups; however, once investors accept the risks and develop their business the government gives no guarantee that the businesses that are to be set up there will be subsidized indefinitely. The market will choose its winners and its losers. Companies entering the cluster will have to survive under market conditions.

Prof. Isenberg may or may not know the Russian realities but in my view, the role of the government here in promoting an innovation economy is absolutely essential. I believe as these initiatives are implemented, this will have a profound impact on Russia’s entrepreneurs and business owners who will feel greater and greater incentive to invest in themselves, and innovation clusters will develop based on each region’s individual strengths.

Tuesday, November 30, 2010

Making a building smart

I read a couple of interesting articles in Vedomosti about commercial real estate the other day. In one of them the authors advocated the idea of a new concept to be offered to buyers and tenants. Participants of the discussion spoke primarily about the redesigning of their existing projects.

From my personal experience I know that there are two main trends in commercial real estate tenancy. Trend 1 is ‘slicing’ space up into as many small rooms as possible and leasing each out at a price as high as possible. There’s good demand for small, 10-20 sq. m offices while supply is low.

Tenants come and go very fast; it’s next to impossible to remember all of them. The same office space may house pet stuff sellers yesterday; a lawyer’s firm today; and somebody else in a week. I regard this kind of tenancy as an Oriental bazaar where you’re fooled into buying goods at the highest price possible. This is business for quick money lovers: “I want it here and now.”

Trend 2 is offering big clients big office space on a long-term and moderate-rate basis. I think it’s a good strategy for you to move from one finished project to another with an eye to long-term and stable revenue.

When I was doing my Teledom business center project in Nizhny Novgorod, I ventured to ‘make the extremes meet.’ And I succeeded in doing that; today several companies rent one floor (within 700 sq. m), with most offices covering from 60 to 200 sq. m. Some of the tenants are ‘infrastructure’ firms important for the business center, including a restaurant, a dentist’s, a notary office, etc.

It’s worth mentioning here that at the time we launched the Teledom project Nizhny Novgorod hardly had any class-B office space, not to mention class A. When you consider a new business, assessing a local market and international best practices is one thing; forecasting trends is quite another. Construction of a class-A business center was a leap over the class-B step but we had to skip B not to be chronically lagging behind.

It was the time when business people would privatize buildings that Soviet-time research labs used to own, give them a face-lift, chop space into small offices and offer rooms for rent. The class-B era was looming as the next stage of commercial real estate development. We asked ourselves: why should we go where everyone will come soon? I came up with a concept that had its zest.

I decided to build a ‘smart building.’ I studied Russian and international experience and ordered design from a Moscow firm. It turned out that the cost of what the designer was suggesting was almost the cost of overall construction. This caused its payback period to skyrocket, too; in Russia’s instability doing a project with a ten or more year payback period is a losing strategy.

Scrapping the project looked like a logical move, but I decided to continue. I brought my own company, Internet Laboratory, into it; the firm made its own unique and less costly intellectual building system adapted to the needs of the future business center. I bet on less known but better-customized high-quality equipment.

Our ‘smart house’ developments have brought about a new business as the system can be easily tailored to an apartment, a cottage, a shopping mall or a residential complex. Unlike competitors we offer turn-key solutions including design, installation, FOCL, telephone gateways, high-speed Internet and cable TV. This Internet Laboratory initiative has made it possible to now use the system at many other projects.

The Teledom project was our attempt to peer far into the future and anticipate market trends. Being ‘smart’ the system is constantly developing.

To pull down and rebuild business centers from scratch or to renovate what is already available? This is a dilemma now faced by owners of land where ‘frozen’ factories stand. The owner of Danilovskaya Manufactura in Moscow took an unorthodox approach (see He rebuilt some of his out-of-use parts of the factory to make a ‘loft quarter’ there. The guy was quoted as saying, “…this has wrought a unique atmosphere of working process where creativity is of value.”

A current office space glut in Moscow is apparently causing owners to ‘put a lovely face’ on offices to be specifically offered to professionals in creative sectors. In my opinion, the developer simply didn’t have enough long funds, which prompted him to launch an option that pays off fast. And he hit the mark!

However, it is service that makes commercial real estate business successful. I would also recommend that a developer bet on convenient location, availability of communications lines and the concept of prestige—this is what business people value.

Sunday, November 28, 2010

Want to go global? Build up at home first—and innovate

According to a World Bank report, hi-tech products account for just 6.5% of Russia’s exports vs. just under 30% for China and the U.S. Sad stats for Russia, indeed. But should exports be the focus? Isn’t it putting the cart before the horse?

As is the case in a traditional commodity economy, Russian businessmen very often think in terms of exporting their products for sale abroad. With an innovation economy, however, it is first and foremost a domestic market that is the first buyer of innovation.

Historically, if you look at any other innovation-driven economy like the EU, Japan or the U.S., the first market has always been a domestic market which creates economies of scale. Local companies gear themselves up, take strong positions in local markets, build up their capital base and production know-how.

That forms the proper platform for exports of high technology all over the world. The Japanese built up their domestic automotive industry, filled it with high technology and then began exporting. The same with many other Asian economies.

So the problem for Russia is the lack of domestic manufacturing demand for innovation and modernized production mechanisms. Owners of new technology products feel they can’t make large enough profits through the domestic market so they immediately seek export markets. But the domestic economy of scale is not large enough. Therefore it is very hard for them to enter into markets such as America; they don’t have a large enough production base for their products within the Russian Federation.

The only way out here is if Russian managers and specifically the owners of Russian large-scale companies begin to buy Russian domestic technologies to use in their own companies. Once in some number of years the domestic market is substantial enough, this will form an outstanding foundation for Russia to begin exporting new ideas because they will already have been tested within the Russian market with quality control improved.

Domestic innovations ignored

Some fault Russian science for being in crisis and unable to supply new ideas. In my opinion, it is not the problem; and our readers responding to our recent poll obviously agree with me. Russian science has the greatest capabilities in the world. The problem is in the lack of commercialization opportunities; Russian science can’t identify local markets.

