Key indicators
Population 142.9 million
GDP $2,118bn
Global competitiveness index
Innovation 68
Capacity for innovation 1-7 (best)
84 3.8
Quality of scientific research institutions 1-7 (best)
58 4.0
Company spending on R&D 1-7 (best)
75 3.2
University-industry collaboration in R&D 1-7 (best)
67 3.6
Government procurement of advanced technology products 1-7 (best)
67 3.3
Availability of scientists and engineers 1-7 (best)
64 4.1
PCT patent applications applications/million population
41 7.7
Source: World Economic Forum 2015-16
Markets and technologies for Russia’s NTI
|
Sector |
Description |
Head(s) of working group |
|
EnergyNet |
Distributed power from personal power to smart grid and smart city |
Boris Ryabov and Alexey Chaly |
|
FoodNet |
System of personal production and food and water delivery |
Sergey Vyhodtsev |
|
SafeNet |
New personal security systems |
Alexander Galitsky |
|
HealthNet |
Personal medicine |
Alexey Repik |
|
AeroNet |
Distributed systems of unmanned aerial vehicles |
Sergey Zhukov |
|
MariNet |
Distributed systems of unmanned maritime transport |
Sergey Generalov |
|
AutoNet |
Distributed network of unmanned management of road vehicles |
Sergey Kogogin |
|
FinNet |
Decentralised financial systems and currencies |
Mikael Gorsky |
|
NeuroNet |
Distributed artificial elements of consciousness and mentality |
Andrey Ivaschenko |
Technologies of interest
Digital design and simulation
New materials
Additive technologies
Quantum communications
Sensory
Mechabiotronics
Bionics
Genomics and synthetic biology
Neurotechnologies
BigData
Artificial intelligence and control systems
New sources of energy
Unit base, including processors
Source: Agency for Strategic Initiatives
Corporate entrepreneurship practices in 10 companies in Russia, Kazakhstan and Belarus
|
|
Companies |
Ownership |
Corporate entrepreneurship practice |
Possible development |
Motive for introduction of practice |
|
1 |
Russian Venture Company |
State-owned |
Venture funds with various legal and organisational forms, jurisdictions and technology focus |
Further diversification of venture investment methods and target technologies |
Development and support of the national ecosystem of innovations |
|
2 |
Rosnano, Rostelecom |
State-owned |
Management of technologically focused external venture project portfolio |
New ways, forms and methods of venture investment |
Maintaining technological leadership in the industry |
|
3 |
Alfa Bank, Wargaming (Belarus), Russian-Kazakh Nanotechnology Fund |
Private (AB, WG), State- owned (RKNF) |
Selecting projects by managing seed incubator, the first steps in external venturing |
Starting the venture fund, managing the portfolio of technology-focused external projects |
Gaining technological leadership in the industry |
|
4 |
Lanit and Morton groups of companies (IT integration, construction) |
Private |
Selecting projects outside their corporate structure for internal venturing |
May think about incubation and selection of projects internally |
Keep share in the old markets and looking for the new ones |
|
5 |
Saturn, Uralvagonzavod (manufacturing navy and airplane engines, military vehicles) |
State-owned |
Corporate renewal, internal project development |
Employee motivation programs, elements of internal venturing |
Requirements of supervising authorities to implement the programs of innovation |
Russia is undergoing its latest experiment in state-directed technology development to try to fulfil its entrepreneurial potential. However, in a country that relishes its black humour, there seemed to be relatively few optimists during its main conferences, the Innovation Ecosystem Forum in Sochi and the Third Moscow Corporate Venture Summit and GenerationS entrepreneur showcase, at the end of last year.
As related in a quote heard by Svetlana Alexievich, the 2015 Nobel prizewinner in literature, and retold during her prize acceptance speech: “Modernisation will only happen here with sharashkas – those prison camps for scientists – and firing squads.”
But, despite attempts to squash it, some Russians retain a romantic streak harking back to Alexander Pushkin and Andrei Platonov. Russian culture has operated on many levels and there were calls at the conferences for a new generation of entrepreneurs to become the heroes of a culture. Pushkin’s Ruslan and Ludmila might have helped save Kiev from its siege but for Russia to grow into its market size could require what seems equal heroism.
