Taking stock of your potential investment

One of the pitfalls in VC financing is erroneous perceptions that investors develop when analyzing entrepreneurs. Not completely erroneous, of course, but rather vague and ungrounded.

Unfortunately, sticking labels on people has always been a tendency. Those labels are a ‘summary’ of what a person has done and still does, and others tend to build upon those their ‘forecasts’ about how the person will act in future. Assuming that an entrepreneur’s past flaws will not necessarily repeat in future is routinely ignored. Analyzers simply take an occurrence and develop their long-term perceptions of other people based on that occurrence.

Sticking an ‘honesty’ label is a classic, I think. We use our prior observations to say if a person is honest or dishonest, thus alleging that the person will be such in all of his future moves.

It’s not so easy to determine whether or not an entrepreneur will act honestly; each step could be interpreted differently, depending on what circumstances preceded it. An investor looks into the past and analyzes how an entrepreneur was evaluated before, but in most instances the investor lacks current data to see if the entrepreneur is honest enough now.

Even with the data aplenty, you can’t fully rely on their truthfulness. According to much research, there’s a major flaw in testing people for honesty, as all of us have at least once done something, for which we can be called dishonest, but does that mean we all want to do other dishonest things in future?

Such traits as perseverance, aggressiveness, inclination to dependence or submission and others are as hard to determine as honesty. While some other traits of an entrepreneur’s character may be just irrelevant.

So, how to take stock of an entrepreneur?

When we assess a person, we set for him standards that we expect from him or adhere to ourselves.

We develop ideas we expect people to act upon, based on prior experience.

When assessing we do not weigh all pros and cons in everything a person does. We respond spontaneously and are oftentimes dependent on our intuition. Intuition is a skill that can hardly be studied and which we typically use unconsciously. We always tend to subconsciously weigh up other people’s doings as ‘correct’ or ‘incorrect,’ and we do not ask ourselves what our assumption is based on.

There are two major approaches to evaluating an entrepreneur that are still valid: analytical and psychological.

The analytical approach is used when an investor completes his study of an entrepreneur (recommendations received, credit reports scrutinized, etc.), and comes down to the investor getting answers to the below questions:

• How will the entrepreneur treat the investor and his company?

• Does the entrepreneur have the traits of character that one should have in this particular business field to achieve success?

• Do the entrepreneur’s traits match those that ensure a successful business?

The psychological approach provides no answers to why people act in a certain manner and not otherwise. The approach helps figure what a person is capable of. With this approach an analyzer purposes to frame a ‘pared-down model’ of the person under scrutiny to predict his reactions in various situations rather than reasons for the person’s action.

You may request the person to undergo some tests (not the best option, I believe), or you may ask him to tell you his life story. Encourage him, and he will eagerly give you an account of his family, achievements, business experience or what he thinks of important aspects of life. It takes asking open questions and be able to listen. A good listener will hear many things he’s interested in reveal themselves unsolicited in a conversation. What questions are worth asking?

First of all, about intellectual efficiency. An investor should try to compare this manager with others he has ever met to see if this new one is part of the investor’s top list (5% of the best). Can the person learn fast? Can he think in conceptual terms? Can he work with numbers fast and accurately? Is he equally skilled in expressing ideas verbally and in writing? Can he make impromptu decisions or does he only stick to plan?

Secondly, about his business approaches and styles. Can he prioritize things or doesn’t know what to start from? Is he impetuous or prudent in decision-making? What strategy does he prefer? Is he reserved or quick-tempered? Sure-footed or easy to stray with the wind? How does he react to force-majeure? Are his goals realistic?

And thirdly, about his personal relationships. What type of relationship does he prefer with his bosses? Is he sincere, stubborn, loyal, responsible? How does he prefer to build relationships with inferiors? Does he feel his responsibility?

A VC investor doesn’t have to have a psychologist on staff to be able to screen an entrepreneur’s personal qualities. Learning some psychological techniques and applying them in work would do.

What do VC investors expect from entrepreneurs?

Personal characteristics:

• High efficiency

• High risk assessment capabilities

• Ability to convince

• Detail-oriented performance

• Psychological compatibility

Entrepreneurial experience:

• Knowledge of the market

• Business records

• Leadership

• Reputation

I recommend that as you analyze an entrepreneur you put down five things you liked and another five things you didn’t like. If a ‘like’ list is shorter than that of “dislike’—do not invest in such a person. When you detect negative traits think how you would act in his shoes. Sometimes, when interacting with your entrepreneur, you might come across things that may prima facie seem negative. If you do not delve deeper and make a no-investment decision, it might turn out that you have missed a terrific investment opportunity.