The real root of the problem lies in owners of this country’s large companies not buying domestic innovations to upgrade their assets. If they begin to do so, this will stimulate the entire development of this sector of the economy and will eventually create a terrific platform, from which Russia can not only export commodities but also high technology products—and not only in the defense sector but in regular consumer electronics, pharma or IT markets. These are significantly broader in scope across the entire planet compared to simply defense products, which are typically government-to-government purchases.

As soon as Russian industry begins to tap into global consumer markets, the scale for expansion is astronomical and can represent huge profits for Russian companies.

R&D neglected

There’s another serious snag that holds back Russia’s innovation drive.

If you look at the American market, for example, on average 3.5% of corporate turnover is returned in R&D investments. If you look specifically at the pharmaceutical or telecom sectors, 20-to-30% of turnover is plowed back into research and development. This allows companies to continuously improve efficiency and their competitiveness on a global scale.

As far as the stats I’ve seen, Russian companies, unfortunately, spend on average less than 0.5% of turnover on R&D across the entire economy. For large government-owned industries in the oil and gas sector, if I’m not mistaken, this is like 0.17%.

There’s no comparison with the amount of money that global majors like Exxon, Shell or BP reinvest in research and development. There’s no path to an innovation economy unless corporate Russia takes the lead in trying to catch up.

Tuesday, November 16, 2010

Business owners as a remedy to heal Russian societal divisions

Following the most recent congressional election the American nation is appallingly polarized. The G.O.P. is goading President Obama to “change course” and desperately wants to make him a “one-term president.” In Russia, a socio-economic rift has been tearing the fabric of Russian society already for two decades, with the mainstream parties and the opposition lambasting one another as “thieves and traitors.” Our two countries seem to be both living now in a time of deep-rooted divisions. But are these divisions of the same nature and equally insurmountable?

Looking at the election results in the U.S. I’m shocked at what a division in society exists. There are two sides of the American culture at the moment. One supports the Obama administration that wants to make a more integrated and inclusive society; those people are very much interested in work with the rest of the world, they are open-minded and very often quite liberal in their view of life. I would call them a progressive side of the American culture.

Opposing this is what I would call a conservative side. And, in my opinion, the division between these two has never been greater in the history of the United States. This is neither a North/South division nor ‘red’ states vs. ‘blue’ ones; this is about progressing into the 21st century or retrenching in order to hold onto past gains from the 20th century. It’s about the attitude of US citizens to our role in the world.

The two sides do not understand one another and can hardly collaborate politically or civilly to get things done any more. So I anticipate a very difficult two years for the American president to get new legislation passed.

When I think about this division in American society it troubles me greatly, and I also think about the division in Russian society and culture. But here the division is of a very different nature. This is more of a generational issue.

Russia, a commodity economy for a thousand years, has developed a certain socio-economic, demographic and geopolitical structure. That’s all very understandable, but I think equally understandable are the systemic barriers that this structure has erected, making it difficult to now create a modern, 21st century innovation economy. Historically, there has been a focus on short-term profit-taking, trading, high concentration of wealth in select hands and monopolization of industries.

The historical part of society that has underpinned this structure now lives side by side with another, very different side of Russian society, which are young progressive entrepreneurial innovators desperately trying to develop Russia into a modern-day global mover and shaker, using the power of brains and the power of intelligence in creating new solutions to global problems through technology.

I’m not saying these two groups in Russian society are necessarily fighting and creating a paralysis as in the United States, but they are very different. There’s nothing wrong with this cultural division; this is a difficult but normal transition Russia is going through on its way from a commodity economy to a modern innovation economy. The key challenge, however, is to ultimately find a middle ground.

In Marchmont we see our audience as business leaders, serial entrepreneurs and innovators. Why business leaders? Because it’s critical that this segment of society, the owners of industry, really have an ability to work between both sides of Russia’s culture. It’s the people who privatized and built industrial companies that now play the critical role in Russia’s development over the next 20 years; these are today’s Russian industrial drivers.

These individuals, now in their 40’s and 50’s, face a crossroads. In order to really make the final transition for Russia into a modern innovation economy the owners of industrial entities across the country, from the top oligarchs whose names you all know down to individual proprietary family-owned industrial businesses in each of Russia’s provinces, need to invest in modernization. Where do they stand?

If Russia’s industrial and manufacturing owners want to be competitive in a global economy and want Russia to be prepared for the WTO entry, they need to invest in themselves. If they do so, that will create a fantastic domestic market for new innovations. This in itself would give hope to young innovators and students and scientists that not only can their ideas be applied into a global market but they can and must be firstly applied within the Russian market and then exported—as is done in all other innovation economies. This will also make it more profitable for business angels to support innovation products.

The situation is a clear choice for me to see. If business owners decide not to invest in themselves, it will continue to restrict this innovation market in Russia. If they do decide to invest in themselves, it will rapidly accelerate Russia’s drive to being a real innovation economy.

The owners of industrial companies manufacturing and selling their products domestically and globally now have the future of this country in their hands; they have the power to support this innovation drive, thus bridging the generational societal gap that still exists. The older generation, people who have made their lives in the commodity economy, cannot change their mentality overnight.

I believe that the majority of our audience in Marchmont would agree with me, and I think that many of today’s business owners simply need to be encouraged and properly motivated with rational tax policies to initiate this process. Hopefully, the Skolkovo innovation city will start to create a new generation of laws and resulting success stories to show the way.

I’m optimistic about Russia

Returning to my own home country, the United States… Unfortunately, I’m not very optimistic. I think we’re in for a very difficult period and we’ll have to wait and see what happens in two year’s time with the next presidential election.

The divisions in American society tend to become greater every day, and I don’t think they will be resolved until we have leadership in the United States which fully understands the root-cause of the divisions and begins an effort to forge a new vision for the U.S. in the 21st century.

As far as Russia, I’m much more optimistic. I see signs every day that owners of companies are investing in themselves and supporting the development of innovation clusters through the creation of business angel clubs, new infrastructure, programs supported by the federal government including the Russian Venture Company, Rusnano and Skolkovo.

