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Thursday, March 29, 2012

Siberia on its way to create its own analog of our Silicon Valley

One of Russia’s leading business monitors, RBC daily, pooled efforts earlier this month with the St. Petersburg Politics Foundation and the Russian Presidential Academy of National Economy in putting together a ranking of Russia’s regional innovation activity for the first two months of this year. The four leaders in this ranking are the Krasnoyarsk, Tomsk and Novosibirsk regions and the Republic of Tatarstan.

My first thought upon looking at RBC’s publication was, “Such an interesting ranking! The first three are all Siberian!”

I think it’s very difficult to determine which regions out of Russia’s 83 are the top ranked. In my opinion, any type of ranking certainly involves a lot of objective economic statistics and investment indicators and numbers that can be tracked, but there’s also a certain amount of subjective emotional assessments.

The most current ranking clearly shows the importance of Siberia as a leader in Russia’s development as an innovation economy. Placing the Krasnoyarsk region ahead of Tomsk, last year’s indisputable number one, might be questioned, though, but the overall trend is clear.

Perhaps, psychologically this is because of the independence of much of the people in Siberia. I recall several years back meeting an economist on a flight from Moscow to Novosibirsk, and the economist was a woman my age. She had studied economics in the former Soviet Union in Novosibirsk at the same time that I had studied economics in the United States. And we compared notes.

I was shocked to understand that they were teaching almost exactly the same things in Novosibirsk at that time about realities of market economics and failures of the Soviet Union as I was learning in my own studies at Stetson University in the mid-1980s.

From this example I understood that the people in Siberia were very far away—not only geographically but perhaps also culturally—from Moscow and from Gosplan and other structures of the Soviet Union. And this independence was perhaps relegated to the far-away regions of Siberia during the time of the Soviet Union. With the crash of the USSR and the country’s opening, as the economy has become globally integrated, new technologies have allowed this to only strengthen.

That woman explained to me that the books that they read in Siberia in the 80s were open although they were on black lists in Moscow. In Moscow, the knowledge that they were learning openly in Siberia was not allowed to be taught.

For me it was shocking to see that. Today it’s not shocking to see that Siberia is becoming one of the leaders in Russia because the true innovation economy is a bottom-up driven economy. The regions that have allowed their young innovative entrepreneurs to thrive and to grow, and to develop themselves, are naturally going to become the leaders in any emerging innovation economy in Russia.

Any global economist can demonstrate the importance of top-down macroeconomic strategies on the part of the government to develop very large-scale government priority projects. This is clear and historically obvious; you can see the results in the space race to put the first man in orbit and then on the Moon, for example. These top-down programs significantly accelerated human development. But taken alone top-down economic initiatives and macroeconomic programs are not enough to create an innovation economy. They must be met by bottom-up initiatives of individual people proposing their own ideas, which can solve specific market related problems.

Therefore it seems to me absolutely non-surprising that three top regions in Russia, Krasnoyarsk, Tomsk and Novosibirsk, are all based in Siberia. And I believe they are going to create their own analog of our Silicon Valley, a very strong innovation clusters system. And perhaps what will emerge is a network of open collaboration between these different cities as exists in different parts of the United States, for example. Silicon Valley is a very long geographically spread out place with different base structures, which are interconnected by human capital and infrastructure and government programs and private programs. So I expect that to develop also in Siberia.

The inclusion of Tatarstan in the list is very exciting to see because I think as a region it deserves this high ranking. I’ve seen for myself the efforts that the local government has put into such organizations as Techno-Park Idea, technopolis KhimGrad and IT Park. These macro top-down investments, including the development of the Alabuga SEZ, have been instrumental in attracting investors, and not only Western manufacturing investors but also financial investors. The emergence of Tatarstan’s Clean Tech Fund has been a very positive development showing Tatarstan as a region to be extremely proactive in attracting financial investments in clean tech and hi-tech industries.

