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Tuesday, February 26, 2013

Russian business needs long-term thinking

This op-ed by Gregg Robins, managing director of UBS in Russia, a musician and a member of Marchmont's Advisory Board, was first published on Reuters.

Russia’s political developments make headlines, but it’s the country’s business development and demographics that are central to its longer-term prosperity. Russia experienced a massive, rapid ownership transformation in the 1990s and is undergoing another one today. Although more gradual than before, the current transformation exposes a profound problem: an emerging leadership gap in business.

The current generation of business owners is not thinking about how best to transfer control of their sizable companies, apart from selling them. And a younger generation is largely unwilling or unable to take over.

This lack of vision has serious consequences. The Family Business Institute notes that “family business failures can essentially be traced to one factor: an unfortunate lack of family business succession planning.” In Russia, succession is especially important because the country is experiencing its first major generational transfer, which should set the foundation for evolution. A shortage of buyers and leaders is a further blight on the future.

Russia will need to address this issue if it is to develop large family-owned business sectors, such as the German Mittelstand and the many world-renowned brands in Italy, such as Alessi, Lavazza and Zegna. Succession across generations has provided stability and its social and economic benefits to these countries.

Apart from Russia’s massive companies, such as Gazprom, there are many sizable businesses where private ownership is concentrated in individuals and their families. These are not “family businesses” in the American sense of corner stores or restaurants, but more akin to Mittelstand. A recent study by Campden Research , sponsored by UBS, explores attitudes of Russian owners of such $50 million to $1 billion businesses in manufacturing, technology, financial services, real estate, pharmaceuticals, mining and telecommunications. Ninety-five percent of these owners say they lack a succession plan.

That’s not surprising in light of the short-term horizons that prevail in Russia. Capitalism is still in an early stage, profit margins are high relative to other emerging markets, and uncertainty is rife. The short-term mindset emerged in the Soviet Union’s final years and persisted as markets opened further in the early nineties. Short-term thinkers – the most nimble and adaptable to the frequently changing environment — were the most successful.

Demographics shed further light on the problem. Three generations constitute at least three distinct Russias.

The older generation have largely not made the transition to the new Russia. They still adhere to the paternalistic Soviet ideology in which the state provides for citizens’ work, health, and cultural needs. Most are passengers in the new system, supported by the state and by their children and families, and not involved in business development.

The middle generation have successfully bridged the old and new systems through knowledge and connections, and have succeeded in many cases as entrepreneurs, some extraordinarily so. Many have diversified their businesses, assets and lifestyles, and found varying degrees of balance between Russia and abroad.

Many business owners want their children to have an “easier,” more “peaceful” life, perhaps in a place outside Russia. In many cases they feel potential business heirs are not well-versed in Russian business culture – partly by virtue of their education and experience abroad. A much higher percentage of Russian business owners wish to sell their companies, as compared with other countries, and they increasingly want private equity firms to take stakes.

As the middle generation shirks planning, the younger generation becomes critical to Russia’s business future. They are more global in mindset and experience than their parents, less ideological and more technologically savvy. They are more likely to have studied and lived abroad.

While this greater sophistication and worldliness should be all to the good, the young are also more often planning to settle outside Russia permanently. More than a million people, many of them young and capable, are estimated to have left over a five-year period. Yet for those who choose to stay and build their careers, evidence suggests that Russia’s traditional competitive advantage in higher education among emerging markets may be slipping. Russia ranked 26th out of 28 countries according to a recent PwC Family Business Survey based on family firms’ assessments of having the right skilled people entering the job market.

Both those trends portend a dearth of business leadership in Russia. The looming deficit is troubling since Russian companies depend a great deal on their managers to cope with endemic challenges, such as bureaucracy, corruption and other inefficiencies. These issues tend to create top-down rather than flat management structures.

Successful transfers of businesses mean higher growth rates, better products for consumers and higher tax revenues to pay for investments in education as well as pensions, critical for maintaining stability. Russia counts on a high oil price relative to other oil exporters to keep its budget in balance, and there is not a large margin for error. A recent report presented at Davos by the World Economic Forum underscores these inter-related factors as they affect Russia’s ability to maintain essential social cohesion.

Short-termism is nothing new in Russia, but a commitment to the continuity of Russian businesses is now urgently needed. The stakes are too high to get this wrong.