To help in this, Russia’s government has begun its National Technology Initiative (NTI), a 20-year strategy to develop the $100bn-sized markets and products that can help the country be independent and reindustrialise away from commodities production.
Alexander Yakovenko, Russian ambassador to the UK, in an interview last summer summarised it thus: “Russia needs a comprehensive solution to a number of problems. First, to ensure technological independence – a task partly resolved under the Import Substitution Program. Second, to reindustrialise the economy by translating the latest scientific advances into fundamentally new products. In the long term, transition to a new technological paradigm will follow.”
The table shows the markets and technologies that Russia has focused on, including working parties and their heads.
Two of the main state organisations working on the NTI, which was awaiting presidential approval for the plans last month, are Russian Venture Company (RVC) and the Agency for Strategic Initiatives (ASI). The ASI’s summary of the NTI tried to answer common questions.
In answer to one question – “In our country, over 80% of the economy is under direct or indirect control of the state – why you are putting all this emphasis on entrepreneurs and markets?” – the ASI said: “The experiment of building the state capitalism in Russia has already shown the inefficiency of this model, and the future belongs to the models of public and private partnership. We generally cannot manage without the important role of the state even in new branches of the economy. It is demonstrated, for instance, by a struggle between Yandex and Google, occurring before our eyes. But relying only on state giants is unpromising – we need well-developed chains of suppliers and ecosystems of medium and small technological companies”.
Eugeny Kuznetsov, deputy CEO of RVC, in a speech at the Innovation Ecosystem Forum, said there were a number of issues to resolve to improve the entrepreneurial market, including having early warning of international competition, transforming older industries and having them as customers of new industries, and raising margins to improve financial returns.
However, with a ranking in 100th place for “structural weaknesses in institutions” in the World Economic Forum’s latest global competitiveness index, the Russian Federation had compromised on its improvements in “some market efficiency aspects, such as the regulatory business environment and domestic competition (96th), reflecting the government’s efforts to improve domestic conditions for doing business”.
The forum report added: “The recession following the 2014 currency crisis has already dented the country’s macroeconomic environment, with rising inflation and worsening public finances. This rather pessimistic outlook is compounded by weakening domestic demand, economic sanctions on the part of certain countries, and the uncertainty regarding future prices for mineral commodities.”
The ASI’s answer to a question about Russia having “a poor investment climate, inefficient basic institutions of a modern society that do not work, rampant corruption” leading to emigration was: “Everybody for whom the Californian comfort, sun, wine, mountains and oceans are the most important, has already left Russia. Others realise that the sun, wide, mountains and sea in Sevastopol are just as good.”
Russia ranks highly in the world for graduates in science and engineering, and 23% of its population hold a degree, but conditions to support entrepreneurs have struggled to take off and scale up private businesses to global success.
Alex Chachava, managing partner of Leta Capital, in a Global Corporate Venturing guest comment in April last year, said: “Russia has many talented engineers but few serious entrepreneurs. Technology startups have been able to develop their products but are helpless in dealing with the market’s realities. It is important to consider the curse of the big market. Due to the fact that 140 million people live in Russia, the domestic market initially seems appealing. In reality, however, most niche products can earn no more than a few million dollars.”
The Russian venture capital market peaked in 2012, with Chachava estimating a quarter of the funds raised in Russia were flowing instead to Israel-based startups.
Russian deal activity has since declined both by the volume and the number of transactions, with more than half the 171 deals going to the IT sector, according to RVC. In 2014, the decline was by about 30% compared with 2013 and by about 50% compared with 2012. There were 15 exits last year, down from 24 in 2014, according to RVC in Sochi.
These exits included substantial successes, such as South Africa-based internet and media group Naspers’ purchase of a majority stake in Russia-based classified listings platform Avito for $1.2bn, to increase its stake from 17.4% to 67.9%.
