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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.

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