As an investor you have to consider everything. And make the right decision.

18+

Innovation has become a buzzword around here. Everybody keeps saying, “Russia must push for innovations to get rescued! Modernization can only materialize with innovators!” All that is true; I agree it’s high time we said bye to the commodity economy we have had. However, innovative ideas do not come out of the blue; they get conceived in the minds of the inspired.

Being innovative always takes change; one has to tear himself or herself away from the comforts he/she is used to. Who will want to work in uncertainty and high-risk conditions? That’s right; those are innovators. They are ready to move mountains to see their ideas accomplished. They make progress possible; they invent, create, try and improve goods, technologies and services that push the entire civilization upward and forward.

When we talk about “setting up a partnership” with a certain company we have in mind a very specific person representing it (the CEO, a sales manager, etc.). This is the person who is motivated to have anything to do with us. The same is with innovation; there’s a specific person behind each innovative idea. Who’s the guy? What makes him different from others? What dominates his character?

With more than ten years of experience in venture business I have a clear picture of the innovator I have worked with. This is how I view his personality:

1. Inquisitiveness. Innovators vigorously study the world that surrounds them. They look for opportunities everywhere.

2. Challenging a ‘status quo’. A current state of things doesn’t content innovators and pushes them to action. They tackle routine head on and oftentimes defy themselves.

3. Self-motivation. Innovators are pro-active in studying their environments because this helps such people develop. They are quick in hunkering down when they have an idea. They take action instead of just talking and are not always rewarded for the efforts made.

4. Vision. Vibrant imagination is innovators’ second nature. They peer far beyond today.

5. Risk. Innovators break free from their ‘comfort zones’ and experiment, undeterred by the fear of making a mistake. A failure is sometimes more precious than success.

6. ”I have a dream!” Innovators can identify opportunities where other can’t. Their great imagination helps them depict unimaginable things—things that they can turn into reality.

7. Sportiveness and a sense of humor. Innovators prefer the unanticipated and can piece together what others deem incompatible. They aren’t afraid of looking silly or acting childishly; they are venturesome and laugh a lot.

8. On the move. Innovators don’t ‘take root’ and prefer changing their working environments, moving from office or home to restaurants, libraries, forums, exhibitions, etc. They travel a lot in search of inspiration and new ideas. They are cut out for moving and embracing the world.

9. Seeing the backbone. Innovators can see links between seemingly isolated things and try new combinations to bring them together. Such people identify the core of a problem and make use of the fundamentals.

10. Reflection. They ponder a lot on problems and ways of addressing them. They can develop ‘clear consciousness’ and use their inner sight to find solutions.

11. Modeling. Innovators are astute and know everything that surrounds their ideas. They can discern trends where other can only see trifles and are therefore able to visualize the future in its entirety.

12. Defying uncertainty. Innovators feel comfortable in chaos and aren’t afraid of taking risks. They aren’t content with just one solution and seek as many options as possible.

13. Always learning to fly. Innovators need new knowledge just as flowers need the sun. With new information in hand they immediately try to apply it. What makes them efficient is quick move from looking for information to implementing ideas.

14. Balancing intuition and analysis. Innovators trust their intuition within reasonable limits but also scrutinize situations meticulously. They employ both cerebral hemispheres to do their work.

15. Wording ideas. Few innovators have the ability of presenting their ideas to audiences in succinct and comprehensible ways. Many tend to speak in abstract or overly scientific terms feeling no ‘wavelengths’ of their audiences. Stewing in their own ‘idea juice’ they find it hard to convey their messages to listeners.

16. Resilience. Innovators attract both positive and negative energy and use both to keep trying until success is achieved.

17. Flexibility. Innovators are like chameleons; with their openness to change they easily adapt to any environment.

18. Doggedness. Innovators are workaholics. They are persistent and persevere to get what they want. Their focus on end results helps them achieve success.

This is a ‘model’ innovator. Let’s try and look for more traits—or maybe question some of those mentioned above.

Angels and their earthly snags

There are hundreds of thousands of business angels in the U.S.; in Europe, they number about 100,000; in Russia, less than a thousand. American angel investors put up tens of billions of dollars in projects, investing several times the amount anted up by all venture funds put together. What tells angels apart from other venture investors is their deep knowledge of the field they bring their money in; they also put on the table their business experience, connections and inroads.

Angel investors form associations across all nations. This reduces problems of communication with innovators, enables angels to invest more money, and broadens the fields of investment. I would define two types of business angel associations: an online one, and a private club. Our Start Invest association is exactly a private club that brings together people with shared interests like syndicated investments in new projects.

