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:: tre_mi@omnigrade.com

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.’

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.

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…

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.