I think all these programs are now creating a critical mass of support moving Russia forward towards real long-term modernization. Unlike America I think the different sides in Russia will eventually converge creating a strong momentum pushing Russia forward.

Tuesday, November 2, 2010

Russia’s modernization from a bird’s eye view

I’ve been between places lately, doing business in Moscow one day and in Perm on another. Travel is always a good opportunity to give thought to things that matter…

Even with its own vast new gas reserves the U.S. is gearing up for an ambitious $5bn phase 1 of its Atlantic Seaboard offshore wind farms. I was wondering if Russia was ever seeing its place in this changing global energy paradigm.

In the current patterns of the global economic development I think it’s critical to work and find as many lower-cost alternative sources of energy as we can. If the U.S. government and private investors are going to develop these types of programs using advanced technology it will clearly help diversify their economy’s energy base.

As global economic developments transpire, certain costs will go up for certain technologies and commodities and other costs will go down for others. As there becomes a critical mass for solar technology, for example, with the Chinese producing a lot of solar panels, the costs to consumers will go down overtime. So to the degree that there are more countries getting involved in promoting alternative energy sources, the costs of those sources will go down and any given country will be able to have a portfolio of different sources.

If Iran, awash in oil, is extremely interested in developing nuclear energy, one has to ask the question: “Why is it so important for Iran to develop nuclear energy?” While there are clearly many alternative views to consider in answering this, it’s also clear that they, too, want to diversify energy usage inside their own country, being free, of course, to export their huge oil reserves around the world at the same time and generate as much profit as possible.

So, what’s good for one country is good for another country as well.

I think it’s absolutely not acceptable for Russia to ignore this global trend; and I’m glad that more than 60% of Marchmont website visitors answering the related poll questions share my view. It’s extremely important to also develop alternative sources of energy based on wind, solar, alternative battery and other ‘clean’ technologies. Looking at everything that Russia does to help support and promote its broad-based domestic energy industry I find it useful for this country; diversification will make it much stronger in the long run.

I reviewed Russian press last week and the following was a real eye-catcher—if not an eye-opener. Sberbank launched a year ago its Ideas Exchange project to encourage and pay for its own employees’ innovation ideas aimed at the bank’s operation optimization, and has now economized about $30m in cost-saving stemming from this program.

It is a very interesting initiative, I believe, and the fact that Sberbank launched it is an excellent example of how all companies in Russia should really view themselves and how they analyze their operating costs, their marginal profitability and the overall effectiveness of their business process.

If the owners of Russia’s industrial base really begin to look at their companies as an asset to be improved in its value rather than a source of free cash flows to milk, and begin to invest in the improvement of their companies’ performance and ultimate value, this will inevitably create, in fact, a very strong market for innovation projects in this country. This is an essential factor in building Russia as an innovation economy in the 21st century.

If Russian shareholders fail to understand this simple fact, the markets for innovation in Russia will continue to be sparse, with most innovators left to feel that the only markets that exist for their products are the EU, Asia or the U.S., and the results will show few projects will be commercialized locally.

To the degree other Russian companies follow Sberbank’s example and begin to invest in themselves and try to reward creative ideas, this will all certainly lead to an improvement in Russia’s development of an innovation economy.

Monday, October 25, 2010

Striving for excellence

Mikhail Treyvish, president of monitoring agency OmniGrade and a member of Marchmont’s Advisory Board. The blogger can be reached at:

I just returned from Madrid; I hadn’t been there for three years. Arresting my attention were more paupers on the streets than before; the streets themselves were sort of unclean. I saw all the signs of problems Spain has been facing in its effort to combat the most recent financial crisis—the crisis that has brought that country 17% unemployment and the status of one of Europe’s ailing economies, discouragingly abbreviated as PIIGS.

But there is a lucky exception in Spain, an eye-catching stroke on a crisis-painted picture of financial doom and gloom. It is Santander, now the Euro zone’s largest bank by capitalization—the level it has reached without any government bailout so widespread among its more prominent European colleagues (and who knows – maybe thanks to that). Now Santander is not only the Spaniards’ pride; it’s their hope too.

The Santander example is evidence that all people are equal—in the sense that each of us has a chance to become an entrepreneur and build the world’s best business irrespective of whether one enjoys any recognition in his country, region or village, or not.

Micro-financing came as a business from Bangladesh; Nokia from Finland—once barely known in the hi-tech world—grew to become one of the largest international telecoms; one of the global majors (and the leader in Germany, for instance) in antivirus software is now Kaspersky Lab from commodity-dominated Russia.

It is not so complex to be number one in the world—striving for excellence is what it takes. To be the best you must be daring and prudent. Daring—in generating new ideas and new products; prudent—in choosing partners and spending resources. And if your company has become number one globally, it will undoubtedly be number one, say, in Nizhny Tagil. It’s not so guaranteed the other way round.

I, for one, am also an entrepreneur running a small rating agency. I’m working to make it the world’s best by simply striving for excellence—trying to outstrip in quality such majors as, for example, Standard & Poor’s or Moody’s.

I met with the director of a Russian company that makes ice-cream some time ago. His company is working towards leadership in the European market—because relevant EU regulators have officially recognized their ice-cream one of Europe’s best. I could set further examples that I know of, but I’m sure there are more examples still unknown to me.

During his most recent visit to Russia Jack Welch said that what Russian entrepreneurs lacked most was courage. We need the above examples to get more daring, while prudence is what life itself teaches us.

Monday, October 18, 2010

Well done, Mr. Schwarzenegger!

Just a week ago I was lucky enough to meet in Moscow at the U.S. Ambassador’s personal residence, Spaso-House, many venture capitalists, industrialists and business people from tech sectors, which came to Russia from Silicon Valley together with Gov. Arnold Schwarzenegger.

It was a very impressive event, and I was excited to be part of that. To be honest, I had been wondering why Gov. Schwarzenegger came to Russia and how he was able to bring all those people. He answered my question with his speech.

