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Wednesday, September 12, 2012

The four questions Russia needs to ensure it has answers to

I found out recently that in a draft federal budget for 2013-2015, severe spending cuts are suggested, stripping science and state-sponsored R&D centers of part of their funding. A very untimely move, in my humble opinion. A lot has been done on Russia’s path to becoming a 21st century innovation-driven economy, and putting a brake on this process would be painful for the growing system. I asked myself, “Am I being delusional about the future of Russia’s innovation?” And here are my answers to this and other questions.

First: does Russia have an innovation culture? Historically, the answer is absolutely yes. Going back and looking throughout Russian history you can find extraordinary individuals such as Mendeleyev, Lobachevsky, Sikorsky and many others. If you look more into recent history, you’ll find people like Sergei Brin, David Yang, Alexander Galitsky; you’ll find leaders in today’s world that have really made their mark.

And if one were to really study many breakthrough innovations in fundamental sciences in the last hundred years he’d very often find, no matter where these innovations came from (US companies, French companies, Asian companies), that the root of the innovation came from a Russian immigrant.

So to answer the first question—does Russia have an innovation culture?—absolutely! There’s a history of advances in fundamental sciences coming from Russian scientists. And this is partly based on the inherent creativity of the Russian language combined with the fundamental basics of the education system which very early on tried to identify a student’s strong points and then funnel them into studying those topics he was really interested in and good at from an early age.

Russia has this fundamental science and innate creativity. I believe this is one of the fundamental competitive advantages for Russia in the 21st century as it struggles to develop its own innovation-driven economy and to diversify its economy away from oil and natural gas.

The second question would be: does Russia have the infrastructure to develop its innovation economy? What do I mean by infrastructure? I mean this: does Russia have the proper educational system, the proper equipment, and the proper ecosystems within its individual innovation clusters around the country? Is there infrastructure built into the system which could help commercialize technologies from the idea stage into working prototypes and on to companies which could approach and secure market positions in a competitive environment?

The answer to this question is that ten years ago Russia did not have this infrastructure. Russia was still struggling in an effort to create its own basic economic infrastructure in adapting to a market economy model from the commodity economy it had pursued for the previous thousand years. Ten years ago this infrastructure for innovation commercialization didn’t really exist.

I’d say that five years ago an effort was initiated to develop this infrastructure, and during the past five years substantial progress was made in developing it. I’m talking about techno-parks, business incubators, special economic zones; I’m talking about the very specific kinds of mechanisms that have been created, like the Russian Venture Company (RVC), Rusnano, or the Skolkovo Foundation. These basic government top-down led programs may have started out slowly but they have now effectively created the foundation on which Russia can build its infrastructure.

And it is building; and the initiatives are helping create the basis of operations for different innovators across the country. I’ve seen tremendous developments in such areas as Tomsk, Novosibirsk’s Academgorodok, a hub in Yekaterinburg and the Urals.

I’ve seen a lot of infrastructure be put into place and I see that that process is continuing and in fact accelerating. I’m not sure how long it will continue to accelerate because I’m not sure how the federal budgets will be able to sustain these efforts, but substantial progress has been made.

I’d say that also culturally and psychologically there’s much advancement and understanding about what the role of the government is in the process of fostering and developing an innovation economy.

For hundreds and hundreds of years Russia has followed the path of a top-down kind of vertically structured society where initiatives come from the top and are then implemented down below. Whereas in most modern-day innovation economies the emphasis is on what local entrepreneurs can do to initiate progress from the bottom up; to initiate ideas and let them percolate up to the top to where they can go to venture funds and strategic partners and so on.

Russia has made a lot of progress in understanding that this is in fact the bottom-up process. And the paradox for Russian government leaders is that it’s necessary for them to initiate this process from the top down but in the end the power would be held in the hands of those bringing their projects up.

The Russian Venture Company was approached about five years ago about creating a small pre-seed fund. Its managers had absolutely no interest in doing so because they felt it was more important to have large-scale funds to finance large-scale projects. When confronted with the idea that a large fund is going to do an average of ten to twenty million dollars per project when, in fact, innovators need much smaller amounts of money, this wasn’t really considered an issue five years ago.

Today, the progress that has been made by the Russian Venture Company is astonishing. The RVC has programs supporting individual entrepreneurs; there are seed funds, infrastructure funds, Venture Partner programs, programs to support business angel investors, etc.

All of these things have changed and developed in the last five years, which gives me great encouragement that Russia really is making strides in its development of not only its infrastructure but its understanding of what needs to be done to actually empower entrepreneurs so that they can develop themselves and their businesses.

If we look at other initiatives, just a couple of years ago Skolkovo was simply a Potemkin village; it wasn’t really operational. Today, this is a different story completely. I visited its space technology cluster recently and saw that there were over forty companies which were residents of this, and these were really advanced and interesting scientific projects. Through the use of grant financing Skolkovo is encouraging the commercialization of fundamental sciences.

So yes, Russia has created substantial infrastructure to support the development of a long-term shift to its innovation-driven economy.

