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Friday, June 22, 2012

Thinking of rankings, Moscow factories and “Russia’s bane”

Russian business monitor RBC daily, the Petersburgskaya Politika Foundation and the Russian Academy of National Economy have prepared a new ranking of innovation activity in Russia’s regions.

It covers the months of spring and shows the Novosibirsk region as ranked number one. The region was number three in the previous ranking in late winter. Experts consider its innovation activity “balanced” and pay special attention to the region’s plans to create a Siberian analog of Skolkovo. The runner-up is Moscow, a region never mentioned among the top regions over the past 18 months. The rankers attribute Moscow’s second place to the “vast reorganization of its industrial sector.” The Krasnoyarsk region is number three now (it led the winter ranking). The Tomsk region, number four, is now on a Top-25 list of international innovation centers. Number five is the Kaluga region with its growing pharma innovation cluster.

Overall, the experts feel there’s a certain slowdown in the regions that have always been considered Russia’s innovation drivers, attributing this to a reshuffle in leadership following the presidential election, and to somewhat unclear government policies as regards modernization.

(Based on media reports)

Personally I don’t believe that those rankings change significantly month to month or even quarter to quarter. There are independent long-term trends for different regions such as Siberia, Tatarstan, Nizhny Novgorod, Kaluga and others, developing their own strategies toward the type of innovation cluster that’s going to create the most value for itself. Month to month different regions will have different success stories to present to the media and the investment community.

I think it’s a useful process to rank the regions simply as an indicator of observing the success stories. And it’s no wonder we once again have three Siberian regions highlighted here. I feel there’s long-term, very strong development for Siberia as a regional innovation cluster—much as you might have along the entire coast of California going all the way from San Diego up to Seattle with their culture of innovation, entrepreneurship, openness, collaboration and so on between the different universities and different cities there.

I believe the culture in Siberia is different from the culture in St. Petersburg or Moscow, or the Urals. The Siberians are very independent-minded; their culture is very exploratory and creative. Different leaders in the region are coming to these conclusions that their population and their regional competitive advantages leave them to promote themselves as innovation clusters, and therefore the process will continue.

Has there been any type of stagnation over the previous six months? Absolutely! If government budgets are put on hold because of political uncertainties, then clearly budget financing for different regional budget organizations becomes tight. People get more conservative and more concerned about the future; you don’t have the same cash flows, which subsequently translates into fewer success stories and highlighted new initiatives because people are holding back until they are sure of their budgets.

Does it mean the regions are slowing down and they are not going to continue to develop innovation strategies? Absolutely not! Of course, they are going to continue with innovation strategies; they absolutely have no other destiny except to pursue this. Russia itself has no other destiny except to develop itself as an innovation economy. Russia cannot compete against the United States or any other post-industrialized country in the 21st century as a commodity economy. And if the geographical, cultural and other competitive advantages of Siberia mean that this is one of Russia’s leaders—well, I don’t think it’s going to change over a short term.

There’ll be continued development in Novosibirsk, Krasnoyarsk and Tomsk. I think this competition between the regions will stimulate independent development regardless of what Moscow initiatives are or what Moscow support comes. This competitiveness is similar to what we have in California. From San Diego to Santa Barbara or San Francisco, the competitive nature of young entrepreneurs drives everyone to work harder and to be more creative.

Moscow factories and creativity hubs: moving out, moving in

Some would wonder if the “vast reorganization of Moscow’s industrial sector” cited by the ranking makers as the reason for placing the Russian capital as the runner-up is a true driver of innovation there. Indeed, some more vibrant phenomena like Digital October may seem a stronger contributor.

But in fact, I believe it is a strong enough driver. In the reorganization, a number of companies have been either moved out or pushed out of the city center. I personally was an investor a few years ago in such a company which makes industrial products; we moved out of the center of the city as there were significant incentives and advantages for us to do so. It freed up space inside the city center to be used for other purposes, which might be more oriented toward the creation of additional projects—such as Digital October.

Digital October is a wonderful example, but there’re also other places in Moscow developing their independent creative centers. I could mention Winzavod, a very creative center for contemporary art and design. It’s a venue completely different in its atmosphere from Digital October, but it’s also developing.

I would also ask a question: what is going to happen to ZIL? Are they still making cars there? I think not. Are they going to do something else with this space? It seems to me that smart people like Alexei Komissarov are thinking of new strategies of how to create additional competitive centers like small innovation clusters within Moscow. There are dozens of industrial companies that have vacated the center to move to more economically efficient space outside of the center, meaning that the center is allowed to create new hubs of creativity and innovation, business incubators, design centers. I believe that once Moscow is restructured, it will be a very positive result for the city. Moscow has always been and will always continue to be a magnet for the best and brightest from around the country. I think that the government of Moscow is actively trying to develop this strategy, and part of it is the restructuring of industrial assets.

