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Message from Moscow

Jonathan Ortmans on October 01, 2012 Source: Policy Dialogue on Entrepreneurship

message from moscow

While the world gathered in New York last week for the Clinton Global Initiative and UN General Assembly meetings, I elected to accept an invitation to head out of town to check up on progress with one of the world’s “strong government” economies grappling with how to reconcile a tradition of top-down government control with a desire for bottom up organic startup communities.

My opening meeting with economic staff at the U.S. Embassy here began with good news. After 18 years of negotiations, Russia finally joined the World Trade Organization (WTO) in August. While it has long been part of the closely observed BRIC countries, Russia is the last major economy to win admission to the WTO. By being exposed to foreign competitors, now local entrepreneurs will feel a healthy stimulus to remain innovative, and at the same time benefit from increased capital. WTO membership signals to many that this country is a legitimate investment destination.

Russia has long had the scientific and engineering talent necessary to reassure investors and fuel science-based startups as reflected in sheer volume of Nobel Laureates and international award-recipients. I have been visiting this country since 1987 and on my first trips here I toured dozens of independent research institutes full of smart, industrious scientists and engineers. More recently, now Prime Minister Dmitry Medvedev showed he understood this when he spoke out about the Russian government’s interest in innovation-based strategies for economic development and again when he visited Silicon Valley and MIT to see first-hand what was required to develop more entrepreneurial capacity.

However, Russia’s entry into the WTO has been somewhat overshadowed by international attention to President Vladimir Putin’s tightened government control over internet sites and non-profit organizations as well as the expulsion of USAID last week. This has raised questions as to whether in such a strong government environment, entrepreneurs can flourish here. The question for us now is how much entrepreneurship is restrained by this environment in Russia?

Michael Bohm, the opinion page editor of the Moscow Times, argues that the direct relationship between freedom of speech and the amount of innovation and economic growth is obvious. Per capita data GDP in the US where there is maximum free speech is around $48,000, in Iran and Libya where there is limited free speech it hovers around $6,000 with Russia in between at currently around $13,000.

It is, of course, not news that Russia has an “anti-entrepreneurial” history. Until the early 1990s, it was criminal to start a company. Russia only recently passed legislation that permitted universities and research institutes to create commercial enterprises in 2009. This history is the background for today’s lack of cultural capital for entrepreneurs. While it is no longer a criminal act to engage in entrepreneurial activities, Russia is still not perceived as a friendly environment for startups. Even with small issues, there are hurdles. It is hard to encourage startups when government officials still visit businesses to solicit bribes or offer paid protection—known locally as a krysha. The Russian Ministry of Economic Development revealed that in 2010 alone, Russians paid $581 million in bribes to authorities for security provisions, which represents 13 times more than the total amount estimated for 2005. Further, with bankruptcy so difficult in Russia, there is a new meaning to startup risk. Russia, as a result, ranks 120th in the World Bank’s Ease of Doing Business rank among 183 economies.

There has also been a lack of entrepreneurship education throughout the country. Young Russians can be very well trained in scientific and IT skills, but they tend to lack management and overall business training. Simply put, Russia has done an excellent job training generations of scientists, mathematicians and engineers, but they have not been readied to commercialize innovations or to grow businesses. The educational problem is such that foreign investors who hear pitches from Russian entrepreneurs often notice this lack of a tradition of entrepreneurship and business management skills in the presentation of their projects. They can be weak in terms of business models and management teams.

Probably in part as a response to this, the Russian government has set up the Russia Venture Company, or RVC, a fund of funds that has launched at least 12 high tech funds in Russia and abroad. Investors can provide much more than capital to Russian entrepreneurs.

Axel Tillman, VC CEO based in Boston,, has even suggested that joint U.S.-Russian deals are a perfect fit: "If you combine the excellence of Russian R&D with the excellence of American-focused sales and marketing activities, you have a winning solution," he has said in interviews.

The private sector is also taking action. For example, since 2002, the Center for Entrepreneurship (CFE) has been offering quality programming and innovative training with a mission to accelerate entrepreneurship in Russia. Among their efforts is a project to activate a nationwide professional academic association to create new curricula and enhance entrepreneurship education in universities. The Center also collaborates with other actors in the startup ecosystem, and leads a newly formed board that manages Global Entrepreneurship Week—which in 2011 held 14,550 events attended by 1,079,016 participants. In addition, it conducts policy forums aimed at improving the climate for startups and innovation and works to build a culture of entrepreneurship. I spoke at one such event celebrating CFE’s 10th Anniversary this week.

It is clear from my visit here that Russian rock-star entrepreneurs of this generation are also doing their part in helping to build a technology innovation culture. Entrepreneurs were inspired by the IPO of Yandex, the so-called “Google of Russia” and the fact that Russia has now the largest internet market in Europe. Other Russian clones of successful ventures abroad have received capital from investors in Europe, and the London-listed Mail.ru Group, for example, reported a year-over-year revenue growth of 50% for the first quarter of 2012. Many who have benefitted from shares or work experience at these entrepreneurial successes, have turned into entrepreneurs and investors themselves, slowly spurring an entrepreneurship ecosystem. For example, Igor Matsanyuk, who merged his online gaming company Astrum Online Entertainment into Mail.ru, has subsequently founded the investment company IMI.VC. Olga Steidl, now partner at dots’n‘spaces and mentor at Seedcamp, headed marketing at mobile software maker SPB Software which was acquired by Yandex.