This doesn’t mean that other potentially attractive innovation clusters in Russia, surrounding certain regions of Moscow and St. Petersburg and Nizhny Novgorod and Samara, aren’t also developing rapidly. I think they are, but they may be working ‘below the radar.’ I think what sets apart those regions in Siberia is firstly the very strong independent nature of the local people who are promoting themselves and their regions. I think the same can be said of Tatarstan; the region has been promoting itself throughout the world for five years through different chambers of commerce in the United States, the UK, in Moscow—all over the world Tatarstan representatives fly out to business associations around the world and present themselves. This has created a certain image of the region as very progressive, and it’s well deserved.

I think that in the next few years other regions will more and more begin to do exactly that, and they should do that.          

Friday, March 23, 2012

The Valley of Death. Market Failure? Or Rational Behavior of Investors to Risk?

More from Thomas Nastas, member of Marchmont's Advisory Board:

Governments, development banks and investors poured billions of dollars to finance entrepreneurs in the ‘Valley of Death.’ Add in the millions of hours of human energy and thought devoted to creating solutions too, and the investment is truly staggering. Yet the Valley of Death still exists.

Conventional thought defines the ‘Valley of Death’ as a market failure. But is it? Or is the Valley simply the rational behavior of investors to risk? If the Valley is a reaction to risk, not a market failure, then perhaps we need to reframe the discussion: what initiatives might influence investor behavior to close the gap that separates entrepreneurs and investment?

I delivered a program at the invitation of the World Bank and it’s investment arm, the International Finance Corporation, ‘Bridging the Valley of Death.’ In it I discuss solutions that match the behavior of investors to risk, to encourage investment to tech SMEs in the Valley of Death.

View the PPT by clicking on the below icon. After the icon is the description of the event and the invitation for World Bank and IFC staff to attend.

I added dozens of slides to make the Powerpoint understandable without my speaking (the audio), but more importantly, to make it a story of solutions and ideas worth spreading to influence the culture of risk and failure, and ways to impact investor behavior in emerging markets.

Description of the Event

“Innovation starts with an idea to do something different, to improve the lives of customers, to make work that matters. Each step of the innovation process requires different forms of funding and different institutions to drive ideas forward, from R&D (grants) to Series A (equity-VC). But if the challenge was just to make funds available, the solution would be relatively easy.

US entrepreneurs ‘sell opportunity’ to attract investors, raise funds. This works in the USA since investors are comfortable with risk, ambiguity and uncertainty, and willingly pay the costs of failure when business models don’t work, founders pivot & models evolve into something different from entrepreneurs’ initial intentions.

Except for the very few, most investors in developing countries approach risk differently. They invest in known and understandable risks, mainly the risks of execution. These are the uncertainties they have dealt with as businessmen and investors, and have the experience to help entrepreneurs solve– avoid. The risks of financing innovative firms, i.e., will customers buy, are profits possible, achieve promised performance from new ideas – often technology based– involves a different sort of risk assessment – one that investors in developing countries are not used to. The result is that domestic wealth is not as big a source of funds as predicted, resulting in tech start-ups going unfunded, entrepreneurs frustrated and Governments wondering what to do next.”

In this brown bag lunch, Tom Nastas will discuss how policy-makers have tried to bridge this “valley of death” with a focus on public policy solutions to influence investor behavior toward angel, seed and early stage venture capital drawing on lessons from the battlefield.

1. Successes and disappointments. The cases of Croatia, Russia and Kazakhstan. Encouraging deal flow where opportunity is assured, to circumvent the risks of opportunity and ‘jump-start’ more investing, entrepreneurship and set the conditions for local knowledge creation to begin. The case of Boulder, Colorado — a world class hub for entrepreneurship, technology start-ups and venture capital without world class research universities in the local community.

2. Financing structures, grant programs & funds to better match the (im)maturity of developing ecosystems, solutions to overcome market barriers and smooth the entry of investors to early stage tech.  Role of government, DFIs & PPPs to support & encourage; do more faster.