All over the globe a regions-to-center principle of business angel integration prevails. Associations are formed based on entrepreneurs’ personal relationships; such regional alliances also typically include innovators and scientists who live close by. This ‘neighborhood’ pattern facilitates interaction greatly. The alliances then go on to forge national and international systems.

The difference between a business angel and a venture fund is even deeper; angel investors put up and manage their own money while venture funds work with other people’s funds. Therefore a business angel will do his utmost to ensure project success. An investment horizon is of little concern for him; if necessary, an angel investor will work on his project for eight or ten years, much longer than a typical three-to-five years. For his project to succeed a business angel may bring into play other angels, venture funds or corporate venture investors. In contrast to an angel, a VC fund may opt to even bar another fund from accessing its project (remember “the dog in the manger”?) A business angel rarely teams up with government; he doesn’t need any government funds as he’s an entrepreneur operating in small or medium-sized business.

I think, as private-public foundations spring up typical problems may arise, which would result in something different from what the planners hoped for. We have techno-parks, business incubators, private-public foundations; but angel investors need development in the right direction. Ironically, the root of the problem is that doing business in Russia is very simple, in spite of conventional belief. In mainstream sectors you can easily make 30-50% interest; making money in the stock market is an option, etc. As long as easy money is available, risking one’s capital on innovation projects is the province of those with deep knowledge in the investment fields. When, and if, traditional business yields less opportunity for a quick buck, entrepreneurs will look for other investment prospects. This is exactly the chance of attracting them into a business angel environment—given the correctly set system—and this is the way to having angels in each region multiply from dozens to hundreds or even thousands.

One of the major snags that need addressing is very few projects that we can evaluate. Another one is the quality of those projects available. Unfortunately, all the system of grants and funds that Russia has works to ensure the survival of scientists who used to literally starve in the 1990s and now must be rescued from extinction. Many fled overseas. They don’t flee today; instead they prefer to apply with the same project over and over and over again to a variety of funds to get grants and live off grant money rather than pushing for actual business results. In a comfort of their $20-30k, all they have to do is write formal reports.

There is also a so-called ‘translation barrier,’ a gap that stems from the innovator’s low literacy in business ABCs. Unless innovators are taught to understand that each scientific work has an element worth a certain amount of dollars, this gap cannot be bridged. Labs and universities tend to show reluctance in sharing their developments; distrust, lack of incentives and fear of change are all behind such ‘wary’ conduct. This is an across-the-board problem, to be tackled by the RF government and the Academy of Sciences. In my opinion, the ministries and the Academy should be motivated to not only increase numbers of scientific developments but also promote actual commercialization of those developments. Of course, the government could back the process by providing tax incentives.

To raise more investment, I think it’s worth repeating how important reasonable and systematic self-promotion is.

There still is a ‘missing link,’ the complete lack of a system to train managers for innovation projects. Unless this is firmly in place, nothing will change in Russia.

Drawing the line, I would like to emphasize that despite all the problems that Russia’s business angels face I strongly believe this country will eventually succeed in innovation.

Regional innovation clusters and a role universities can play (part 2)

Prof. Fyaxel goes on describing what he believes an innovation economy is like and what National Research Universities can do to promote it.

Universities went to a Factory

When I was in Helsinki, a simple thing astonished me. To create an efficient innovation cluster they combined into one three universities, apparently very different from each other. These were the Helsinki School of Economics, Helsinki University of Technology and University of Art and Design Helsinki with as many as an amassed 30,000 students. Why? They did that to establish a Design Factory.

The new factory is a small, 3,000 sq. m building where a kind of ‘broth’ we talked about earlier has been ‘cooked.’ There are machining and woodworking shops there; design studios; economists and market specialists work there too. A product evolves alongside market studies, with a prototype and promotion strategies to complete the picture.

Large companies pay exorbitant rent for office space in the facility, funding the needs of the Design Factory. What are they after? Staff they select right there, and products made by students. The factory is a habitat; students have all they need to stay there overnight.

Merging three universities is a pretty complex endeavor, but the Finns didn’t hesitate in order to set up an innovation cluster. This is an example of what our close neighbors do for their future.

Fourteen + Fifteen

Now it’s time to talk about the concept of National Research Universities (NRU). Those are higher educational establishments equally good at teaching and doing scientific research. An NRU is a form of a cluster based on integration of science and education. There’s a plenty of examples, of which Stanford University and Massachusetts Institute of Technology are probably the most well-known.

The RF selected in 2009 its first twelve NRUs on a tender basis and two more based on some unknown criteria. Another fifteen have joined this year, all lining up for government funds. But in my opinion, before the line grows the RF needs to grow the original fourteen to a level of true NRUs.