The most recent wave of Russian startups (e.g.Kaspersky Lab, Ozon, Mail.ru) has attracted attention from incubators and accelerators from the region. For example, Finland’s Startup Sauna ran sessions at three Russian cities this year—St. Petersburg, Moscow and Krasnodar. In the 2011 Startup Sauna program, three Russian teams were admitted to the selective program covering the Baltic and Nordic region. One of them was Maxygen, a young company producing inexpensive DNA tests to detect infectious diseases in 15 minutes compared to the industry average of 2-3 hours. Russia also has some great new local incubators, such as the student-created QD incubator at the St. Petersburg State University of Information Technologies, Mechanics and Optics (ITMO), Digital October in Moscow, and the Russian State University of Trade and Economics’ (RSUTE) incubator in Krasnodar.

Startups are key to diversify the Russian economy, and in my meetings with policymakers here, it is clear they are not oblivious to this. Russia is extremely vulnerable to changes in commodity pricing with oil and gas representing two thirds of its exports. The government has launched initiatives to spur innovative businesses, such as the IT Park near Kazan; special economic zones; Rusnano, a fund aimed at building Russia’s nanotechnology industry, which has succeeded in attracting foreign life science partners; and more importantly, the Skolkovo Foundation, which, following a briefing here by its strategy director, Ekaterina Inozemtseva, clearly warrants further comment in any discussion about Russia’s entrepreneurship ecosystem.

Prime Minister Dmitry Medvedev established the Skolkovo Foundation in 2010 as a nonprofit organization charged with creating a new science and technology development center in the Moscow suburb of Skolkovo. While new (as far as I can tell only the “Cube” is built and a couple of labs in temporary locations), Skolkovo science park has already been dubbed by many “Russia’s Silicon Valley.” Based on an open innovation model, it has already produced some home grown success (e.g. Totorion) and has attracted global entrepreneurship heavyweights. (I noticed just in recent days here, Russia has enjoyed visits from the likes of Geeks on a Plane and expects more start-up rockstars at an upcoming Open Innovation Forum). Along with subsidies and tax cuts for innovative projects, Skolkovo offers the synergies created when you connect academia, industry, legal and financial resources, and the entrepreneurial and innovative talent. Skolkovo features the Skolkovo Moscow School of Management, the Skolkovo Institute of Science and Technology (SkTech), corporate R&D centers, business incubators and accelerators, an office space complex for startups, and partnerships with global private seed and venture funds. These partner funds get access to pre-selected start-ups in Russia as well as a local partner who can oversee the projects. Skolkovo has also reached agreements with corporations, like Microsoft, to create matching funds for seed investments. Cisco announced it will open an innovation center at the science park. The Massachusetts Institute of Technology (MIT) is in turn a key partner in building capacity in education, research and entrepreneurship programs at the SkTech.

Alexei xei Sitnikov, the head of international development at the Skolkovo Foundation said that the innovation hub is working with the Ministry of Interior to train a "separate" police force for the center, to create a shield against the krysha. The Foundation is said to have similar plans for its sanitary inspectors and other rent-seeking bureaucrats.

How effective this strategy is will be important to watch. While it is a great start, rule of law reforms are vital now. Even with Skolkovo’s apparent strength, it will be hard to stop the exodus of Russian engineers, scientists and entrepreneurs without expanding the reach of efforts to build an entrepreneur-friendly environment to the larger Russia. According to the New Yorker, by 2002, more than half a million Russian scientists had left. TIME magazine reporter Simon Shuster reports that corruption and bureaucracy are the forces driving “the biggest exodus since the fall of the Soviet Union,” namely the mass emigration of mostly young, educated people and members of the middle class. One graduate student I spoke with here in Moscow explained to me that she has already had to travel overseas twice to complete experiments vital to her research due to lack of equipment—and that as she nears completion of her work, she expects to leave the country for good in order to fulfil her professional objectives. She had been hopeful about SkoIkovo but said the labs will just not be ready in time for her needs. Other well educated Russians I ate lunch with up brought up low salaries as an incentive to leave but for most this was not their primary reason. In a world when many economies are seeking to attract foreign talent, addressing this is urgent for Russia. Entrepreneurs need to feel confident about the larger regulatory framework and judicial system in which they will operate and access to technology.

I leave Russia however still optimistic for the future of startups. In the words of one entrepreneur I met, Oskar Hartmann, founder of KupiVIP.ru, “There is no better time to be an entrepreneur in Russia. Everything is changing everyday and entrepreneurs thrive on uncertainty.”

Hartmann reminded me of the glass half full shoe salesman who went to Africa and reported home with glee—“They have no shoes!” He did not see finding money and administrative bureaucracy as major hurdles to Russians with ingenuity. To ideas-driven entrepreneurs with initiative, these are just tests and all part of the challenge. So, while the road traffic in Moscow seems to get steadily worse each visit, entrepreneurial opportunities for Russians are increasing. While some fear that future clampdowns on individual freedoms will slow opportunity, we should afford Russians more time as they reinvent themselves for our new, less predictable world.

Category:  Global 

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