Kinnevik divested its entire 31% stake to Naspers for $846m in the deal, making a 13-times return, according to Unquote. Public funding accounts for a significant portion of VC investments, with the state providing about a quarter of the funds, according to RVC in Sochi. As well as RVC acting as a fund of funds, there are a several other state-backed funds, including Rusnano – racked by controversy after investigations against its former CEO, among others, for alleged fraud – the Internet Initiatives Development Fund, and the Russian Direct Investment Fund (RDIF). Last year, the RDIF said it would create a $1bn joint fund with Thailand-based conglomerate CP Group.
In addition, grants have been made through initiatives, such as the Skolkovo Foundation and the Fund for Assistance to Small Innovative Entrepreneurs in Science and Technology (Bortnik Fund).
The independent VC firms were subject to conflicting claims, with Prostor Capital estimating just 20 out of 245 firms counted by RVC were “alive”. Its survey of 39 venture investors found 88% expected 2016 would be worse than 2015, although the five-year outlook was better.
RVC has been trying to stem this decline in venture funding by encouraging what Kuznetsov called “social capital in cooperation” involving government-academic-industry relationships, particularly through university venturing funds, and corporations, as well as collaborations looking towards Asia, including Korea, Singapore and China.
Despite a scientific lineage that includes the airliner, the light-emitting diode and satellites, Russian innovation has been largely off the radar when it comes to the global stage, according to Global University Venturing in our Early Stage Report on the global innovation capital ecosystem part-funded by RVC last summer. The report found no Russian universities in its global list of the most important centres for student and faculty startups.
Russia has numerous projects focused on global cooperation, rather than isolation, including one trying to get five of its universities in the top 100 globally.
In May, Skoltech research centre extended the International Proof of Concept Centres Association (IPOCA) to five other Russian research universities, Kazan Federal University (KFU), North-Eastern Federal University (NEFU), Ural Federal University (UrFU), Innopolis University and Samara State Aerospace University (SSAU). Skoltech initiated the IPOCA in 2013 with the US-based MIT Deshpande Centre for Technological Innovation, the Masdar Institute of Science and Technology in the United Arab Emirates and ITMO University (Saint Petersburg), while Lobachevsky State University of Nizhni Novgorod, Tomsk Polytechnic University and Perm Polytechnic University have also joined the initiative from Russia.
Encouraged by RVC, some of Russia’s leading universities have set up university venturing and innovation programs to help their impact on local regions and their international standing.
The prestigious Moscow Institute of Physics and Technology (MIPT) has Phystech Ventures as a self-proclaimed “key element of ‘Phystech ecosystem’ dedicated to dramatically facilitate development of innovative projects on top of MIPT strong science and technology school”.
In October 2014, UrFU and its local Sverdlovsk regional government set up a venture fund to develop seed and venture financing in the Urals.
Earlier that year, Skolkovo Foundation launched a $200m fund with China-based investment group Cybernaut and internet company Qiwi partnering Moscow State University to support early-stage projects.
The latest funds, however, follow a longer line of similar efforts, including 2012’s decision by the ITMO University and the US-Israeli venture capital fund RSV to establish the startup accelerator iDeal-Machine, and a decade ago, in 2006, St Petersburg said it had set up a fund to promote venture capital in small enterprises and scientific and technical areas.
RVC and the government have also encouraged corporations to spend more on research and development as well as venturing.
However, despite its large economy, Russia was the 16th most active country in corporate-funded venture investments, with 14 deals tracked by Global Corporate Venturing in 2014. In 2013, it was the 12th most active country, with 11 deals.
In a survey of 40 innovative corporations from Russia, Kazakhstan and Belarus, half of them owned by the government, 21 have launched corporate venture funds, such as Rostelecom and Sberbank, or run external venture projects, two run internal venture projects, eight companies incubate projects themselves or participate in incubation activities jointly with partners, and nine have a program of innovation development based on a strengthening corporate R&D department, according to research by Leonid Shabad (see table below and graphics overleaf).
Last year, GS Group, a Russia-based technology company, set up a corporate venturing unit. GS Venture was spun off as a separate business unit within the holding company structure to focus on enterprises in Technopolis GS, developed by the holding company in the town of Gusev, Kaliningrad.
Its first deals included investing €200,000 ($220,000) in the Share the Moment project by the Finland-based startup Tellyo and the Startup Bar in Kaliningrad.