Education and science are inseparable—this is what differentiates them from any other university. The two sides are interwoven and support each other. In the USSR, Moscow Institute of Physics and Technology (MPhTI) was a classical example. A powerful school of physics was created, which is still employed in many foreign countries.

What are the goals and objectives of an NRU? The main one is the creation of a viable innovation environment and a technology transfer vehicle around the university. I talk about innovative SMEs, spin-off companies, techno-parks, technological entrepreneurship support funds for students, etc.

An HSE model: an NRU as a cluster nucleus

The Higher School of Economics is the only humanitarian NRU of the original fourteen. Its campuses are located in Moscow, Nizhny Novgorod, St. Petersburg and Perm.

Historically, each campus has developed its own ‘driver’, a focal point of research. In Nizhny Novgorod it is entrepreneurship and business computing. And it is Nizhny that has been developing and putting into use the idea of an innovation cluster with a local NRU as its nucleus.

The model calls for the spawning around the NRU of a whole system of components that complement and support one another. Those include support infrastructure, which is a techno-park, a business incubator, a technology transfer center, a business angel association and a mechanism of innovation project promotion. They also include a personnel training system provided by a university and a coaching center. We further talk about a financial system with sources of seed and venture capital as well as investment funds and consultancies. We talk about markets, both remote and local, and suppliers of equipment, materials and tools. And finally, we can’t leave out a supporting social climate and a quality of life system that include a broad variety of notions from norms, values, families and competitors to access to culture, entertainment and housing.

Nizhny pushes the HSE model

What is available at the Nizhny Novgorod HSE campus today, and what is being created?

Support infrastructure is being put together, which is a business incubator. The Venture Management Department here already has a mini-incubator of its own; up to 20 projects are resident there. We now want to expand it to be able to work with both HSE students and talented youth from outside.

We go further: an information component. We’re launching a Web-based journal, Innovation System Management. I hope the journal will be a venue for the readership to come in contact with something really new and commercially viable rather than a place for scientists to do self-promotion.

A research component. We have a research and training lab; in future we would like to set up an entrepreneurship center or a think-tank doing research in innovation systems.

Training of personnel. We are now working to create a faculty that will be completely different from what the HSE or any other university has ever had. It will foster master’s programs exclusively; and all those syllabi will focus on innovation. We have already developed the Innovation Management and Marketing & Innovation Promotion programs, with the Entrepreneurship in Technology curriculum coming soon. The faculty will train a cadre of entrepreneurs specifically for Russia’s emerging innovation economy.

On top of that it’s our student’s club, The Entrepreneur. It currently brings together 100 in-house members and about 700 online participants who want to become entrepreneurs. We build teams, share experiences, assist them in promoting their projects and provide overall guidance.

In a similar club in Finland there are 5,000 members. So we have a long way to go but the vista is promising, and we know that increasing numbers will cause qualitative change.

We preach and employ project-focused training techniques. Students form interdisciplinary teams to develop and realize innovation projects. The key principle behind the techniques is a Living Case approach to coaching managers; students have to develop solutions to actual problems that real companies face. What adds value to the approach is that team members, acting as consultants, present their solutions before the top managers of those companies.

An entrepreneurial component includes spin-off companies. There is one already; students are setting it up and we help them achieve a certain level. We’re eyeing many companies like that and have begun approaching other NRUs in the hope of establishing joint spin-offs. We are not a technological university, but we are ready to collaborate in commercializing technological projects.

And finally, a financial component, which is the establishment of a seed fund and a grant financing system.

In focus: Centers for Entrepreneurship and grant funds

I have talked about what we have created; now it’s about what needs to be created. To make sure NRU-based research turns into an innovation product a Center for Entrepreneurship must be set up within an NRU. It is crucial, and the HSE NN has come up with the concept which Moscow has approved.

What should be the focus for such a Center? First and foremost, it is seed investing and pairing up business trainers, or mentors, and innovators. The Center should also supervise IP issues and encourage staff to continue research by assisting them in project commercialization as a consultancy. The student body of innovators will clearly see a path to commercialization—this is the overall objective.

What else needs to be set up? Funds. Those aren’t venture funds; they provide grant financing. What I envision differs profoundly from the Bortnik Fund or any other fund existing today. The funds I believe Russia needs must not only give money but also give a hand in project commercialization.

Three keys to innovation

Making a long story short… What are the key elements of a doable innovation commercialization model? There are three of them.

An entrepreneurial team must be formed, and a mentor must be given to the team to ensure project monetization. In Nizhny Novgorod this works already. Our students are aided by experts; there is a regional business angel association, Start Invest. We believe that reinforcing a student’s team with a business angel or a mentor will properly channel the development of an idea and momentum won’t be lost.

