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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.

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