Friday, February 15, 2013

Conscience Is In, Greed Is Out and Crowdfunding Is On

This op-ed by Victoria Silchenko, founder and CEO of the U.S.-based Metropole Capital Group and a member of Marchmont's Advisory Board, was first published at Huffington Post. Victoria has taken a pro-active stance in promoting crowdfunding--and not only in LA.

When I opened our monthly Global LAVA group meeting last Friday, I couldn't help but pronounce it out loud: "If anyone would like to know what the market trends are, check out our LAVA (Los Angeles Venture Association) meetings and see how packed the room is!" What made about 80 people meet at rather a vicious time -- 7:30 a.m. -- was not a question but a matter of fact: crowdfunding, our Global LAVA's topic of the month, is clearly on the minds of entrepreneurs.

The enormous impetus of the entrepreneurial community's decisive move toward crowdfunding -- the relatively new way to raise money via online communities -- is a result of the ultimate failure of the financial system that has proved to be dysfunctional for the most self-starters in the U.S. and globally.

In the past four years, according to the National SBA survey, almost half of small businesses have not been able to secure capital; 38 percent of small businesses had loans and lines of credit either reduced or revoked. As the most recent PWC Money Tree Report revealed, the investments into seed stage companies decreased by 31 percent last year -- the lowest annual seed dollars since 2003.

I believe there is a whole generation of the brightest and brilliant minds that have failed to obtain capital not because of their poor business models or lack of ambitions but because the VCs have primary focused on tech for at least past 25 years.

There is one more "catch." As a new study released by the Institute for Exceptional Growth Companies (IEGC) and Pepperdine University confirms, women-owned and foreign-owned businesses are 23 percent and 46 percent accordingly less likely to obtain venture capital.

While the fate of equity-based crowdfunding here in the United States is in the hands of the Securities & Exchange Commission (that was due to arrive with regulation rules last year but missed the deadline), rewards and donation's based crowdfunding models are getting their momentum. Why?

I would seriously argue that today, if you are a minority or represent any start-up but tech, and you look for seed capital, chances are crowdfunding is most likely the only option to go with.

After tirelessly trying to get the attention from Silicon Valley and local VCs to his SATORI Brands, an LA based international beverage start-up company, Daniel Regidor has recently turned to the on-line community. He started his first crowdfunding campaign on Kickstarter and presented the potential backers with an insightful video produced by the SATORI supporter Anthony Zuiker (a creator of the CSI TV series). In less than a week the company received almost 4,000 Facebook "likes" and on the day I am writing this post, there is $33K pledged toward the $60K goal.

If you are an entrepreneur and about to jump into crowdfunding websites, a note of warning: running a crowdfunding campaign is not easy and might be a grueling process. As Regidor confessed, without benefits of having an established network of friends and supporters in the media industry here in Los Angeles, the cost of his crowdfunding campaign would easily jump to $10K and more. He and his team are also in the dark on how to be featured on Kickstarter's main page, which increases the chances of being financed significantly. Lastly, the "all-or-nothing" model operated by Kickstarter means that if you haven't met a pre-set target, the money that you've been able to raise will be returned to the backers.

To date there are numerous other, primary niche crowdfunding platforms and not all of them have the "Cinderella clock." One of my favorite examples is, a global reward-based crowdfunding platform with a focus on non-profits. The company is backed by John Mackey, the founder of Whole Foods Market and author of the recently published Conscious Capitalism. I love the book. At our Global LAVA meeting, the CEO and co-founder of When U Wish, Dave Harvilicz, was wearing a yellow t-shirt that had the tag "Team Conscious Capitalism" on. Harvilicz's motto -- "Forget big banks and government -- we, the people, can unite to bailout each other." Harvilicz and a team of other doers and disruptors are going to speak at our second annual Next Entrepreneurship and Global Crowdfunding Forum here in Los Angles on November 15th, 2013. Please mark your calendar. And let me know if you want the yellow t-shirt as well.

The rise of crowdfunding is not sudden. To date this new form of financing is the only form that directly connects passion with a market demand and a supply of capital. Add to this an emerging culture of transparency, thanks to the unlimited potential of thousands of blogs, discussion groups and e-mail threads that are on safeguard, and I bet you'll feel a welcome change in the financial system.

But most importantly, for most entrepreneurs crowdfunding is not just an option anymore. It is a necessity. And as we all know, necessity is the mother of invention. Stay tuned.