Element 2 is the establishment of seed grant funds that make money available to university staff on a tender basis.

Element 3 is training of students and postgraduate students in entrepreneurship. These should be the audiences. Not those notorious coaching programs that move from city to city and ‘teach’ entrepreneurial skills to scientists—they sometimes just make no sense. A scientist must do science, and he wants to do that. But if you want to have effective innovation managers for the future, you need to train young people.

These are the three elements that I believe create in a National Research University a culture of innovation and entrepreneurship.

Regional innovation clusters and a role universities can play

An innovation economy has been a buzz phrase lately in all sorts of context. But the words oftentimes fail to convey what it’s all about and what needs to be done. Let me have a try and verbalize my own vision of what it is.

First and foremost, it’s the creation of an innovation ecosystem. It is a pretty capacious concept that also incorporates the notion of innovation culture. It is an environment. And for as long as we carry on attempts to create an innovation ecosystem in the environment tailored to the old commodity economy, this environment will be vomiting it out as ‘foreign substance.’ You can’t create an innovation economy without generating an innovation environment.

The latter encompasses many things. The first brick in the wall is teaching and training of young people. In my system of beliefs, youth should be taught from an early age; they need to know what to expect in their future.

The wind has changed lately; polls show schoolchildren would much rather become government officials than entrepreneurs. Universities that train officials are showered with applications—unlike entrepreneurial chairs. Other polls reveal that for many, entrepreneurship is a sort of hobby but not their life. Entrepreneurship can’t be optional; one can’t play soccer without a ball. You’re either inside, dedicating your whole life to it, or you’re completely outside and have nothing to do with it.

To create a system funding is crucial. I’ve seen statistics saying in the U.S., venture investments account for about 2% of overall investments. But I also know a fact: companies that have spun off from venture businesses currently employ more than 20% of Americans. To me this indicator is much more important than investments; it shows that venture business’ contribution to the American GDP is way over 2%.

This brings us to a plain and logical conclusion: venture investments yield much more than any others. The focus is to create a system of VENTURE investing.

You won’t reap an innovation crop unless you lay the groundwork for sowing innovative ideas. There’s conventional wisdom among officials that Russia’s flush with innovative ideas. It is not true, unfortunately. Russia may be flush with raw concepts but ideas with potential for commercialization are few. An environment, a sort of ‘broth’ is required where entrepreneurs with commercially viable ideas will ‘boil’ alongside investors and consultants.

Historically, this country stashed R&D funding aside for fundamental research; that’s why Russia’s still home to first-rate mathematicians and physicists. But those generating ideas for monetization are scarce.

When we talk about support infrastructure, we use words that all know, such as ‘business incubators,’ ‘techno-parks,’ ‘technology transfer centers,’ etc. A lot has been done to discern what they imply; lots of funds have been spent; but results are still barely visible and efficiency of what’s available is low.

There are four levels of techno-parks. Russia is coyly transitioning itself from level 1 to level 2. What does that mean? It means that what is called a techno-park leases out space to outsiders. Most widely touted techno-parks, now referred to as Russia’s exemplary in innovation, do just that. Courting large companies for tenancy doesn’t make one an innovation techno-park.

And finally, a cluster approach. To my mind, there’s currently no better response to innovation challenges. The approach enables an innovation system; it helps spawn technological and business innovations, no matter what its name—a ‘science city,’ a ‘zone’ or a ‘valley’. Wherever the cluster approach takes root, activities are jump-started.

’A promised land’

There are different models for innovation economy that different countries and cities employ. What suits Russia most seems to be one referred to as a ‘promised land.’ It is nurtured through contribution by intellectual communities. All Russian ‘science cities’, such as Novosibirsk’s Akademgorodok or Dubna outside Moscow or Sarov in the Nizhny Novgorod region, are established as nuclei of Russia’s ‘promised land.’

There are a few clusters worldwide that are most vivid examples of a ‘promised land’ approach. These are the U.S.’ Silicon Valley, India’s Bangalore, Canada’s Toronto, and Finland’s Helsinki.

Russia’s ‘Silicon Valley’

Russia is setting up a sort of ‘Silicon Valley’ of its own. Unfortunately, the essence of what was established in America is being poorly translated to the Russian turf. I’m talking about the Skolkovo ‘science city’ outside Moscow.

I’m ready to make a wager with whomever and win in five years. The construct will lack the kind of spirit the original Valley has had.