The third question would be: does Russia have enough of a regional diversity within its innovation clusters to develop a real modern-day, 21st century innovation-driven economy? One can look at the United States and see that there’s a dozen innovation clusters which have developed in various parts of the country and are focused on specific different types of technology segments. It’s IT in Silicon Valley; genetics and biotechnology in Silicon Alley; New York is developing its own cluster; there’s Austin, Texas. In the U.S., there are numerous innovation clusters and they are developing and advancing and springing up.

And the strength of these individual innovation clusters—this is important to understand—lies in the horizontal collaboration and relationships between different types of innovation clusters. A good example could be seen recently with federal initiatives to work with private corporations and universities to develop solutions addressing Alzheimer’s. The collaborative efforts on both the horizontal and vertical levels have created tremendous progress in the fight against this disease.

Russia historically has had very strong vertical relationships but these vertical relationships result in the fact that individual universities see that their interest lies in obtaining additional subsidies through their relationships with the vertical counterparts in the Moscow ministries. And this has created a sort of competition so that within any individual innovation cluster individual universities have little motivation to collaborate between themselves because they see themselves competing for resources from Moscow. This is highly negative and needs to be changed.

Russia has huge potential because the diversity of its own innovation clusters is fantastic. Look at what the region of Tyumen is doing with the development of absolutely new advanced supercomputers, bringing in artificial intelligence technology; or at what Nizhny Novgorod is doing in search technologies and IT, or Obninsk with new molecules. And the real key to make the system effective is to find how these individual innovation clusters and the entrepreneurs developing and evolving within each cluster can begin to work together and collaborate, not only seeking federal funding and support from Moscow but also between themselves.

We all know that some projects now require different specialists to cover different aspects in order to help solve an overall complex problem. Developing new medicines to fight Alzheimer’s, for example, requires vastly different types of technology approaches to understand where the disease comes from, how to identify it, how to identify it early, how to deliver a solution to solve that problem, in what way to monitor and check the progress of therapies. So, the complex problems that need complex solutions require horizontal collaboration between different technology segments.

The idea of commercializing technology is not to just focus on one aspect of fundamental science but rather to look for the multifaceted solution that creates sellable products. In this regard, Russia still has a long way to go. There’s a major gap between the academic circles and fundamental science developments and specifically the business sectors which are used to a very short investment cycle and a short investment horizon.

So the basic answer to the question is yes, Russia has a wide diversity of innovation clusters but those are not cooperating or collaborating either within themselves or between themselves across the country. And this is the main challenge this country faces over the next five years: how to make each regional innovation cluster work itself as a local ecosystem and how to connect that local ecosystem to other broader regions across the country.

The fourth main question to ask is: does Russia have the financial infrastructure to develop its innovation economy? I’d say that this question is complex because 20 years ago Russia didn’t have any type of financial infrastructure for this. Ten years ago it started really to advance its private equity system and even to some degree venture capital.

Five years ago the venture capital system was really emerging and probably before the most recent crisis of 2008 Russia already had more than a hundred fund management, venture capital and private equity companies. Unfortunately, most of these sprang up in Moscow, and the reality is that many of the regional venture funds that were developing were not very successful. Those were based on a model whereby the fund managers were headquartered in Moscow and only had very limited presence in the region, so investments were made with little initial due diligence and very little or no follow-up. Therefore a lot of the venture funds in the country simply made bad investments and did not achieve positive returns.

This has all really begun to change now. Starting five years ago there was an effort to develop a network of business angel clubs across the country, and this started with some presentations that I made in Samara almost six years ago. Today, there are 12 different business angel clubs around the country; these business angel clubs have started to develop a new generation of Russian investor who is quite interested to support technology.

The problem is that today, most of these business angels are in their mid- to late forties and are still working on making their first or second million dollars. So they don’t really have the same psychology as the sixty- or seventy-year-old American business angels who already have many, many millions of dollars in the bank and have already a history of maybe ten or twenty or thirty different projects they’ve developed.

The type of experience that comes from developing multiple angel-level early pre-seed stage projects is invaluable, so therefore the role that angel investors play in more mature economies is such that they act as general mentors and coaches for young entrepreneurs helping them develop business strategies, commercialization strategies, business plans, financial models, and so forth. In Russia today, unfortunately, these business angels are not very active. Perhaps, they have an interest to invest in technology and support innovation but their experience level is not yet high enough to understand what role they really need to play.

This is changing, however. I believe that over the next five years the role of angel investors will become one of the most important roles in the country. According to Fast Lane Ventures, a venture accelerator in Moscow making IT projects, the fastest segment for growth in new investment for Russia over the next five years will be at the angel level, pre-seed and start-up stage levels. I expect a lot of changes to come in the next five years and for more and more money to be flowing in at the earliest stage of project development.

So, to answer the fourth question, I’d say that the infrastructure is developing rapidly and that over the next five years there’ll be great advances made in ensuring that this infrastructure really develops properly.

I have raised these four questions, and to each my personal answer is yes. On Russia’s path to being one of the world’s leading innovation economies in the 21st century, its deadliest foe would be putting all these advances on hold.

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