#19 - JRL 8044
Date: Sun, 01 Feb 2004
Subject: Will Russian VCs invest in Russian startups or will Russian startups move to America?
From: Laura Mack <laura67bike@yahoo.com>

At the first US-Russia Technology Symposium held at Stanford University on January 29-30th, panelists and participants discussed the potential of the technology industry in Russia. Fursenko, Minister of Science and Technology, proclaimed that the Russian government is and will continue to support technological innovation and entrepreneurship in Russia.

Yet, two trends continue to shed doubt on this statement: Russian money is not streaming back into the economy at high rates, and laws protecting intellectual property may exist on the books, but the extent of their enforceability is limited. Both of these trends suggest that it will take time to convince Russian as well as foreign investors, that the environment is stable and secure enough to support business opportunities based on technological innovation.

Dr. Sergei Pachikov, of Paragraph, was aware of these limitations. His company reached a point in product development that they needed to get more investment to continue to grow. Unable to find funding in Russia, they moved their entire company to Cupertino where they created a small Russian village in the heart of Silicon Valley. With headquarters in America, they were able to gain the credibility to get the financing necessary to take their company further. It is a unique success story, but apparently one that is beginning to be copied elsewhere.

During one panel discussion, Ian Bremmer, President of the Eurasia Group, painted a bleak political forecast. However, Patricia Cloherty of Delta Capital Management, who has lived and worked in Russia for several years, highlighted over a dozen successful investments her company has made. While most of these investments were in areas such as grocery chains and retail stores, she and others believe that long term investments were as valuable as their more immediate quick dollar short term investments.

Silicon Valley venture capitalists Brook Byers, Bill Draper, Pitch Johnson and Don Valentine, discussed their experiences in venture capital investment and the prerequisites to VC investment. Across the board, they all agreed that it has historically been and always will be fundamentally a local investment. During the Q&A, Anna Kozina of Baring Vostok Capital Partners, pleaded with the panel for suggestions on changing bad management in a startup without losing the company or the investment. It was a moment of VC 101 as the seasoned panelists replied, ³You might have to lose your investment.²

When asked by a participant what it would take for them, in particular, to invest in Russian companies, one of the VCs replied jokingly, ³The only time my firm would ever consider investing in Russia is when I have been kidnapped.² While the audience chuckled, the underlining message did not get lost on the crowd. The one Russian VC on the panel, Dr. Alexander Kuleshov, of Russian Technologies, discussed some of the investments they are making in Russian technology companies.

Most of the venture capital investments today, if they exist at all in Russia, are in later stage development. In general, these are easier to manage than startups. Because venture capital is such a new area for Russia, engineers and technical entrepreneurs are unwilling or unable to understand the necessary partnerships involved in growing startups.

Throughout the symposium, a common issue continued to be raised by both panelists and participants alike: while Russian technology and science are rated B+ and A in many cases and remain competitive with China and India according to Ernst and Young; the lack of solid managerial infrastructures and continued lack of intellectual property protection remain stumbling blocks to the development and growth of new successful and profitable Russian companies.

AMBAR, the American Business Association of Russian Expatriates, evolved out of the growing base of Russian entrepreneurs and engineers living and working in Silicon Valley. With over 1000 members, an overwhelming majority of them are experienced software engineers who have MBAs from Stanford or other well-known American business schools, and are marrying their technological backgrounds with their new western managerial education. The founder of AMBAR, Dr. Alexei Andreev, is an example of this new Russian expatriate. With strong cultural ties to Russia, many feel comfortable developing their outsourcing needs with Russian engineers.

In the last 5 years, the successful growth of IBS and Luxoft, software engineering outsourcing companies, has created a pool of skilled engineers and designers who are managed successfully by Russian management and offer globally competitive services to well-known multinationals like Cisco, Intel, Microsoft, IBM and Boeing.

One American participant, whose company outsources to India, was encouraged to attend this symposium by a friend. He came to learn more about the Russian outsourcing options and left feeling extremely encouraged by the success stories of EPAM, Luxoft, IBS and other successful companies that are capable of delivering high quality, well-managed and price competitive services to global clients. When asked if he would come to such an event again, he said absolutely.

In general, the overall enthusiasm of participants and panelists, suggested that the young Russian talent, both the expatriate Russians and those with companies in Russia, are working harder, smarter and more organized to transform Russian technology into global business opportunities within the next decade. And as Don Valentine said, ten years from now, the panel of venture capitalists at the Symposium will not be Americans from Silicon Valley but Russians from Moscow.

Laura Mack
freelance writer
(510)910-6406
www.lkmcreativesolutions.com.