In the U.S., the Valley was built out around the Stanford research and industrial nucleus that consisted of three powerful educational hubs: Stanford University, University of California Berkeley, and University of San Francisco. The park also incorporated large labs and companies that formed the system. In addition to technology companies (52% of a total) and Internet companies (2%), there were 46% of firms that provide services, including financial companies, law firms and consultancies. On top of those, there are restaurants, movie-theaters, etc.

This is food for thought for those who might think that bringing many scientists and ideas into Skolkovo will make it another Silicon Valley. No; a ‘Silicon Valley’ is a combination of technology and support companies. Those are venture establishments, lawyers, advisors, etc. Had the U.S. lacked all this, it wouldn’t have ensured the result we all know of.

Many believe an idea is a product. It’s a delusion. An idea is but only a raw material, from which one can make a ‘sweet’ while another a piece of sh…

Business angel club development in Russia: practical experience (part 3)

Dr. Eduard Fyaxel, professor and a business angel, on intellectual property and commercialization perplexities

Envy puts the brakes on progress

A huge stumbling block is academic bosses’ reluctance to see projects commercialized. Why? There are reasons. 

To them, their scientific legacy is an object of pride, not a vendible. 

They are too much used to living off government and grant moneys to welcome ‘dubious’ investment from ‘outsiders’. 

In fact, there’s little to market; few research results have commercial potential. 

Administrators dread collaboration with private investors; their worst nightmare is the fear of losing all their staff to employment in commercial companies. This is nothing short of sabotage, they think. 

In a nutshell, all those reasons may be easily distilled to one everyone knows of. It is envy. If a department chief at an academic institution gets word of his former junior researcher who became an entrepreneur and has made more money on some ‘outlandish’ project than his former boss in his old chair—it’s too much of insolence. Away with those innovators, we don’t need them!

This may look like an exaggeration, but it is a problem too serious to ignore. 

What project developers still don’t have…

There’s a long list of things that project developers still don’t have. Resources to commercialize projects are meager; conditions are inadequate. Few are really keen to market their projects—simply because it takes entrepreneurial experience that those people lack. There’s still much uncertainty regarding intellectual property rights, too.

It requires a team to further a project. Few understand that, though. Teams do get built sometimes, but members are typically scientists. A team of scientists can produce a scientific report or discover something but it cannot monetize a project. Their attempts to talk to an investor will take them nowhere. 

Why? Because their project is like a baby for them. Is it thinkable to sell a child? Never! “Scram with your money! We’ll do fine without it!” 

…and what they could have but…

Federal law 217 was passed last year on the setting-up of small innovation companies on university premises and IP rights. I’m an optimist and believe that our legislators will be smart enough to polish and refine it to a degree where the law can really work. Until then it will keep a ‘dusty shelve’ of hopeless projects intact.

“The project developer has the opportunity to receive a bonus, provided that the university administration finds it suitable. It is his right, not an obligation.” This is nonsense number one.

In one company I once talked to they do give bonuses for an innovation adopted. The amount is ‘astronomical’: a thousand rubles ($33). 

With this being fact, not a joke, I find it bizarre to hear academic bosses wonder why university-based innovations have shrunk twenty times over the past five years. Innovations could have dropped to a virtual zero. 

Unless the developer gets interested, you won’t get anything from him. 

Here comes nonsense number two that just bewilders me. According to the law, the poor investor who was unlucky enough to put up his money for a project has no right to sell the project! Under such conditions, you will have to subject him to torture to make him invest in the first place. 

You can’t sell your Motherland and you can’t sell your project—this seems to be legislators’ rationale behind the idea. I agree on the former but I just can’t fathom the latter. The guy invested his own money—how is it possible to bar him from selling at least his personal share?! 

The law must unambiguously, and without fail, allow academic institutions to (i) transfer to authors the rights for specific intellectual property; (ii) create mechanisms for authors to buy out their rights for IP; (iii) create mechanisms for authors to formally legalize their IP rights, and (iv) sell IP rights to investors. 

The current law 217 is void of all this.

What a venture capitalist looks for is ownership, not the license for it.

Business angel club development in Russia: practical experience (Part 2)

Dr. Eduard Fyaxel, professor, head of the Marketing and Venture Management Chairs of the state Higher School of Economics in Nizhny Novgorod, president of the Start Invest business angel association continues sharing his ideas and worries regarding financial support of Russia’s innovation.

“Give him money, he’s a good guy!”

We’re not philanthropists, of course, and monetization is our number one priority. We realize, however, that we have to create and develop projects before we gain from them. It takes eight-to-ten years to accomplish, longer than the classical three or five, as a business angel nurses his project from the very beginning—typically from the pre-seed stage that normally requires other mechanisms (such as ‘three F’ or grant programs). 

