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.

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.

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" (http://ideas.economist.com/blog/cluster-bluster). 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.