He said that when he was with President Medvedev in Silicon Valley in summer, the latter was very impressed and the Californian governor really understood that was a visionary president; he was proud to present the state and Silicon Valley to the Russian president and his entourage. So, Mr. Medvedev simply extended his hand and invited the governor to come visit Russia.

There’s a ‘Reset’ going on between the two countries and President Medvedev is raising the profile of this relationship with a focus on innovation sectors. There are many areas, in which our countries may have conflicting interests or opinions, but this is an area where we have an opportunity to jointly and collaboratively solve global problems. And this can help boost both Russian and American economies.

Gov. Schwarzenegger basically indicated that he was there to promote Californian business in Russia. Nothing wrong in this, especially as there are so many Russian programmers and entrepreneurs living there and establishing new links between his state and Russia.

As many recent examples show, Indian software programmers have played a significant role in the development of Silicon Valley; and so have Chinese businesses. It’s clear that Silicon Valley has achieved its success because it has been very open to immigrants from many emerging markets around the world for the last 50 years.

But the trend is such that many of those entrepreneurs who once came to Silicon Valley are now going back to their home, either temporarily or even permanently.
The Indians are doing this, and so are the Chinese. The Chinese even have their own government-funded Sea Turtle and Sea Gull programs in place to encourage this with generous financial incentives! It’s clear that the Russians will be part of that trend too. So, President Medvedev is also trying to encourage this.

Gov. Schwarzenegger understands that it’s in the interests of his state to encourage the development of interaction between the original Silicon Valley and the new ‘Silicon Valley’, which will be a guiding example in Russia for technology and innovation development across the RF.

Of course, there was a PR aspect in the event. It’s one thing to have a low-profile group of venture capitalists visiting Russia. To have a major Hollywood figure, a globally recognized brand name like Arnold Schwarzenegger is another thing; it adds prestige and profile to the trade delegation. And both leaders perfectly understood that.

But the main message was that the risk level should be lowered on both sides of the relationship to encourage real partnership in science and technology sectors. By leading the U.S. trade delegation Gov. Schwarzenegger may have wanted to show other Americans that this is an interesting thing for Californians to be doing. It’s also a signal to Russians that California is taking the Skolkovo process very seriously since the governor came here himself. So, all parties are interested in mutually beneficial business that can generate profits.

I expect that as a result of the meetings in Moscow there will be a lot of media coverage in the U.S.; these prominent venture capitalists will be asked, “what do you think of Russia?”, “is Skolkovo just an image or is it something real?” In fact, I spoke with many of those venture capitalists myself; they are in fact looking for real opportunities. They were wondering what Russia was doing to create an innovation economy and what U.S. companies could do to participate in that; they are looking to set up Russo-American VC, PE and strategic partnerships to expand Russian innovation projects into U.S. markets.

So, was this all just some Hollywood hype to promote a new ‘Potemkin village’? No, I don’t believe so. Time is money, and the top VC leaders in the U.S. would not be the type of people to waste either their time or money. This was a serious milestone on the U.S.-Russia ‘Reset’, and I was impressed that the Californian governor chose to put his reputation on the line to lead such a delegation! Well done!

Thursday, August 26, 2010

If you want to survive a next crisis…

Mikhail Treivish, president of monitoring agency OmniGrade and a member of Marchmont’s Advisory Board, ponders on short-term mentality and what pitfalls it may bring. The author can be reached at::

President Medvedev is a vocal supporter of an idea to reduce government bureaucracy by 20%. “It is a tough measure, no doubt, but it would help address a whole array of pressing issues,” he said.

It is clear that slashing government officials is a counter-crisis move. What is less clear is whether it is aimed at tackling the aftermath of the past crisis (to which some experts still refer as “ongoing”) or it is laying the groundwork for Russia to deftly handle a crisis to come. The answer is crucial for the future of this country.

A new crash will happen—in two, five or ten years. It is now so obvious that Russia can’t be immune to the cyclic nature of the global economy.

The president’s determination has prompted me to draw parallels between officialdom and business. What does Russian business have to focus on to “address a whole array of pressing issues” of its own?

When the global recession crippled this country in the fall of 2008 most business leaders were preoccupied with the shortest-term task of “fending off the crisis.” Refocusing long-term strategies to adjust to changing economics across the globe was a province of the few. But it’s those few that will survive a next crisis.

As president of a strategic monitoring agency I can’t but think of how fair complaints were about international rating agencies’ distorted handling of corporate ratings prior to the crisis. To me the reason for their behavior was exactly what differentiates long-term thinking from ‘fleeting’ mentality. Those were ratings solicited and granted to pursue short-lived objectives of issuing cheaper bonds, cutting costs of borrowing, doing IPOs, etc. Ratings that show painstakingness and assist in strategic, slower and longer-term activity aimed at enhancing companies’ true creditworthiness were of little interest.

James Clarke, an American preacher and author, once described the difference between a politician and a statesman: “A politician thinks of the next election; a statesman of the next generation.” I think corporate leaders could be distinguished along the similar lines. Some think of quarterly reports; others of their companies’ stable operations in ten, twenty, thirty years’ time.

Coming back to bureaucracy to (hopefully) be reduced… I want to believe that at least part of the funds saved (if saving it is going to be) will help address Russia’s long-term strategic development issues. Unless this is done, we will hardly have hopes for Russia to face a next global debacle as a true “island of stability.’

Friday, August 20, 2010

Regional innovation clusters and a role universities can play (part 2)

Prof. Fyaxel goes on describing what he believes an innovation economy is like and what National Research Universities can do to promote it.

Universities went to a Factory

When I was in Helsinki, a simple thing astonished me. To create an efficient innovation cluster they combined into one three universities, apparently very different from each other. These were the Helsinki School of Economics, Helsinki University of Technology and University of Art and Design Helsinki with as many as an amassed 30,000 students. Why? They did that to establish a Design Factory.

The new factory is a small, 3,000 sq. m building where a kind of ‘broth’ we talked about earlier has been ‘cooked.’ There are machining and woodworking shops there; design studios; economists and market specialists work there too. A product evolves alongside market studies, with a prototype and promotion strategies to complete the picture.