Hopefully, therefore, Russia’s innovation capital ecosystem will, unlike its national hero Ruslan, avoid death before winning its beloved – in this case entrepreneurs.
Summary of tax and regulations in Russia
Leo Batalov, partner at DLA Piper, from the Practical Law website
IT companies: Russia-based IT companies engaged in software development and sales activities, or provision of technical services for developed software, are eligible for reduced rates of insurance contributions until 2019 – 14% to 28% compared with the standard 30%. Expenses for certain types of research and development activities can be deducted at 150% in the period incurred, regardless of the result of those activities.
Skolkovo tax incentives: Certain tax benefits are available to Russian companies that are residents of the Skolkovo Innovation Centre. Generally, Russian companies can become a Skolkovo resident if they conduct qualifying research and development and innovation activities, and comply with certain other requirements. The main tax benefits are:
• Profits tax exemption for 10 years.
• Social insurance contributions at a reduced rate of 14%.
• A VAT exemption.
Sale of shares in Russian companies: Income is taxed at a 0% profits tax rate from the sale of:
• Unlisted shares.
• Listed shares in high-tech Russian companies.
• Shares in “non-property-rich” Russian companies.
• Participation interests in Russian companies acquired after January 1 2011 and held for at least five years.
Income from sale of equity interest in Russian companies acquired after January 1 2011 and held for at least five years is exempt from Russian individual personal income tax.
In 2014 and 2015, amendments to the Russian Civil Code and the Russian Joint Stock Company Law became effective, clarifying several existing Russian law concepts and introducing into law several new concepts typical in common law-governed transactions, such as:
• Warranties and indemnities.
• Put and call options.
• Rights of parties to shareholders agreements, including voting rights.
• Potestative conditions precedent.
On January 1 2012, Federal Law No 335-FZ – Law on the Investment Partnership – introduced the “investment partnership”, a Russian vehicle allowing for features of a common law partnership that had not previously existed under Russian law, such as:
• Allocation of profit and losses and governance votes disproportionate to the invested amount.
• Rules governing capital contributions, exits, distributions and so on.
While not widely used by private investors, the investment partnership is the preferred structure of Russian state-sponsored limited partners, such as Russian Venture Company and Rusnano. The investment partnership remains an untested vehicle and has serious flaws, such as:
• Separate taxable “income baskets” for capital gains from different securities and assets.
• Inability to claim a 0% Russian capital gains exemption for sales of securities earlier contributed by a participant in the partnership.
• Joint and several liability of limited partners in certain circumstances.
Russian law does not permit convertible debt. The concept of preferred equity is not recognised for Russian limited liability companies, the most used corporate entity form for Russian early-stage companies.
Startup generation relies on old guard for validation
It is hard to criticise money going to worthy winners or the organisers of an impressive stage show for startups but having watched the rehearsals and then the final results being handed out some of the issues in Russia’s entrepreneurial ecosystem seem to become clearer.
The judges, some arriving late, were all leading authorities but summed up the elderly, patrician nature of a culture where responsibility comes with seniority and networking skills, which usually comes with age. As one insider of the judging process put it, the top prize went to the company with technology that people could point at and say this is real rather than a business model or market. Given the National Technology Initiative (NTI) has been focusing on new markets rather than just technologies it might be seen as a missed opportunity to inspire this.
And so the $142,000 in grand prize money was shared by three winners, according to news provider EWDN. First place went to the AntionkoRAN-M anti-tumour drug that has worked effectively against head and neck, as well as cervical, cancer, in early testing.
The Samocat Sharing System, a new concept for renting scooters with cloud technology, came in second. Next year, Samocat will be launched in Moscow, Paris, and Brussels. The bronze medal went to Turbo-diagnostica that makes a software used to check the condition of engine turbo blades during use.
The GenerationS startups competition, organised in Moscow by the state-owned fund of funds Russian Venture Company (RVC), in total 35 startups receiving investments of more than $2.2m from more than 150 of the project’s partners. These included foreign and Russian companies such as SAP, IBM, Samsung, Microsoft, Johnson &Johnson, Sberbank-Technology, NPO Saturn.
