Investing in IT business

Michael Kalinichenko – General Director of StarForce Technologies

IT business is a kind of business that makes quick profits. However, in Russia, start-up businesses are being invested less and less in recent years. Since 2008, the number of investors has decreased significantly. In the past five years, they have become even less, so there is a downward trend, today almost nothing is heard about new companies.

IT is a specific industry, which is very different from the high-tech industry, even not speaking about traditional industries. If industrial enterprises and projects are characterized by a long life cycle, then for IT industry is typically a short life cycle, which is caused by a rapid change in the market, emerging technologies and user′s preferences. Meanwhile, long-term forecasting of demand is almost impossible, especially for innovative products. For example, take smartphones. Before the advent of the first iPhone, mobile phone makers did not even consider keyboardless devices as massive. And there are dozens of such examples.

As a result, investing in IT businesses start-up are risky by definition since it is impossible to exactly predict the market situation in 2-3 years, what is the standard time for launching such projects.

The main source of funding for most IT start-ups is venture capital investments. In the world, a characteristic feature of successful venture business is the high share of specialized funds that are ready for making such risky investments and able to work in an unpredictable market.

Meanwhile, in Russia, new projects are mainly receiving funding from the State or from companies that are in the care of the State. Naturally, such investors want a guaranteed return of money, which was put in each project. As for unprofitable projects, primarily managers working in the companies are usually considered guilty.

The Russian investors become accustomed to playing by the same rules, not taking into account the features of the IT market. Besides, they believe that these rules are universal for all types of business. As a result, the approach to investing in an IT project with an innovative product is similar to investing in oil pipelines.

Another situation is in the USA, the most successful country in this kind of business, where today they have the most developed system of investment. For this country is typical specialization in the stages of investment.

The main feature of the successful innovation environment of Silicon Valley is not in a large number of specialists in one territory but in the presence of a huge number of investors who are always ready to offer investment capital to companies and entrepreneurs at any stage of development.

As a result, the US venture funds invest in 20-30 projects simultaneously, while the Russian investors put money in only 2-3 start-ups. In order to be sure that one project in IT would pay off; you should invest at least in 10. The more projects you put money in, the more likely that a few of them would become successful.

No one will demand a return of funds from all investments since market volatility and huge speed of technology development are already taken into account in the investment strategy of the funds. The bankruptcy of companies in Silicon Valley is more natural than their rise to the stock market.

Readiness to take risks and sustain local losses distinguishes the investment efficiency of Silicon Valley and other similar IT investment centers. Only the company offered an innovative solution can gain the market, but no one is able to foresee which solution will be the next breakthrough in IT in a few years.  And if so, the only way to succeed is to try. Try. And try again. Therefore, until the Russian investors are not ready to take risks and consider investment in IT as a separate business, where losses are an integral part of the success, perhaps, there won`t be new high-profile IT companies in Russia.

About StarForce Technologies Inc

StarForce Technologies is a leading vendor of information protection, copy protection and code obfuscation solutions for software, electronic content and audio/video files. Since 2000, StarForce has been successfully developing and implementing its state-of-the-art security solutions, providing copyright and intellectual property protection worldwide. Two of these solutions were transformed into StarForce cloud services: protects e-Documents against illegal copying and distribution and secures emails.

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