During a US-Russia Bilateral Presidential Commission meeting held on October 30, foreign and Russian experts debated approaches that the participants thought would be beneficial for Russia to choose in its drive for innovation.
Marchmont CEO Kendrick White took part as an American expert. He shares his impressions and his ideas on how to improve what seems to be Russia’s zigzaggy, if not knee-jerk, advancement towards a 21st-century economy.
Kendrick, at the Moscow meeting, you raised the issue of the fundamental lack of a culture of business mentoring in Russia, to which Igor Agamirzyan, the head of Russian Venture Company, jokingly responded that “experienced Russian businessmen will do mentoring for start-ups when they retire.” Don’t you think that would be too late?
Unfortunately, Russia’s process of transitioning from a top-down commodity economy to a bottom-up driven innovation economy capable of competing in the 21st century global economy is only 20 years old. Twenty years ago, people who were in a strong position in their lives in whatever sphere – in business, in agriculture, in politics – were already in their 40s or 50s.
And let’s face it: many of the insiders at that time in history were able to privatize factories for very low prices. It was the rare case that entrepreneurs of a younger generation were able to buy those, as at that time they were not insiders. I know doctors who finished their studies and ended up in 1992-93 having to sell ice cream in street markets or work as drivers.
The generation of today’s 40-year-olds had to start from almost nothing, building themselves up. Many who have succeeded are now relatively wealthy. These are Russia’s future business angels, and this is what Igor Rubenovich Agamirzyan was referring to. But they’re still making their first millions and still working to make their first businesses successful. And they will continue to do so.
What I can see and understand is that there’s a complete difference in the mentality between this younger generation of self-made entrepreneurs and the insider elites which were able to buy factories 20 years ago. Today, those insiders are at the top of their position in life. Coming into their 60s or 70s, these top industrial leaders have a mindset raised during the Soviet Union. Of course, I’m speaking in generalities, but generally those people were not responsible for building their own businesses or achieving the reward of growing something up. They were able to buy factories, and then very often those factories were not run for the maximization of wealth creation but for obtaining dividends, for developing companies that would pay significant revenue streams to federal government budgets, and so on and so forth. And more importantly, many of those companies were local monopolies in their own right and therefore not necessarily subjected to the pressure of modern competition.
Self-made entrepreneurs that had to fend for themselves over the last 20 years grew up in the most highly competitive environment imaginable and learned how to focus on competitive advantages and efficiency. Their education in business, and their mentality, is completely different from the older generation’s.
In my opinion, we cannot wait another 20 years as Igor Rubenovich [Agamirzyan] so jokingly mentioned at the meeting – it’s obvious we can’t. We need to set up new creative mechanisms that will work today.
What is the objective of those mechanisms? To help angel investors understand how to become mentors, how to become coaches, how to invest their money wisely into start-ups. I know a number of business angels that have not invested very wisely. They’ve had a very strong interest in investing in technology, but it’s a very hard game, and unless you have a lot of money and a lot of time to work as a mentor and to raise up a business you cannot approach angel investing as a passive investor simply developing a portfolio.
In the top-down vertical structure that had been prevalent in Russia over the years, the government would task scientists with something, the scientists would do the job, and then the government would try to hand the results over to business people. The system is malfunctioning, according to the American delegation at the meeting. Do you envision an alternative mechanism of interaction between science and the market?
The new generation of today’s scientists and innovators needs mentors, ‘older brothers’ that are going to help them develop a company and invest a bit of money into the development of that company along the way. Unfortunately, today’s business angels are not ready to play that role.
So, my proposed solution is to develop a national network of proof-of-concept centers. You can call them accelerators. These are not business incubators which Russia already has for successful start-ups to go to and fly off the ground with a low-cost office, a secretary, and so on.
Why do we need proof-of-concept centers (PoCs), or accelerators? Effectively, Russia’s innovation community is still very much inside the academic institutions of the country. These researchers and laboratory folks need more help than anyone else in understanding how to commercialize their ideas into real business. And this is what the role of a proof-of-concept center is all about: to assess the commercial viability of any given technology and to give that feedback to the innovator, and to also help pair that innovator together with an entrepreneur, a business manager, maybe a venture capitalist, maybe a business angel investor, maybe a market or finance expert.
The PoCs should be properly funded with government finance, which could be matched with private donations. The idea is actually to take the concept and, if it has commercial viability, form a team, protect intellectual property, prepare a financial analysis of the global market potential of that technology so that you can then put together a real financial model to allow you to assess the value of that technology. Because if you can’t make a basic value estimation, you can’t start any discussion with any angel investor or venture capitalist as there’s nothing to start from.
The reason that I’m proposing to develop proof-of-concept centers is that they can play an instrumental role working closely with university tech-transfer offices, entrepreneurship support centers in the universities, techno-parks and business incubators that are springing up around the country, together with business schools and venture management programs such as those being developed at the Higher School of Economics.
The role of the PoC is that of a catalyst; it’s like a systems integrator. It’s meant to work together with various parties and to cross different political boundaries between academia and business, politics and industry.
Another important role for the proof-of-concept centers is to effectively search the industrial landscape, assess Russian industrial corporations’ strengths, weaknesses, opportunities and threats, identify problems, and then to present those problems back to academia in order to set in motion the process of solving those problems.