Large companies pay exorbitant rent for office space in the facility, funding the needs of the Design Factory. What are they after? Staff they select right there, and products made by students. The factory is a habitat; students have all they need to stay there overnight.

Merging three universities is a pretty complex endeavor, but the Finns didn’t hesitate in order to set up an innovation cluster. This is an example of what our close neighbors do for their future.

Fourteen + Fifteen

Now it’s time to talk about the concept of National Research Universities (NRU). Those are higher educational establishments equally good at teaching and doing scientific research. An NRU is a form of a cluster based on integration of science and education. There’s a plenty of examples, of which Stanford University and Massachusetts Institute of Technology are probably the most well-known.

The RF selected in 2009 its first twelve NRUs on a tender basis and two more based on some unknown criteria. Another fifteen have joined this year, all lining up for government funds. But in my opinion, before the line grows the RF needs to grow the original fourteen to a level of true NRUs.

Education and science are inseparable—this is what differentiates them from any other university. The two sides are interwoven and support each other. In the USSR, Moscow Institute of Physics and Technology (MPhTI) was a classical example. A powerful school of physics was created, which is still employed in many foreign countries.

What are the goals and objectives of an NRU? The main one is the creation of a viable innovation environment and a technology transfer vehicle around the university. I talk about innovative SMEs, spin-off companies, techno-parks, technological entrepreneurship support funds for students, etc.

An HSE model: an NRU as a cluster nucleus

The Higher School of Economics is the only humanitarian NRU of the original fourteen. Its campuses are located in Moscow, Nizhny Novgorod, St. Petersburg and Perm.

Historically, each campus has developed its own ‘driver’, a focal point of research. In Nizhny Novgorod it is entrepreneurship and business computing. And it is Nizhny that has been developing and putting into use the idea of an innovation cluster with a local NRU as its nucleus.

The model calls for the spawning around the NRU of a whole system of components that complement and support one another. Those include support infrastructure, which is a techno-park, a business incubator, a technology transfer center, a business angel association and a mechanism of innovation project promotion. They also include a personnel training system provided by a university and a coaching center. We further talk about a financial system with sources of seed and venture capital as well as investment funds and consultancies. We talk about markets, both remote and local, and suppliers of equipment, materials and tools. And finally, we can’t leave out a supporting social climate and a quality of life system that include a broad variety of notions from norms, values, families and competitors to access to culture, entertainment and housing.

Nizhny pushes the HSE model

What is available at the Nizhny Novgorod HSE campus today, and what is being created?

Support infrastructure is being put together, which is a business incubator. The Venture Management Department here already has a mini-incubator of its own; up to 20 projects are resident there. We now want to expand it to be able to work with both HSE students and talented youth from outside.

We go further: an information component. We’re launching a Web-based journal, Innovation System Management. I hope the journal will be a venue for the readership to come in contact with something really new and commercially viable rather than a place for scientists to do self-promotion.

A research component. We have a research and training lab; in future we would like to set up an entrepreneurship center or a think-tank doing research in innovation systems.

Training of personnel. We are now working to create a faculty that will be completely different from what the HSE or any other university has ever had. It will foster master’s programs exclusively; and all those syllabi will focus on innovation. We have already developed the Innovation Management and Marketing & Innovation Promotion programs, with the Entrepreneurship in Technology curriculum coming soon. The faculty will train a cadre of entrepreneurs specifically for Russia’s emerging innovation economy.

On top of that it’s our student’s club, The Entrepreneur. It currently brings together 100 in-house members and about 700 online participants who want to become entrepreneurs. We build teams, share experiences, assist them in promoting their projects and provide overall guidance.
In a similar club in Finland there are 5,000 members. So we have a long way to go but the vista is promising, and we know that increasing numbers will cause qualitative change.

We preach and employ project-focused training techniques. Students form interdisciplinary teams to develop and realize innovation projects. The key principle behind the techniques is a Living Case approach to coaching managers; students have to develop solutions to actual problems that real companies face. What adds value to the approach is that team members, acting as consultants, present their solutions before the top managers of those companies.

An entrepreneurial component includes spin-off companies. There is one already; students are setting it up and we help them achieve a certain level. We’re eyeing many companies like that and have begun approaching other NRUs in the hope of establishing joint spin-offs. We are not a technological university, but we are ready to collaborate in commercializing technological projects.

And finally, a financial component, which is the establishment of a seed fund and a grant financing system.

In focus: Centers for Entrepreneurship and grant funds

I have talked about what we have created; now it’s about what needs to be created. To make sure NRU-based research turns into an innovation product a Center for Entrepreneurship must be set up within an NRU. It is crucial, and the HSE NN has come up with the concept which Moscow has approved.

What should be the focus for such a Center? First and foremost, it is seed investing and pairing up business trainers, or mentors, and innovators. The Center should also supervise IP issues and encourage staff to continue research by assisting them in project commercialization as a consultancy. The student body of innovators will clearly see a path to commercialization—this is the overall objective.

What else needs to be set up? Funds. Those aren’t venture funds; they provide grant financing. What I envision differs profoundly from the Bortnik Fund or any other fund existing today. The funds I believe Russia needs must not only give money but also give a hand in project commercialization.

Three keys to innovation

Making a long story short… What are the key elements of a doable innovation commercialization model? There are three of them.

An entrepreneurial team must be formed, and a mentor must be given to the team to ensure project monetization. In Nizhny Novgorod this works already. Our students are aided by experts; there is a regional business angel association, Start Invest. We believe that reinforcing a student’s team with a business angel or a mentor will properly channel the development of an idea and momentum won’t be lost.

Element 2 is the establishment of seed grant funds that make money available to university staff on a tender basis.

Element 3 is training of students and postgraduate students in entrepreneurship. These should be the audiences. Not those notorious coaching programs that move from city to city and ‘teach’ entrepreneurial skills to scientists—they sometimes just make no sense. A scientist must do science, and he wants to do that. But if you want to have effective innovation managers for the future, you need to train young people.

