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Friday, December 23, 2011

It’s no longer a question of what we do; it’s a question of how we do that

I sat down with my managing editor the other day for a quick roundup of developments that had shaped things here at Marchmont over the past 12 months; and as we went on, him asking questions and me answering, broader matters of Russia’s advance down its long and winding path to innovation were discussed. It has been a tough year, but not without headway...

Another year of tumultuous progression to an innovation economy is drawing to a close. What have you observed that might be considered a distinctive feature? Are there any new elements in Russia’s regional innovation infrastructure?

I’d say that the chief accomplishment of the outgoing year were some real results from Russian Venture Company, Rusnano, Skolkovo and other state-run initiatives that are ready to support this innovation economy.

For example: it was just some months ago that Skolkovo announced that “already one hundred companies were accepted for residency in the hub.” And if I’m not mistaken this number jumped recently to about 250. Just a year ago they had only a few top employees at Skolkovo, and today there’s a whole team in place. 
There are five cluster funds and agreements to establish the Skolkovo Institute of Science and Technology together with MIT; and there are people working on those.

At Rusnano, hundreds of millions of dollars of revenue are being generated from projects that the firm has invested into in the nanotechnology sphere to create advanced manufacturing facilities working on nanocoatings, nanocosmetics and other things.

A year ago it was decided that Russian Venture Company had to start its Seed and Infrastructure Funds. Today, these Funds are operational. There are already three investments approved by RVC’s InfraFund and more by the Seed Fund—whereas five years ago the concept of RVC investing in such early-stage projects was far from any reality. RVC’s Seed Fund is also looking into pre-seed projects, and we at Marchmont are extremely interested in that area as that’s our focus.   

Which regions are in front in the advancement and which are trailing?

Tomsk is surely one of the leaders in Russia; Novosibirsk’s Akademgorogok is just fabulous. I think Nizhny Novgorod also has a good chance to be a leader with support from the administration and the Sistema Sarov techno-park and the creation of a pre-seed support and packaging center here in Nizhny Novgorod. If this comes to fruition, this will be a fantastic push for the Nizhny region. Other regions that have made huge strides include Kazan and Obninsk; of course, Moscow and St. Petersburg are taking leading roles.

Areas where I think there has been less progress but there’s huge potential would be Chelyabinsk, Astrakhan, Yekaterinburg and Tyumen.

The most important thing that we can see from our dialog across Russia is that the focus of the dialog has changed. It’s no longer a question of “what do we do?”; it’s a question of how we implement these things, how we can develop more business angel clubs, how we can channel private sector money into the development of innovation and support the infrastructure needed for that. And I think Marchmont has played an important role in helping shape this new dialog. Not the idea of “let’s build an innovation economy,” but “let’s think about what real impediments to that innovation economy are and how we overcome them.”

Is the state still the main player in the market, or are businesses and/or universities taking over?

The state is still the main player. The role of the government in this country is fundamentally critical to laying the right foundation for private investors to invest in innovation.

Universities are beginning to understand how to utilize the new laws such as Law 217, and there’s a growing body of evidence and case studies of success stories (and failures) allowing the authorities in Moscow to begin to amend laws to improve their efficiency.

The most important thing is that the private sector and the government sector in Russia need to understand how to work together to achieve common goals. Maybe in the old commodity economy the role of the government sat in the position to lead all efforts. In a modernized innovation-driven economy the role of the government is simply to properly motivate business owners to invest in modernization by establishing the rules of the game.

Are there any legislative moves that in your opinion could better bridge the current gaps between the state, science and business?

Absolutely! Tax policies, currency control laws and Central Bank laws are critical to be adjusted for the 21st century, revolving around electronic contracts without stamps, for example.

Young innovators need currency accounts to deal with global licensing companies. There must be ways for those young innovators not to resort to illicit activities but rather be comfortable in their home provincial towns working with local banks to be able to sell products and IP to global social networks and markets. The laws in Russia need to be fundamentally altered to lower the risk levels for individual entrepreneurs to jump into the game of business inside Russia, not outside.

I believe top-level authorities in Moscow deeply understand these problems. Unless there’s a new business-friendly set of laws in place in Russia within the next two or three years, the entire generation of entrepreneurial start-uppers may be pushed to leave this country, which would be a catastrophe to Russia.

The RF seems to be pushing innovative SMEs to look for export markets rather than domestic applications. Is this the right way to stimulate growth in the hi-tech sector?