My experience over 20 years in Russia shows that the fundamental sciences in this country are astonishing. But scientists need some instructions, some problems to be tasked to solve. Industry here does not do a very good job in presenting those problems to solve to academia. Industry in this country is better at listening to proposals from foreign corporations which have already analyzed Russian companies very thoroughly and come back with off-the-shelf solutions which they can sell here — at very high prices, by the way.
New ideas can be sourced domestically instead. With a PoC’s involvement an assessment could be made, using the students of a university, of a company’s production lines to determine what can be improved to make the corporation more competitive against global competitors which are surely now coming into Russia. Project teams can then be formed to help the company implement researchers’ solutions. These project teams may start out as small consulting companies introducing new systemic changes to production lines, but they can, theoretically and hopefully, grow into real companies.
So, the overall role of the PoCs, I believe, could be fundamental in developing a new class of angel investors knowing how to work with start-ups and act as brokers to bring together interested investors and entrepreneurs.
Russia’s so-called ‘development institutions,’ such as Skolkovo and Rusnano, have been this country’s official showcase of modernization for years. In your opinion, do they do anything or enough to support bottom-up initiatives and take early-stage innovators/researchers across their ‘valleys of death’?
I think in general that Russia started the process of creating the innovation economy as the Russian political system has usually started major projects. Just like the United States had its Manhattan Project, or its Man on the Moon project, Russia has traditionally begun with very large-scale programs.
Looking over the past ten years, it all began with the creation of special economic zones, the network of dozens and dozens of techno-parks around the country. These started as big real estate infrastructure projects. What the authorities didn’t understand, and what they have learned step by step over the previous five years, is that the key to an innovation economy is actually filling those big buildings with young innovators and then giving them the tools they need to make their own small businesses.
Just like a Russian entrepreneur once told then President Dmitry Medvedev, “it only costs 35 bucks and 20 minutes to create a new company in Silicon Valley.” That’s where we have to lead in this.
So, one cannot blame Russia; and certainly, as a foreign observer and patriot in this country I cannot criticize the approach of Russia because every country has its own way. Russia has historically taken a very top-down approach. But what I can say is that over the last five years these big regional infrastructure projects run by Rusnano, RVC and others have come to the point where it’s absolutely obvious that the demand on the ground is from the young entrepreneurs, and the programs have become smaller and closer to the ground in their scope.
If five years ago Russian Venture Company [RVC] was keen on setting up $500 million funds, today they are supporting their InfraFund, their Venture Partner program, the development of business angel clubs around the country; they are supporting a number of bottom-up initiatives which are critical.
Looking at prior investments, there are infrastructure real estate projects now which can house incubators and techno-parks and data centers, such as the wonderful IT Park in Kazan; it’s brand new and it has hundreds of entrepreneurs running around it. You’re feeling like in a 21st century city when you’re walking around inside that complex. For young people it’s fantastic; they don’t need to fly to Silicon Valley as they have their own innovation ecosystem in Tatarstan now, and it was built from the bottom up.
Today’s programs being developed are focused more on mentoring, on venture capital investment, on incubation. So, we have evolved from a 100% top-down system into being a system that is now providing bottom-up support. If we achieve the main aim within a five-to-ten year period, then who can criticize the approach?
And these programs are achieving goals. I can see it on the ground. I was at the Kuzbass techno-park just a few weeks ago; an absolutely fantastic system is being developed there to support and mentor young innovation companies. The same is across many other Russian regions.
Two weeks ago, Prime Minister Dmitry Medvedev rejected a government plan to develop science and technology because he found its reliance on a surge in private funding to be “absolutely unrealistic.” Many Russian officials, including the president of the Russian Academy of Sciences, side with the PM and expect government spending to increase – in sharp contrast with the Russian Ministry of Finance, which requested cost cutting in this area in order to enable the government to meet the social targets set forth by President Putin. Is there a way out of what looks like a stalemate, and is there a practical way to support innovation in Russia, in your opinion?
First of all, I completely agree with the Prime Minister’s assessment. I think that it’s too early to rely so much on private investment coming into the innovation sphere because the risks are still high. If Russia wants to create an innovation economy, it’s going to have to allocate government funds to do that: funding to Russian Venture Company, to Skolkovo and its grant programs, to Rusnano, to the Bortnik Fund, and to a number of infrastructure development programs which are going to encourage private investors to enter that market.
If you slow down the government spending now, you won’t achieve the result of attracting private investors because, as I said earlier, private investors are only coming into this environment today. The entrepreneurs who started that work 20 years ago are only in their 40s. They are beginning to be encouraged by the government investments that lower risks. And the government has to continue with that drive.
As far as structuring the budget, I’d say there has to be a priority of what the Russian government wants to do in the 21st century. Will the government focus on its historical role of being a commodity economy with high levels of defense spending, or will Russia create the modern innovation economy where marginal profits on innovation development will be no comparison with commodity-related economic development?
I think now is the time for Russia to continue and even step up its investment in developing this, just as I expect that the newly re-elected Obama administration in the United States will absolutely double down on investments in technology, in education, in infrastructure, in proof-of-concept centers, in business incubators, and so on. They will support business and technology programs, the Jobs Act that encourages crowdfunding, and other initiatives, as they understand that this is the only way to be competitive for the U.S. in the 21st century.
Russia should really do the same thing. And there’s nothing stopping Russia from becoming one of the top economies in the world in innovation. But it must set its priorities now, and its priorities must be firmly established in creating the innovation economy.