These are the three elements that I believe create in a National Research University a culture of innovation and entrepreneurship.

Thursday, August 12, 2010

Regional innovation clusters and a role universities can play

An innovation economy has been a buzz phrase lately in all sorts of context. But the words oftentimes fail to convey what it’s all about and what needs to be done. Let me have a try and verbalize my own vision of what it is.

First and foremost, it’s the creation of an innovation ecosystem. It is a pretty capacious concept that also incorporates the notion of innovation culture. It is an environment. And for as long as we carry on attempts to create an innovation ecosystem in the environment tailored to the old commodity economy, this environment will be vomiting it out as ‘foreign substance.’ You can’t create an innovation economy without generating an innovation environment.

The latter encompasses many things. The first brick in the wall is teaching and training of young people. In my system of beliefs, youth should be taught from an early age; they need to know what to expect in their future.

The wind has changed lately; polls show schoolchildren would much rather become government officials than entrepreneurs. Universities that train officials are showered with applications—unlike entrepreneurial chairs. Other polls reveal that for many, entrepreneurship is a sort of hobby but not their life. Entrepreneurship can’t be optional; one can’t play soccer without a ball. You’re either inside, dedicating your whole life to it, or you’re completely outside and have nothing to do with it.

To create a system funding is crucial. I’ve seen statistics saying in the U.S., venture investments account for about 2% of overall investments. But I also know a fact: companies that have spun off from venture businesses currently employ more than 20% of Americans. To me this indicator is much more important than investments; it shows that venture business’ contribution to the American GDP is way over 2%.

This brings us to a plain and logical conclusion: venture investments yield much more than any others. The focus is to create a system of VENTURE investing.

You won’t reap an innovation crop unless you lay the groundwork for sowing innovative ideas. There’s conventional wisdom among officials that Russia’s flush with innovative ideas. It is not true, unfortunately. Russia may be flush with raw concepts but ideas with potential for commercialization are few. An environment, a sort of ‘broth’ is required where entrepreneurs with commercially viable ideas will ‘boil’ alongside investors and consultants.

Historically, this country stashed R&D funding aside for fundamental research; that’s why Russia’s still home to first-rate mathematicians and physicists. But those generating ideas for monetization are scarce.

When we talk about support infrastructure, we use words that all know, such as ‘business incubators,’ ‘techno-parks,’ ‘technology transfer centers,’ etc. A lot has been done to discern what they imply; lots of funds have been spent; but results are still barely visible and efficiency of what’s available is low.

There are four levels of techno-parks. Russia is coyly transitioning itself from level 1 to level 2. What does that mean? It means that what is called a techno-park leases out space to outsiders. Most widely touted techno-parks, now referred to as Russia’s exemplary in innovation, do just that. Courting large companies for tenancy doesn’t make one an innovation techno-park.

And finally, a cluster approach. To my mind, there’s currently no better response to innovation challenges. The approach enables an innovation system; it helps spawn technological and business innovations, no matter what its name—a ‘science city,’ a ‘zone’ or a ‘valley’. Wherever the cluster approach takes root, activities are jump-started.

’A promised land’

There are different models for innovation economy that different countries and cities employ. What suits Russia most seems to be one referred to as a ‘promised land.’ It is nurtured through contribution by intellectual communities. All Russian ‘science cities’, such as Novosibirsk’s Akademgorodok or Dubna outside Moscow or Sarov in the Nizhny Novgorod region, are established as nuclei of Russia’s ‘promised land.’

There are a few clusters worldwide that are most vivid examples of a ‘promised land’ approach. These are the U.S.’ Silicon Valley, India’s Bangalore, Canada’s Toronto, and Finland’s Helsinki.

Russia’s ‘Silicon Valley’

Russia is setting up a sort of ‘Silicon Valley’ of its own. Unfortunately, the essence of what was established in America is being poorly translated to the Russian turf. I’m talking about the Skolkovo ‘science city’ outside Moscow.

I’m ready to make a wager with whomever and win in five years. The construct will lack the kind of spirit the original Valley has had.

In the U.S., the Valley was built out around the Stanford research and industrial nucleus that consisted of three powerful educational hubs: Stanford University, University of California Berkeley, and University of San Francisco. The park also incorporated large labs and companies that formed the system. In addition to technology companies (52% of a total) and Internet companies (2%), there were 46% of firms that provide services, including financial companies, law firms and consultancies. On top of those, there are restaurants, movie-theaters, etc.

This is food for thought for those who might think that bringing many scientists and ideas into Skolkovo will make it another Silicon Valley. No; a ‘Silicon Valley’ is a combination of technology and support companies. Those are venture establishments, lawyers, advisors, etc. Had the U.S. lacked all this, it wouldn’t have ensured the result we all know of.

Many believe an idea is a product. It’s a delusion. An idea is but only a raw material, from which one can make a ‘sweet’ while another a piece of sh…

Friday, August 6, 2010

Business angel club development in Russia: practical experience (part 3)

Dr. Eduard Fyaxel, professor and a business angel, on intellectual property and commercialization perplexities

Envy puts the brakes on progress

A huge stumbling block is academic bosses’ reluctance to see projects commercialized. Why? There are reasons. 

To them, their scientific legacy is an object of pride, not a vendible. 

They are too much used to living off government and grant moneys to welcome ‘dubious’ investment from ‘outsiders’. 

In fact, there’s little to market; few research results have commercial potential. 

Administrators dread collaboration with private investors; their worst nightmare is the fear of losing all their staff to employment in commercial companies. This is nothing short of sabotage, they think. 

In a nutshell, all those reasons may be easily distilled to one everyone knows of. It is envy. If a department chief at an academic institution gets word of his former junior researcher who became an entrepreneur and has made more money on some ‘outlandish’ project than his former boss in his old chair—it’s too much of insolence. Away with those innovators, we don’t need them!

This may look like an exaggeration, but it is a problem too serious to ignore. 

