K.White book

Innovation for Business: a 21st Century Development Model for Russia

Part VI

Angels and seed capital: too few, too little, but the winds changing

The statistics developed by the Russian Venture Capital Association demonstrate that fully 80% of the money in Russia is already dedicated to restructuring and expansion. Less than 20% is allocated to early stage financing, seed stage and start-ups.

This disparity explains why the concept of business angels is so important. In the U.S. in 2007, before the crisis, a review by the Economist Intelligence Unit revealed that approximately 250,000 business angel investors existed with accumulative investments of an estimated $30 billion in start-ups and seed funding. This is a statistical indicator of an innovation economy. In Russia, the figures are still very, very small.

I helped to start my first business angel club in 1987 in Chicago with friends from my graduate school. We pooled together our money and started investing in the financial commodity exchange in Chicago. We experimented with different investments, and at one point we accumulated $10,000 and bought a new seat on a new 24 hour currency trading exchange. It was a brand new innovation in finance. We rented the seat for six months to a currency broker for $5,000/month. Half a year later we sold that seat for $100,000. We took a risk and we made a profit.

So with much experience, I can see that Russia is now developing several business angel networks, such as the group Private Capital based in Moscow, and the Unions of Business Angels in Russia (SBAR) in Moscow.

In Nizhny Novgorod, the Start Invest business angel club is run by Eduard Fyaxel, and was ranked last year as one of the leading, if not the leading business angel investor in Russia. Today, the new formal professional association for angel investors, called RuBAN, the Russian Union of Business Angel Networks, has been launched and is led by Konstantin Fokin.

Russia is creating a new generation of VC funds focused on seed capital and early stage expansion. The range should start from $25-50k investments and go up to a $3-5m, and possibly up to $10m. Beyond that there are many professional fund management firms in Moscow actively looking for projects that need up to $100m. In this large scale range theres no problem sourcing finance for sizable Russian projects.

The problem is for the early stage projects, which simply require $25-50k to make a prototype, or move from unit production to serial production. I think, between the Russian Venture Company and Rusnano the diversification of the ranges has already begun. I strongly believe that this will encourage a new generation of private investors to enter the market.

Untying Russias IP knot

If a Russian innovator with a PhD in mathematics feels he can never become wealthy in Russia but sees many incentives and a higher salary for him to move to the Silicon Valley, what should he do? Stay in Russia and remain poor, or move to America where he knows he can become rich through his hard work and knowledge?

The nation needs to do its utmost to encourage its bright young minds to stay in Russia and make their business in Russia. But these brilliant individuals must be free to connect and communicate with other like-minded people. The university system is the first place where people should begin to feel this freedom.

The fundamental law that was approved last summer, #217, is absolutely critical for the future of Russia. It focuses upon defining rights in ownership over intellectual property developed at a state university.

For the first time in Russias history the law says that the project developer at Russian universities (individual and/or group/lab) has a share of direct ownership of the project and IP behind its technology alongside the university as an entity. Prior to that whatever was created by and within a university was undivided federal property.

Also the law allows the setting-up of innovative SMEs by and within Russian academia, with private investors being part of new companies.

Intellectual property is the key, and any person should have the right to hold on to his property and be a part of a company that develops based on his technology. The individual must a direct ownership of the technology.

Universities should participate; in fact, professors, laboratories, student bodies and universities as entities should all share in the development of a new company and have shareholdings in it.

Unless ownership in the intellectual property is clear, no person or entity will feel confident that money could be made with that project.

Unfortunately, as an investor I saw many examples of brilliant technology coming from the education system of Russia. However, when I asked the question Who owns the intellectual property? as a potential investor wanting to own a percentage of the technology, I was informed that the intellectual property was owned by the federal government. Immediately, I stopped my investment due diligence because I thought: Why should I invest in the technology if Im not going to own it?

As an investor, I should have the direct ability to own a percent of the intellectual property, and have the option to sell it upon exit.

Why am I going to develop another Google if Im not going to own it? Why should I look for financial investors if I cannot guarantee them they will become owners of the company? an innovator has the right to think. I hope the new law will serve to solve this dilemma.

27 Aug '10

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