Gulnara Bikkulova, director of GenerationS and a RVC board member, said in a translation by EWDN: “This year, GenerationS was made possible thanks to close cooperation with Russia’s largest corporations, which directly participated in selecting, examining and accelerating projects based on their needs for innovative developments.
“The GenerationS-2015 competition gathered a record number of applicants: 2,566 projects from 14 countries. And 141 startups selected based on the results of a multi-stage examination were able to benefit from an intensive study program in the corporate accelerators.”
GenerationS is a kind of “corporate accelerator” launched in 2014 to stimulate innovation in large Russian companies and the awards was hosted by the IR&D club of leading research and development organisations in the country.
Next tech breakthrough will come from east Europe
Kiev, St Petersburg, Tallinn, Krakow and Vilnius are the hidden gems of the tech world
Marcin Hejka, vice-president, Intel Capital, and managing director, Emea region.
First published in GCV September 2015
Uncovering new talent can take you to a range of fascinating places. Historic London has its burgeoning fintech scene, China is throwing its considerable weight behind Beijing as a high-tech startup centre, and San Francisco is home to some of the most innovative web entrepreneurs in the world.
However, these three cities are not where I am parking my shopping trolley. For me, Kiev, St Petersburg, Tallinn, Krakow and Vilnius are the hidden gems of the tech world, full of untapped talent and the places where the next big breakthroughs in technology will come from. Venture capitalists are beginning to take notice. Venture capital investment in the region increased 245% between 2007 and 2012. It is a trend that is continuing, with 2014 seeing €431m ($483m) of investment, the highest on record. These are significant figures, but we are only at the beginning of the journey.
The region is on course to become a major force for innovation, and Europe is looking east for the next tech breakthrough. There is a simple reason behind this. Before the money really flows, every tech hub needs talent – and central and eastern Europe (CEE) has it in spades.
Performance ratings on Topcoder, an online platform running international coding and data challenges, puts four eastern European universities in the top 10, more than China, Japan or the entire developed world. This dominance is even more obvious at the high-school level, with the most successful teen coder in the world coming from St Petersburg and the third most successful hailing from Zagreb. Indeed, Russia tops the platform’s global rankings, ahead of developed powerhouses like the US and Japan, while Poland, Ukraine and Belarus are all in the top-performing 10 countries worldwide. This trend continues throughout the Topcoder tables, with the Czech Republic, Kazakhstan, Bulgaria and Romania all beating France and Germany.
These young, agile, inquisitive minds are tuned into some of the most pressing problems of our data-driven age. How do you spot a computer virus you have never seen before? Or how can businesses make use of the reams of data they now have access to? The next generation are coming up with industry-changing solutions. At GoodData, for example, instead of analysing business data manually, their software engineers in Prague have created a machine learning algorithm that grows in sophistication the more it is used, spotting opportunities and risks before human analysts can. Intel Capital led a $25.7m financing round for the business at the end of last year.
For those of us who work in the region, this comes as no surprise, but it is set against a testing economic climate. In recent years, the region has suffered from economic sanctions, political instability, a crash in oil prices and protracted armed conflict. Nevertheless, while the GDP of Russia, Ukraine and Belarus have each plummeted, technology startups have flourished.
That is because tech, more than any other industry, is borderless. Intel Capital’s portfolio companies in the region do not sell to their neighbours – their innovations are shaping businesses around the world and competing with the best and brightest of Silicon Valley.
Take Parallels as another example. Created in Russia in 2000, its software allows more than 4 million users worldwide to access Windows software on their Mac devices, while more than 10 million businesses in 125 countries receive cloud services through their products. The software has become the lens through which millions of people access the latest IT, and their success is built on Russian engineering talent.
There remains a lot to be done, however. Despite the great strides in recent times, only 0.54% of venture capital activity occurs in CEE. Given the depth of genuine talent, this is a tragedy. It is not for a lack of money – according to law firm Olswang, European venture capitalists raised €3.8bn worldwide in 2014, more than at any time since 2009. The problem lies with European investment in IT. Year on year, the proportion of technology-related investments fell from 19% in 2013 to 12% in 2014. u
See more at: http://www.globalcorporateventuring.com/next-tech-breakthrough-will-come-from-eastern-europe#sthash.lScWJS39.dpuf