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Russian start-ups and business incubators are thriving and attracting the attention of foreign technology investors.
Tiger Global Management, a New York-based international investment management firm has recently invested twice in the Russian e-commerce platform Wikimart.ru – $5m (£3.1m) in 2010 and another $7m in 2011.
It has also contributed $10m in a round of financing for online travel sales site Anywayanyday.ru. Tiger also has shares in Russian search giant Yandex, which began trading on the Nasdaq in May 2011, and once held a stake in Mail.ru, a leading email service and portal.
Other examples include the whopping $55m that was invested into private shopping club KupiVip.ru last April, in which US venture fund Bessemer Venture Partners played a notable part. And, Ostrovok.ru, a clone of Booking.com, received $13.6m last July from western funds and business angels such as Zynga founder Mark Pincus, early Facebook investor Peter Thiel and Skype founder Niklas Zennström, among others.
Russia’s new appeal comes as a logical consequence of the fast growth of its innovation-led markets. One in two Russians now uses the internet and last September the country overtook Germany as Europe’s largest internet market.
“There has been a lot of enthusiasm among US funds for taking elements of successful e-commerce and social networking companies in one geography and transplanting them to another – first China, now increasingly in Russia,” said Mac Elatab, an investment analyst at TrueBridge Capital Partners. “With a GDP-per-capita growth of around 13pc annually from 1999 through 2010, Russian consumers have money to spend.”
Another appealing factor for investors is the reputation of Russia’s science and technology industries. “In computer science and materials science, the Russians are as good or better than anyone in the world,” said Bill Reichert, managing director of Garage Technology Ventures, a major US venture fund chasing Russian start-ups.
Progress in entrepreneurship has been remarkable over the past 10 years – with a more than a scent of northern California in the Moscow air.
“Both Silicon Valley and Russia have extremely smart people who are working to create innovative opportunities globally,” said Court Coursey, managing partner at Eric Schmidt’s Tomorrow Ventures.
Labour costs are another reason for hi-tech investors to come to Russia. Salaries are high in Moscow start-ups, but in a city like Tomsk, in Siberia – where every fourth resident is a student, a researcher, a university teacher or an employee of the Russian Academy of Sciences – a modest $2,500 (£1,580) a month can be enough to attract the best local talent.
Another factor favouring investment in start-ups is the level of government support for foreign and domestic investment in private equity: at the federal and regional levels, the Russian state is investing tens of billions of dollars in innovation.
With its huge subsidies and tax cuts for innovative projects, Skolkovo, the giant technology hub outside Moscow now nearing completion, has attracted dozens of global venture funds and hi-tech firms.
IT Park, near Kazan, is one of the largest technoparks in Eastern Europe, while the Tomsk special economic zone has attracted a number of domestic and international technology companies, including Nokia Siemens Networks, Korea’s Darim International and the US-based firms Monsoon Multimedia and Rovi Corporation.
Direct state financing is also provided through the Russian Venture Company, which has launched 12 hi-tech funds in Russia and abroad. Three years ago, fewer than two dozen funds were operating in the country, but now there is more money in Moscow than in many other innovation hotspots.
Avi Hersh, a US private equity investor who began investing in Russia in the Nineties, said: “As more young Russian enterprises are funded, then merged or acquired, it will produce more success stories, which in turn will provide more funding for the next round of start-ups.”
Obstacles to investment
But there are still some obstacles to investing in Russian start-ups. Russia doesn’t have a long history of entrepreneurship and some Russian businessmen do not always present mature projects.
“We sometimes see very raw start-ups, lacking sound business models or business plans or with weak management teams,” said Marina Kuznetsova of BV Capital, a venture fund operating from San Francisco and Hamburg.
Russia is considered less attractive by many venture capitalists than other Bric countries because of its smaller population compared with China or India, and because of its location – Moscow has a 12-hour time difference from California. Language can also be a barrier, as relatively few Russians speak fluent business-level English. Russia still has a serious image problem too.
“Media coverage from Russia is almost uniformly negative in the US,” said Mr Elatab. “That is not to say that only negative things are happening in Russia – the truth is somewhere in the middle. I think the Cold War still has an effect on how Russians and Americans view each other.” Corruption and frequent breaches of the rule of law, whether real or imagined, are the greatest deterrent in the eyes of many foreigners.
According to Silicon Valley veteran Steve Blank: “So many entrepreneurs have told me they have no guarantee that what they are starting is what they will keep… How can Russia have an innovation future in such conditions? When a new wave of start-ups began developing in Silicon Valley 30 years ago, there was never a discussion of such things. R ussia has to fix this critical government issue. Otherwise, the brightest section of Russian entrepreneurs and engineers will leave the country.”
Other investors have not found corruption a problem. Esther Dyson, a US investment angel who has invested in 15 Russian start-ups as well as in Yandex, said she had not witnessed any serious threat from aggressive Russian businessmen or corrupt Russian courts.
Gleb Davidyuk of the Russian venture fund iTech Capital agreed: “In the digital sphere, greedy civil servants don’t know what to look for – or where. This helps the industry stay below various radar screens.”
44 per cent of start-ups’ costs when launching are spent on surveys and research, according to the Expert-RA rating agency.
32 billion dollars is the amount the Russian IT market will be worth by the end of 2013, according to a Ministry of Economic Development forecast.
300 thousand people now work in the Russian Information Technology Industry, according to the Russian Ministry of Economic Development.