The Russian business landscape has been transformed over the past decade, with many entrepreneurs and investors stepping forward to take advantage of a freer business environment. The results of this business perestroika are evident in the successes of home-grown tech giants such as Yandex and Mail.ru. However, the flow of investors from the west can be characterised as a steady stream, rather than a torrent. In my view, part of the reason some western investors avoid Russia is, at its most basic, fear of the unknown.
Russia is undergoing a revolution in investment similar to changes in the US half a century ago. In the US, the first venture capital (VC) funds were established after the Second World War. By the 1970s, some of these had evolved to target early-stage companies. Only in recent years has a similar system developed in Russia. As a result, Russian VC funds have not yet developed into worldwide brands. There are currently no Russian equivalents to Sequoia or Summit Partners. At the initial stage of Russia’s VC market development, simply having the money and the expertise has been enough. However, in terms of the complexity of deal-making and buoyancy of the Russian VC market, there is little to differentiate it from the west.
Looking purely at cultural differences, there are subtle variations in how business takes place. Reputation and referrals count for a lot in the Russian VC market, more so than in the US and the UK, but not quite to the same degree as in China. Doors will still open to western VCs lacking connections in Russia. However, there is an obvious advantage in having contacts, even if they are not within the tech industry. The most tangible difference is in how pitches are received. Russian tech conferences are notable for the low level of pitching that takes place. It is unusual for a start up to approach a Russian VC and embark on an elevator pitch. Cold pitching is uncommon.
In relation to making connections, Russian VCs largely ignore local networking sites, such as VK, and prefer western platforms, such as LinkedIn and Facebook. Whereas UK VCs may baulk at contacting a potential business partner via a Facebook message, their Russian counterparts usually welcome a more personal touch. Similarly, Russian VCs are much more inclined to ditch the company office or boardroom meeting for the informal setting of a restaurant.
Western investors and entrepreneurs can often be put off by what they perceive to be cold body language among Russians, but the simple fact is they tend to smile only when they mean it. If after 15 minutes of impassive responses your Russian business contact cracks a smile, you will know you are on a firm footing.
Many western businessmen can also be surprised by the average age of Russian tech VCs. They tend to be a lot younger than their western counterparts. It is not uncommon to reach director level at a fund by the age of 26. This has a lot to do with people starting work at a younger age, usually taking up a role while at university, and the fact that there is a notable skills gap in the tech VC market due to its relative immaturity in Russia. In other investor segments, the age range is more comparable to the west.
These cultural differences are minor relative to the benefits of doing business in Russia. Western entrepreneurs and investors have an advantage in speaking English – a valued ability. The vast majority of investor deals follow English common law, and tech companies and deals are structured with US and European audiences in mind. Company reporting and business procedures also usually follow the western model, raising companies to a higher standard than Russian law demands.
The government plays a relatively hands-off role in the tech sector. There are several large government funds that promote peripheral tech segments and support start-ups. Public-private partnership projects within the tech industry are also common. But political influence is negligible and not something VCs or entrepreneurs should worry about.
I would, however, caution potential investors to be wary of start up clones. Given the number of solid and innovative start-ups populating the tech industry, it is unnecessary to target a deal with a clone.
One of the most valuable assets a western investor or entrepreneur can bring to the Russian tech market is knowledge of international expansion and scaling. Russia has one of the strongest pools of developers anywhere in the world, but has a dearth of talent experienced in expanding a tech business into European or US markets. There is also a relatively small pool of people with tech business development and management experience, but the talent gap is closing fast.
Doing business in Russia is not the enigma many people believe it to be. With knowledge of Russia’s business culture and a good understanding of the opportunities in the market, it soon becomes just as accessible as the west.