Approaching Russia’s point of no return

Today, just months after the presidential election, government policies as regards modernization may still be unclear. I think that over the course of this year the administration will probably change a few faces and policies. My personal opinion is that these changes will inevitably, in the long run, accelerate the drive toward innovation.

This society cannot operate as a commodity economy indefinitely. As a macroeconomist I can say that the general commodity cycle of the past ten years is coming to a close and the generally high prices of commodities will probably begin to fall.

China, the largest commodity prices driver over the past 25 years, cannot sustain its eight-to-ten percent growth rate and in the next 20 years China’s economy will consume fewer commodities. The European Union is at a point of stagnation and cannot be expected to grow more than one or two percent per annum. The US economy is at a point of potentially growing at a two-to-three percent rate, but it’s not clear if it’s going to achieve that or not; it depends politically on what happens with the election in November. But generally, the prognosis is that the commodity-driven economies will suffer over the next 20 years.

Russia, in my opinion, has no choice but to diversify its economy and modernize as rapidly as possible. One of the key steps to be taken over the next two years should be to incentivize medium and large-scale Russian companies to invest in themselves. This will subsequently create a greater-scale market for innovation inside of Russia. If more Russian companies buy Russian innovation and prove to the rest of the world that Russian technologies can save money and improve efficiency, it will lower the risk for foreigners to buy those technologies.

Another step is restructuring the Russian tax policies to encourage angel-level investors to take risks investing in early-stage technology projects to bring them from the innovation laboratory into commercialization and into markets.

Tuesday, June 5, 2012

Two may be company. Three or more may make a paying crowd

We had a chat some time ago in my office about what banks could do to shore up potentially interesting early-stage technology projects in Russia which failed to get angel investors on board. Certainly, no matter how developed a business angel community may become in a Russian region, there will always be less angels than innovators that seek funds to avoid their ‘valley of death.’ To tell you the truth, I’m skeptical about the Russian banks in this context; but not about some unorthodox ways of helping innovators.
Personally I don’t think banks are going to change very quickly in Russia because I don’t believe that the Central Bank rules are very conducive to small business enterprise. Until those rules are dramatically changed to encourage the diversification of banking resources, which are competing against each other to get good clients from SMEs, I don’t expect banks to lead any changes in this country themselves. This will only be led when the laws and regulations guiding the Central Bank are dramatically altered to focus on small and medium-sized business development.

In the meantime, however, let’s look at international economies. We can look at examples in the United States. is an American start-up only probably two years old. This is a website which uses crowdsourcing and crowdfinancing to help raise small amounts of money for small early-stage technology and IT projects. It started out just helping musicians raise money to make an album.

But just over a month ago there was a great milestone for Kickstarter when a project called Pebble Watch was launched and their goal was within two weeks to raise $100,000. But the community of social networks of young start-up innovators across the United States—there are millions of such people—saw this product idea, they saw the background of the people, they read their business plan that was offered on, and they were shocked: it’s a great idea!

And after an hour the company founders—who only wanted to raise a hundred thousand so they could make a prototype for the idea and had allocated two weeks to raise this amount, according to the rules of Kickstarter—had $100,000 contributed to this project!

These guys from Kickstarter in New York went out to celebrate and got a beer at a local pub. They came back later that night and checked their website—they’d raised over $500,000 by midnight. Within 24 hours they raised a million dollars; within a week they raised more than $5m, expecting to top out at about $10m in the end to make their Watch. So, instead of just making a prototype and trying to find a strategic investor they now have the money to build the factory.

And what does Kickstarter do?

Kickstarter gets a 5% commission. So if they’d raised $100,000 Kickstarter as a company would have $5,000; but since they raised up to $10m, they got a $500,000 commission on that!

A new angel-friendly business model

As I said earlier, I don’t think banks are in any way in Russia ready to compete against each other for SME clients. Kickstarter is a new business model which raises money from crowds. I think this is the mechanism which is going to help Russian innovators. And I think this is the mechanism which is exactly going to help reduce the risk barriers for Russian business angel investors because I believe angels will look at projects that are able to raise money at the initial start-up phase from crowdsourcing and that will prove that the risk is lower on those projects.

For every 20 projects that go live on Kickstarter probably more than half fail and don’t raise the money; maybe the statistics is even worse. But who does raise money proves that the market likes that project idea. And this is the key indicator to reduce the risk for angel investors.

I believe this will be a fundamental factor which will increase the flow of angel investors coming into the market in Russia, and angels will join forces together with organizations like that US company called Kickstarter. From my standpoint, I absolutely believe this market is going to evolve extremely rapidly within the next 36 months.