In Russia, venture capitals market is yet to take proper shape whereas startupers and investors are often disappointed in their expectations and financial realities. Kendrick D. White, Founder and Managing Partner of Marchmont Capital Partners, shared his views of the current situation and its possible improvement with Invest Foresight.
– Russia’s VC market is just a small fraction of the global one, less than 1%. Are Russian and international high-net-worth individuals so reluctant to risk their money in it?
– Russian high-net-worth individuals and business angels have a long history of working to make money through Russia’s natural resources which offers relatively short time horizon in investment horizon cycles, meaning that investors could invest their money in year one and perhaps see their project through in one or two years or possibly three years and then exit with substantial profits. This is historical heritage of Russia’s commodity based raw materials economy. Shifting to the innovation economy is a major transition for Russia, because it’s a change in the mindset of investors on what type of horizons they should set as their expectations. High technology projects are not always going to be profitable in two or three years. If they advance high-tech science projects, the time horizon can be eight, or ten, or twelve years. And this is something new for Russian investors to understand. Therefore as long as Russian investors can make substantial profits on short-term real estate and commodity projects, they will continue to invest and prefer those types of investments over high-tech. When the opportunities for those quick profits disappear, Russian investors will like all other investors’ around the world look for more advanced superprofits through investing in high technology.
– Still, there are some investors who do want to invest in the venture capital market. But they still do face some problems when doing so. What is the core of the problem? Is it lack of interest or money on the part of investors or inadequacy of projects that seek funding?
– It’s a combination of multiple factors. First of all, there is a lack of qualified advanced technology projects because the universities are not playing the role they should play in developing qualified projects to present to investors, because the tech transfer function in most or all Russian universities is limited only to understanding the uniqueness of a technology and then submitting the paperwork for patenting. What is missing in universities is the ability to assess the commercial valuation of a new idea and then support the development of that idea into a real project with a real prototype trough its proof of concept and development of a working commercialization roadmap. Because universities do not do this yet, most of the projects remain at the idea stage rather then being fully developed and brought to mentors and accelerators and brought to venture capitalists.
Secondly, laws in Russia need to be strengthened regarding IP protection because many Russian angel investors would prefer to invest offshore because of better IP protection rights and ability to commercialize technology and export it out of the country without such limitations. Russia has extreme restrictions on exporting of technologies. Russia has not fully developed its IP protection laws, and Russia’s laws on investing in university need to be updated to reflect the realities and what Russian angel investors require to invest in domestic Russian enterprises.
-What should be done to improve the situation?
– I think the Ministry of Science and Higher Education needs to work together with the National Technology Initiative programs to focus on modernizing universities with the support of funding from the Russian Venture Company and NTI and other government support agencies. Funding should be given over a longer period of time to universities to develop their tech transfer and commercialization infrastructure. Three years is not an adequate period of time to assess the KPIs on a tech transfer office. Assessing KPIs on a tech transfer program at a major top ten research universities requires at least seven to ten years time to assess the value of intellectual property which is commercialized. Because if you are talking about advanced technologies, you can’t assess the success of a program based on a revenues generating, you have to assess the value which third party investors judge those projects to have, as they invest the capital into expanding projects. So it is about evaluation of the IP rather than the ability to generate quick revenue. And this is a cultural change which has to happen. Without this change Russia can not create an innovation driven economy. There has to be a change of mentality on a time horizon and there has to be a change in the understanding on the part of the government that they have to support long-term university programs which will promote advanced technologies into global markets.
– What are the key dos and don’ts which investors and startups should consider when trying to find each other?
– I think investors need to look at the status of the intellectual property on a project, has it been patented domestically and internationally, or should the technology be considered a secret know-how and therefore not patented and not disclosed to the community. So the status of how to protect the intellectual property is not black and white. Every project may be quite different, but the investors are smart and they will look at and ask questions about the IP protection. Secondly, what is the status of the team? If a university can not produce an effective team including business-related managers and people with finance experience, and a university is only able to produce a technology idea then in this case perhaps a university should seek out an industrial partner to jointly further develop the research then ultimately leading to licensing revenues or the joint ownership of new intellectual property created between a university and an industrial partner. I think that from the standpoint of the university, if they have a unique technology, they have a working prototype, they have a strategy to protect the intellectual property, then they should look for the right investor. Should they be seeking an angel investor, should they be seeking an industrial partner, that seems to do with the long-term potential of the technology. If this is a technology needing to gain application, perhaps it’s necessary to have a mentor to help bring the project to Silicon Valley. If the technology is advanced and has advanced industrial applications, then it’s necessary to prepare the technology project to eventually be sold to an industrial partner. But this can not be done by the researchers themselves, this can not be done by the professors and the students. This work has to be done to assess the commercialization roadmap on any technology idea, and it should be done by a technology transfer office, and it should be done by the professionals within the team who understand how to assess the proof of concept, and these people need specific language skills, language in science and language of business. And they need to work to translate these ideas and convert them and transfer them into workable industrial solutions.
So I think everything is possible in Russia. I think there is a growing number of Russian business angels, investors. And they are younger than maybe elsewhere. Maybe they are in their forties and fifties. But these people, this generation of Russian angels, they have a better understanding of how to use, how to leverage intellectual property, rather then simply leveraging access to land resources, and so in this situation the younger generation of Russian angel investors are more self-made. They created themselves in the last 25 years, and they understand that they can use their knowledge and experience. Not only their money, but their experience to help the next generation of young, 20 to 25 year-old entrepreneurs. So I am very hopeful that we are now developing a critical mass of a new generation of angel investors and inventors.
This new generation will create a better pipeline of projects, working together between angels, and mentors, and university tech-transfer offices. They’ll create a better flow of new projects which can go to venture capitalists. When there is a better pipeline flow of projects, money will come, Russian venture capital money, international venture capital money. When the pipeline of new projects is improved, money will then flow to Russia. If there are not enough projects, money is not going to come to Russia. This is the issue which has to be addressed by the government during the next five years.
By Oleg Kouzbit (Marchmont Innovation News) for Invest Foresight