I collaborate with the Bortnik Fund as a member of its panel of experts. Out of the nine-man panel, six are scientists and only three represent the world of business. And the following remarks can be heard, “To deny Mr. X financing? He’s such a prominent scientist—how can we?” Or, “You know what? It is very interesting from a scientific standpoint.” And those people discuss projects that need to be commercialized. 

Until the panel composition is reversed, or—even better—instead of scientists the panel invites three academic administrators, the Bortnik Fund will keep up its current ‘efficiency’, with just one successful project out of twenty approved. Improving it to one out of five could be quite possible.

Innovators vs. beekeepers

 

It’s a mistake to think we have lots of projects. Whoever says this speaks of fundamental research rather than projects. Marketable ideas are scarce; the quality of project applications is pitifully low.

Based on data from our four related government departments in this region and own survey we have found out that there are about 200 truly innovative SMEs in Nizhny Novgorod—a pathetic number for a city where there should be thousands of such small businesses. 

Unlike innovation companies, local authorities would find it much easier to tell you how many beekeepers or gardeners this region has.

It’s sad statistics. Companies tend to multiply but few survive beyond their third birthday because the ‘death valleys’ with their dearth of early stage financing usually take their heavy toll.

On an octopus and a ‘private matter’

Another problem is what I call a communication, or translational, barrier. It resembles an octopus whose tentacles move in different directions, thus tearing its body asunder. 

An investor has his view; an innovator has his. A project manager or businessman may or may not exist at all; even if he does, he acts more like a many-headed dragon peering into all the four corners of the earth at once.

They can’t understand one another; all they can think of is how to avoid being bamboozled. Being quick enough to dupe one of the other two in the process is regarded as a stroke of luck. 

A serious problem is deep-rooted mistrust that university and research institute administrators have for the very concept of commercialization. The RF Academy of Sciences commands them to do fundamental research, while whatever is accomplished outside that task is a private matter, not academia’s, and should not be part of academic activity.

In a big hi-tech cluster in the region’s south, in Sarov, we can see innovations flourish. Why? Because its base entity, the RF Nuclear Center, doesn’t prevent inventors who need funding for their ‘private matter’ from seeking capital from business angels. And it’s good those angels fly to help; otherwise the inventors would have nowhere to go.

When I was in Finland, I wanted to know who worked at a local business incubator as residents. I was sure those were young people, like here. I was mistaken; I saw some imposing forty-year-old men with years of experience at large firms. They had come up with project ideas but their employers rejected those ideas, forcing the innovators to quit their jobs and head for the business incubator. Such were more than 70% of all residents. 

So what happens in Sarov is normal.

Meanwhile, scientists in Nizhny Novgorod keep doing what their research chiefs tell them to.

‘Off the wall’ entrepreneurs as a species

There’s yet another problem: no professional environment, in which venture managers could be trained.

To my mind, there are three categories of managers. There are managers at big companies; they are useful but serve their specific purposes like bolts in a mechanism. 

There are owners of small businesses (other than innovation). Small companies in Germany are a classical example. A family has been running a barroom or a store for decades and generations; their kids will carry on. They make enough to pay bills and live comfortably and find it appealing. Their business doesn’t grow; it gets passed on from father to son ‘as is’. 

And finally, there’s a ‘nuts’ category, a kind of ‘off the wall’ entrepreneurs who can hardly tell you what drives them. Want to find out how much they earn? Ask one of those eccentric business angels, and that oddball (sometimes popularly resented as a ‘bloodsucker’) will go about telling you in detail how much… he has invested. He may really not know how much he has made, and this is of little concern for him! And why worry? He has something to eat and drink, and he can do what he likes and believes in.

The word ‘entrepreneur’ is almost obscene in this country. Elsewhere in the world it goes with an enterprising person whose goal in life is to create new things. His work is his life. Get him to retire—and he’ll wither away within months. 

This is a peculiar species. But they have to be trained. Some can stir up their abilities by themselves, while some others can’t. Venture managers must be coached professionally. Until there’s a proper training system in place, even best projects may fizzle out before they find a market. 

As an investor a business angel is team-oriented. He invests in people capable of shouldering a project. But to do that, he needs training as well.

Business angel club development in Russia: practical experience

Dr. Eduard Fyaxel, professor, head of the Marketing and Venture Management Chairs of the state Higher School of Economics in Nizhny Novgorod, president of the Start Invest business angel association

Before I talk about our Association’s experience, I believe it’s important to make it clear who venture investors are.

