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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.

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