Absolutely not! Pushing young innovative companies to sell abroad means pushing them to leave this country. The most important thing to do is to stimulate domestic demand and legislatively lower the cost of investing in modernization for business owners.

There should be a substantial revision of anti-monopoly laws to encourage the creation of a competitive market economy, not the economy filled with individual monopolists surviving without any competition in their niche markets. This system has no future. Only a competitive system, both domestically and internationally, will push the owners of corporations to invest in the improvement of their own competitive advantages.

As Russia enters the WTO and becomes more and more integrated into the global economy, the pressure of competition will only increase.

If you look at any historical example of an innovation economy in the U.S., Israel or Singapore, any such economy first and foremost established its own domestic industrial bias, and only after a strong market was firmly in place within the home country did companies use the strengths and profits from this market to then begin to export.

Regrettably, most industry doesn’t buy Russian technology for modernization. How do Russian companies get their innovation sometimes? Western companies come to their boards and persuade them to buy some fabulous new technology to improve performance. The problem is that technology from Western Europe might have been originally developed in Russia, then packaged beautifully in Germany, and resold to a Russian corporation at ten times the price.

What the RF government could do to address the problem is to encourage the development of domestic packaging centers—pre-seed level funding and support structures that help innovators from the academic world to package their technologies to be custom-made for Russian industry.

A US company is commercializing in the States a cutting-edge nanostructured titanium technology once developed by Bashkortostan scientists but never supported or used by Russian innovation market players. A Japanese company is commercializing in Japan a revolutionary plasma-based technology to harden and sharpen razor blades developed by Tomsk researchers but finding no market domestically. There are other examples of this kind. What do you think this is: sabotage? lack of understanding of how to apply domestically? backhandedness of modernization rhetoric?

The immediate problem is the lack of successful commercialization strategies by innovators. But the root cause is not enough business angel investors which play a critical role in developing such strategies.
There’s major disconnect between academia and business in this country. Western companies want Russian technology—one of the best in the world—and there’s the lack of domestic investors that test the technology first in the Russian market.

What happens often is that a scientist trying to sell his products domestically can’t find buyers, and then a large global corporation offers him a highly paid job overseas. This is a very attractive option because thus scientists can turn their dreams into products.

This is not sabotage—this just indicates that Russia has not prepared itself yet for this global economy. The top owners of corporations here in Russia don’t seem to be fully aware of what their assets need to improve themselves and don’t have internal mechanisms to receive bottom-up signals that would make them aware. Mid-level people simply wait for top-down instructions. They do not have the mentality to kick some ideas up from the bottom.

This is perhaps a legacy of the old times when Gosplan (the USSR’s government economic planning behemoth) alone decided what was to be done to improve an industry and how academia could participate in that.

In the same manner, Russian universities do not study markets—unlike US universities where researchers always think how to make a product that would improve, say, General Electric or Ford. These ideas come out from the bottom of American universities and are delivered by business angels to the board levels of large corporations. And in the symbiosis effect, large companies place orders directly with universities. In Russia, such connections don’t exist.

‘Innovation specialties’ in the Russian regions. Does this innovation cluster talk resonate with you?

Sure! Russia has the tremendous potential to develop a pharmaceutical cluster in Obninsk, an IT cluster here in Nizhny Novgorod, a nuclear medicine cluster in Chelyabinsk; of course, Novosibirsk and Tomsk have huge potential in many areas.

I believe that over the next ten years there’ll be more and more connectivity between different clusters as key fundamental scientific disciplines require cross-fertilization in order to produce specific solutions to problems. 
So, the nanotech specialist in Yekaterinburg will need to hook up with the biomed expert in Obninsk to create a new medicine which works at a certain molecular level to affect brain diseases, for example.

I believe Russia will develop what I would call system integrators across the country that would analyze various fundamental scientific trends and then piece them together into products for Russian industry first and foremost. Once the products are proved to be extremely efficient for Russian industry, their makers will then be able to go international. This is how it should develop within the next 15-to-20 years.

Your outlook for the 2012 innovation market in Russia?

In my opinion, 2012 will mark a milestone in the acceleration of Russia’s advancement to a diversified innovation-driven economy. There’s going to be more progress, I’m sure, and Russian Venture Company, Skolkovo and Rusnano will gather steam building the correct foundations.

I think the modernization drive will continue in Russia, and the recent political commotion will speed it up because young people who are actively interested in Russia’s development are making their feelings known—not in the aggressive way but simply showing that they want to participate in overall social life in Russia.

Please also take a look at my most recent interview on these and other issues with VentureVolga.com. Would love to have your comments.

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