3. Proof-of-concept program and skill transfer: the Nastas project with Russian Corporation of Nanotechnology, Universities of Colorado, Michigan & Utah

4. Deal flow funds to catalyze more ideas, achieve tech performance

5. SBIC venture lending-type funds to engage local pension funds in early stage SMEs

6. Illusion of ‘fund of funds’ :  when execute, when not to, how channel capital.

For more information please visit Mr. Nastas' website

Tuesday, March 13, 2012

Michigan State Univ., Silicon Valley, Hungary & Emerging Markets

More from Thomas Nastas, member of Marchmont's Advisory Board:

On 2 February I spoke to graduate and undergraduate students of Dr. Zsuzsanna Fluck at Michigan State University (MSU).  Zsuzsanna teaches graduate and undergraduate courses in private equity and venture capital at the Eli Broad Graduate School of Business.  Zsuzsanna is also the director of MSU’s Center for Venture Capital, Private Equity & Entrepreneurial Finance.  A few weeks ago I delivered this same lecture to graduate students enrolled in the private equity class of Dr. David Brophy, Ross Graduate School of Business at the University of Michigan.

MSU is on an ambitious journey to build a more vibrant entrepreneurial community in mid-Michigan.  MSU has new programs and new money commitments to encourage start-ups from university technology, under the leadership of Charles Hasemann and Ian Gray, VP of Research.  All the best to them in this endeavor.

Zsuzsanna was born and raised in Hungary. As an economist she worked on international joint ventures and then moved to the US to pursue doctoral studies in economics and finance. She and I talked extensively about the parallels of entrepreneurship between Hungary and Michigan, the perils that entrepreneurs from both face in capitalizing their businesses, and lessons they can learn from one another to do more-faster.

Silicon Valley’s greatest strengths are its comfort with risk, ambiguity and uncertainty; Valley investors willingly pay the costs of failure when business models don’t work, founders pivot & models evolve into something different from entrepreneurs’ initial intentions. This willingness to finance the wild and crazy is what attracts entrepreneurs to the Valley with gamechanging ideas that develop into businesses that truly change the world. These successes draw more investors and their money to these entrepreneurs, and the cycle repeats. As this happens over and over, the ecosystem lives, breathes and renews itself from one economic cycle to another.

Michigan entrepreneurs and its venture investors are more conservative, due to the culture that developed around the auto industry and its supply chain.  Ways of doing business that flow from one industry that dominate a region or country’s economy often leads to an investment culture that rejects early stage innovation, the untested and undeveloped ideas of innovators and entrepreneurs that makes Silicon Valley, uhm, Silicon Valley.

Decades ago I worked in engineering at Ford Motor Company, and new innovation had to be well proven before it worked its way into cars and trucks. If technology failed on the road, people can get hurt or die, risk unacceptable to all; in such circumstances the risks of failure are logical and understandable.  While times are changing, such thinking created a culture and way of doing business and investing directly opposite to the risk appetite in Silicon Valley. Conservatism to risk does not make Michigan and like-minded Rust Belt states bad, just different.

Except for the very few, most investors in developing countries approach risk differently than Silicon Valley. They invest in known and understandable risks, mainly the risks of execution. These are the uncertainties they have dealt with as businessmen and investors, and have the experience to help entrepreneurs solve—avoid. The risks of financing innovative firms, i.e., will customers buy, are profits possible, achieve promised performance from new ideas – often technology based – is simply too much for them. While the risk appetite of Midwest investors is greater than their counterparts in emerging markets, they share more commonalities than differences due to shared values toward uncertainty, ambiguity and failure.

So specifically, what actions can entrepreneurs and participants in the local ecosystem execute to create a more risk friendly venture community?  Let me suggest two:

Mentor entrepreneurs to ‘Sell Risk, then Opportunity.’ The prelude to this is of course the building of business models that sell risk and opportunity by incorporating cultural attitudes to risk and failure since they drive investment decisions & the entrepreneurial process in the local community.

Entrepreneurial ventures need ‘spark points’ to capture the attention of the market, users, and investors.  While spark points are easy to see in hindsight vs. foresight, they frequently result when overcoming the friction that exists in commercialization, leading to minor revenue, but huge leaps in confidence.  Keep the eyes of your entrepreneurs open to these accomplishments and transform them into events that are publicized to the market.

I’ll be writing about these subjects in future posts so stay tuned for more.

Comments, opinions welcome here or send directly to me at

Be well and be lucky.

For more information please visit Mr. Nastas' website