What project developers still don’t have…

There’s a long list of things that project developers still don’t have. Resources to commercialize projects are meager; conditions are inadequate. Few are really keen to market their projects—simply because it takes entrepreneurial experience that those people lack. There’s still much uncertainty regarding intellectual property rights, too.

It requires a team to further a project. Few understand that, though. Teams do get built sometimes, but members are typically scientists. A team of scientists can produce a scientific report or discover something but it cannot monetize a project. Their attempts to talk to an investor will take them nowhere. 

Why? Because their project is like a baby for them. Is it thinkable to sell a child? Never! “Scram with your money! We’ll do fine without it!” 

…and what they could have but…

Federal law 217 was passed last year on the setting-up of small innovation companies on university premises and IP rights. I’m an optimist and believe that our legislators will be smart enough to polish and refine it to a degree where the law can really work. Until then it will keep a ‘dusty shelve’ of hopeless projects intact.

“The project developer has the opportunity to receive a bonus, provided that the university administration finds it suitable. It is his right, not an obligation.” This is nonsense number one.

In one company I once talked to they do give bonuses for an innovation adopted. The amount is ‘astronomical’: a thousand rubles ($33). 

With this being fact, not a joke, I find it bizarre to hear academic bosses wonder why university-based innovations have shrunk twenty times over the past five years. Innovations could have dropped to a virtual zero. 

Unless the developer gets interested, you won’t get anything from him. 

Here comes nonsense number two that just bewilders me. According to the law, the poor investor who was unlucky enough to put up his money for a project has no right to sell the project! Under such conditions, you will have to subject him to torture to make him invest in the first place. 

You can’t sell your Motherland and you can’t sell your project—this seems to be legislators’ rationale behind the idea. I agree on the former but I just can’t fathom the latter. The guy invested his own money—how is it possible to bar him from selling at least his personal share?! 

The law must unambiguously, and without fail, allow academic institutions to (i) transfer to authors the rights for specific intellectual property; (ii) create mechanisms for authors to buy out their rights for IP; (iii) create mechanisms for authors to formally legalize their IP rights, and (iv) sell IP rights to investors. 

The current law 217 is void of all this.

What a venture capitalist looks for is ownership, not the license for it.

Friday, July 30, 2010

Business angel club development in Russia: practical experience (Part 2)

Dr. Eduard Fyaxel, professor, head of the Marketing and Venture Management Chairs of the state Higher School of Economics in Nizhny Novgorod, president of the Start Invest business angel association continues sharing his ideas and worries regarding financial support of Russia’s innovation.

“Give him money, he’s a good guy!”

We’re not philanthropists, of course, and monetization is our number one priority. We realize, however, that we have to create and develop projects before we gain from them. It takes eight-to-ten years to accomplish, longer than the classical three or five, as a business angel nurses his project from the very beginning—typically from the pre-seed stage that normally requires other mechanisms (such as ‘three F’ or grant programs). 

I collaborate with the Bortnik Fund as a member of its panel of experts. Out of the nine-man panel, six are scientists and only three represent the world of business. And the following remarks can be heard, “To deny Mr. X financing? He’s such a prominent scientist—how can we?” Or, “You know what? It is very interesting from a scientific standpoint.” And those people discuss projects that need to be commercialized. 

Until the panel composition is reversed, or—even better—instead of scientists the panel invites three academic administrators, the Bortnik Fund will keep up its current ‘efficiency’, with just one successful project out of twenty approved. Improving it to one out of five could be quite possible.

Innovators vs. beekeepers
It’s a mistake to think we have lots of projects. Whoever says this speaks of fundamental research rather than projects. Marketable ideas are scarce; the quality of project applications is pitifully low.

Based on data from our four related government departments in this region and own survey we have found out that there are about 200 truly innovative SMEs in Nizhny Novgorod—a pathetic number for a city where there should be thousands of such small businesses. 

Unlike innovation companies, local authorities would find it much easier to tell you how many beekeepers or gardeners this region has.

It’s sad statistics. Companies tend to multiply but few survive beyond their third birthday because the ‘death valleys’ with their dearth of early stage financing usually take their heavy toll.

On an octopus and a ‘private matter’

Another problem is what I call a communication, or translational, barrier. It resembles an octopus whose tentacles move in different directions, thus tearing its body asunder. 

An investor has his view; an innovator has his. A project manager or businessman may or may not exist at all; even if he does, he acts more like a many-headed dragon peering into all the four corners of the earth at once.
They can’t understand one another; all they can think of is how to avoid being bamboozled. Being quick enough to dupe one of the other two in the process is regarded as a stroke of luck. 

A serious problem is deep-rooted mistrust that university and research institute administrators have for the very concept of commercialization. The RF Academy of Sciences commands them to do fundamental research, while whatever is accomplished outside that task is a private matter, not academia’s, and should not be part of academic activity.

In a big hi-tech cluster in the region’s south, in Sarov, we can see innovations flourish. Why? Because its base entity, the RF Nuclear Center, doesn’t prevent inventors who need funding for their ‘private matter’ from seeking capital from business angels. And it’s good those angels fly to help; otherwise the inventors would have nowhere to go.
When I was in Finland, I wanted to know who worked at a local business incubator as residents. I was sure those were young people, like here. I was mistaken; I saw some imposing forty-year-old men with years of experience at large firms. They had come up with project ideas but their employers rejected those ideas, forcing the innovators to quit their jobs and head for the business incubator. Such were more than 70% of all residents. 

So what happens in Sarov is normal.

Meanwhile, scientists in Nizhny Novgorod keep doing what their research chiefs tell them to.

‘Off the wall’ entrepreneurs as a species

There’s yet another problem: no professional environment, in which venture managers could be trained.
To my mind, there are three categories of managers. There are managers at big companies; they are useful but serve their specific purposes like bolts in a mechanism. 

There are owners of small businesses (other than innovation). Small companies in Germany are a classical example. A family has been running a barroom or a store for decades and generations; their kids will carry on. They make enough to pay bills and live comfortably and find it appealing. Their business doesn’t grow; it gets passed on from father to son ‘as is’. 