A lot of horns are locked over the issue. However, most controversialists agree that venture funds are venture investors. Business angels and private equity investors are also viewed by many as such; maybe less convincingly, though. (By the way, there’s a huge difference between these two species.) And finally, corporate VC investors; debaters aren’t unanimous here, either, but personally I tend to consider then venture investors.

Out of this understanding of who’s who (and where) in the VC world comes the concept of a ‘death valley’ for potential projects: advanced stages of project development receive the lion’s share of funding while the seed and start-up stages are financially famined. And for them business angels provide the much-needed lifeline.

Between alleged sectarianism and partnering with the Russian Venture Co.

Our not-for-profit partnership, the Start Invest business angel association, was set up in 2006. It took us time and tremendous efforts to register. Domestic registration agencies found the concept of business angel extremely suspicious; we had to get screened by a local theology expert panel for alleged sectarianism. Some officials simply called us cons plotting to dupe someone.

But we did it in the end. In the very first year of existence, we became a co-founder of the Russian Business Angel Network (RuBAN); in 2009, we helped set up the Russian National Business Angel Association (RNBAA). Earlier this year Start Invest was selected a Venture Partner for the Russian Venture Company’s Seed Fund.

We were not trail-blazers; business angels had tried to pool efforts before, too. In 2003, two such networks were established in Moscow. But they positioned themselves as national alliances. We in Nizhny chose a classical path by building a regional association of business angel investors. From the very beginning we would say that such organizations should be mushrooming across the country, to be later incorporated in a national one and further on into the European business angel community.

I travel from region to region very often; I have to explain and tout the concept, campaigning for the establishment of more alliances. As a result, several regional associations have sprung up.

“Business angels, alongside killers, are serial”

In this country, people have historically had a bias in favor of tapping high-priced oil or gas and ensuring 100% profitability. Hi-tech projects? Venture business? Bullshit! In earlier years any endeavor was venture business. And people enjoyed ‘sticking a cane’ in the ground and watching a ‘tree’ grow out of it right away.

But now, in the aftermath of the financial crisis, I think our time has come.

On the one hand, venture funds have seen their financing dried up, which is pretty bad. On the other hand, there emerge a lot of people who have cashed in their assets and today can’t invest in ‘traditional’ businesses as there are few niche markets to pay as handsomely as before.

And now, their money made wherever, those people are eyeing hi-tech segments, which is good. The business angel movement must be a mass one. In the U.S., between several hundred thousand and a million active business angel investors were reported in prior years with projects worth as much as $30-50bn, according to diverse sources. In Europe, about a hundred thousand business angels have been counted.

I’ve seen reports here in Russia that domestic business angels invest up to $250m a year. Idle talk; a maximum $5-10m! PRIVATE EQUITY investment could indeed hit $250m, but those are not angels’. This is about one buying a company and investing in it. A typical PE investor, like a beast, may grab a ‘morsel’, take it to his ‘hole’ and ‘chew’ it for a long time. Such an investor is not serial; whereas business angels—alongside innovators and killers—ARE serial.   

For a business angel, as well as a venture fund, to exit a project in the right time and finance many more is critical because statistically, only two out of ten investments are successful. Those trained and experienced in this normally have more than a dozen projects in their portfolios, which is very professional.

A club of the like-minded

Our Association now includes ten members, and they may be viewed as differing from ‘classical’ business angels. Each has behind him a team of dozens or hundreds of professional ‘innovation cultivators’.

The Association has been built as a club for the like-minded. Our mission is the pooling of resources; not only monetization but also mutual enrichment through sharing opinions and expertise. We coach innovative entrepreneurs free of charge; we help them prepare business plans, assist them in seeking investment from other sources; we also act as partners for other investors, including venture funds. The scope of our activity is pretty broad.

The efforts have been appreciated. Last year I was awarded as Russia’s Best Business Angel Group Leader and nominated for participation in the 2010 Istanbul competition held by the European Business Angel Network this past April.

A missing link required

We are open for collaboration with anyone willing and doing something to make Russia an innovation economy. The Russian Venture Investor Association operating since 1995, for one; or Quadriga Foundation set up in 1993; the Bortnik Fund is another example.

But things didn’t pan out well enough all the time. I would often argue we didn’t have real private investors and there was a missing link. They wouldn’t believe me. Now they have become believers; they understand that an innovation economy cannot be created without business angels.

Elsewhere in the world the state is a sizable helper for business angels; investors are aided in the setting-up of organizations, in taxation. In Russia, investing in a venture project entails ‘triple’ taxation.

Russian business angels are only making their first big move these days. There are no more than two hundred of those who realize who they are and what they want and need. Until they add up to tens of thousands, the current gap is impossible to bridge.