And finally, there’s a ‘nuts’ category, a kind of ‘off the wall’ entrepreneurs who can hardly tell you what drives them. Want to find out how much they earn? Ask one of those eccentric business angels, and that oddball (sometimes popularly resented as a ‘bloodsucker’) will go about telling you in detail how much… he has invested. He may really not know how much he has made, and this is of little concern for him! And why worry? He has something to eat and drink, and he can do what he likes and believes in.

The word ‘entrepreneur’ is almost obscene in this country. Elsewhere in the world it goes with an enterprising person whose goal in life is to create new things. His work is his life. Get him to retire—and he’ll wither away within months. 

This is a peculiar species. But they have to be trained. Some can stir up their abilities by themselves, while some others can’t. Venture managers must be coached professionally. Until there’s a proper training system in place, even best projects may fizzle out before they find a market. 

As an investor a business angel is team-oriented. He invests in people capable of shouldering a project. But to do that, he needs training as well.

Tuesday, July 20, 2010

Business angel club development in Russia: practical experience

Dr. Eduard Fyaxel, professor, head of the Marketing and Venture Management Chairs of the state Higher School of Economics in Nizhny Novgorod, president of the Start Invest business angel association

Before I talk about our Association’s experience, I believe it’s important to make it clear who venture investors are.

A lot of horns are locked over the issue. However, most controversialists agree that venture funds are venture investors. Business angels and private equity investors are also viewed by many as such; maybe less convincingly, though. (By the way, there’s a huge difference between these two species.) And finally, corporate VC investors; debaters aren’t unanimous here, either, but personally I tend to consider then venture investors.

Out of this understanding of who’s who (and where) in the VC world comes the concept of a ‘death valley’ for potential projects: advanced stages of project development receive the lion’s share of funding while the seed and start-up stages are financially famined. And for them business angels provide the much-needed lifeline.

Between alleged sectarianism and partnering with the Russian Venture Co.

Our not-for-profit partnership, the Start Invest business angel association, was set up in 2006. It took us time and tremendous efforts to register. Domestic registration agencies found the concept of business angel extremely suspicious; we had to get screened by a local theology expert panel for alleged sectarianism. Some officials simply called us cons plotting to dupe someone.

But we did it in the end. In the very first year of existence, we became a co-founder of the Russian Business Angel Network (RuBAN); in 2009, we helped set up the Russian National Business Angel Association (RNBAA). Earlier this year Start Invest was selected a Venture Partner for the Russian Venture Company’s Seed Fund.

We were not trail-blazers; business angels had tried to pool efforts before, too. In 2003, two such networks were established in Moscow. But they positioned themselves as national alliances. We in Nizhny chose a classical path by building a regional association of business angel investors. From the very beginning we would say that such organizations should be mushrooming across the country, to be later incorporated in a national one and further on into the European business angel community.

I travel from region to region very often; I have to explain and tout the concept, campaigning for the establishment of more alliances. As a result, several regional associations have sprung up.

“Business angels, alongside killers, are serial”

In this country, people have historically had a bias in favor of tapping high-priced oil or gas and ensuring 100% profitability. Hi-tech projects? Venture business? Bullshit! In earlier years any endeavor was venture business. And people enjoyed ‘sticking a cane’ in the ground and watching a ‘tree’ grow out of it right away.

But now, in the aftermath of the financial crisis, I think our time has come.

On the one hand, venture funds have seen their financing dried up, which is pretty bad. On the other hand, there emerge a lot of people who have cashed in their assets and today can’t invest in ‘traditional’ businesses as there are few niche markets to pay as handsomely as before.

And now, their money made wherever, those people are eyeing hi-tech segments, which is good. The business angel movement must be a mass one. In the U.S., between several hundred thousand and a million active business angel investors were reported in prior years with projects worth as much as $30-50bn, according to diverse sources. In Europe, about a hundred thousand business angels have been counted.

I’ve seen reports here in Russia that domestic business angels invest up to $250m a year. Idle talk; a maximum $5-10m! PRIVATE EQUITY investment could indeed hit $250m, but those are not angels’. This is about one buying a company and investing in it. A typical PE investor, like a beast, may grab a ‘morsel’, take it to his ‘hole’ and ‘chew’ it for a long time. Such an investor is not serial; whereas business angels—alongside innovators and killers—ARE serial.   

For a business angel, as well as a venture fund, to exit a project in the right time and finance many more is critical because statistically, only two out of ten investments are successful. Those trained and experienced in this normally have more than a dozen projects in their portfolios, which is very professional.

A club of the like-minded

Our Association now includes ten members, and they may be viewed as differing from ‘classical’ business angels. Each has behind him a team of dozens or hundreds of professional ‘innovation cultivators’.

The Association has been built as a club for the like-minded. Our mission is the pooling of resources; not only monetization but also mutual enrichment through sharing opinions and expertise. We coach innovative entrepreneurs free of charge; we help them prepare business plans, assist them in seeking investment from other sources; we also act as partners for other investors, including venture funds. The scope of our activity is pretty broad.

The efforts have been appreciated. Last year I was awarded as Russia’s Best Business Angel Group Leader and nominated for participation in the 2010 Istanbul competition held by the European Business Angel Network this past April.

A missing link required

We are open for collaboration with anyone willing and doing something to make Russia an innovation economy. The Russian Venture Investor Association operating since 1995, for one; or Quadriga Foundation set up in 1993; the Bortnik Fund is another example.

But things didn’t pan out well enough all the time. I would often argue we didn’t have real private investors and there was a missing link. They wouldn’t believe me. Now they have become believers; they understand that an innovation economy cannot be created without business angels.

Elsewhere in the world the state is a sizable helper for business angels; investors are aided in the setting-up of organizations, in taxation. In Russia, investing in a venture project entails ‘triple’ taxation.

Russian business angels are only making their first big move these days. There are no more than two hundred of those who realize who they are and what they want and need. Until they add up to tens of thousands, the current gap is impossible to bridge.