Feature stories | Finance, business

Angel investors in focus: how government’s hypercare and innovators’ hypoverve weigh down innovation drive

18 Sep '14
Oleg Kouzbit, Online News Managing Editor

Russian business angel investors last week convened for the 2014 International Business Summit in Nizhny Novgorod, in the mid-Volga area, to discuss problems and prospects of angel investing in Russia. Alongside indisputable achievements, the participants identified a number of deep-rooted difficulties that may be felt differently by individual investors but are nonetheless persistent across the angel investing spectrum in this country. Marchmont News approached two of the most experienced players in Russia’s growing field of private tech investing for their views of the current complexities. One is Prof. Eduard Fiyaksel, a serial Nizhny Novgorod based entrepreneur, the president of the Start Invest Volga Association of Business Angels and head of the venture management chair at the regional branch of the Higher School of Economics. The other is Louisa Alexandrova, the chairwoman of the St. Petersburg Organization of Business Angels. They tend to believe the worst snags lie in the government’s approach to supporting innovation, which appears to be a little wide of the mark, and in inability on the part of some innovators to move from playing with a lab idea to doing actual business.

Who rules, and how?

There still remain some clear factors that hamper the development of regional innovation ecosystems. Why? For Eduard Fiyaksel, the answer is unambiguous: because the state is eager to hold sway over everything and all the time. In his opinion, the government would do good if it chose to unfetter the process once the foundation for such an ecosystem has been laid, and let private initiatives take it from there.

”There are federal and regional development institutions; huge money’s being spent; smart people are working there—yet the results are barely visible. It’s hardly those people’s fault—it’s their headache. In the outside world, as an addition to its primary role of a rule-setter and referee in all nationwide processes a good government works to nurture an innovation ecosystem at an initial stage, releasing it later into the private hands.”

Mr. Fiyaksel set an example of the UK, a country that has launched a mechanism of shared investing between the government and business angels, with the private partners in such a consortium placed in control of the process and the government seeing that its share of the investment is not misappropriated. Russia, too, has similar mechanisms, based on RVC initiatives [RVC, the government-owned fund of funds for innovation]; however ”the government enjoys free rein in partnerships while private investors have their hands tied fast”, the entrepreneur emphasized. One of the key factors that impede Russia’s bottom-up scenarios of innovation development (unlike top-down directives the regions receive from the federal center) is, to Mr. Fiyaksel’s mind, ”a fundamental lack of government trust in private business”, which causes the latter to keep away from actively investing in innovation.

Nizhny Novgorod universities were among the co-organizers of the Business Summit; that prompted the angel investor to share with them his own recipe of growing specialists whose competencies would suit the actual needs of business:

”Ten years ago I established a business-supporting chair [at the Higher School of Economics]. I ran a small business at that time, and we would use the new chair to both train people and develop projects. The impact was enormous. The business grew from small to medium-sized and one of Russia’s leading in the field of telecommunications, and was acquired by Virgin Connect last year. Why? Because, among other things, we had been training specialists to staff our company. That was an initiative from private business.”

To insure against errors in one’s assumptions regarding what’s right and what’s wrong, criteria are needed to assess a system one develops. Who is to come up with those? The Start Invest president shared his view of this as well, setting a pretty vivid example along the way:

”I was once invited for a meeting in Novosibirsk, in Siberia, where members of a new association of innovative regions would gather. I came and listened to the governors of those regions talk at length how powerful the innovation drive was in their areas. But I knew the real status in each of these regions, and I asked a very simple question, “You already have 15 member-regions in your association. What are the criteria of selecting candidates?” There was a great and unexpected commotion after my question, and I realized in the end that they had no criteria. Some time passed, and at another meeting where I was (much unexpectedly) invited again there came an announcement that “very good criteria” had been developed. Once again, I asked a very simple question, “How many of the fifteen meet these criteria?” And once again, there was a great commotion, as it turned out that only one region did, and only to a certain extent.

How can such things be happening? The answer is clear: in the Siberian example the criteria were developed by the wrong people. The government must be kept away from this job. It is a professional community, including entrepreneurs and scientists, that must take this on. The government’s job will be to endorse the results. If the criteria are developed by the professional community, I think they will be a living thing that reflects reality.”


People, the “key missing link”

For Louisa Alexandrova, an experienced participant and leader of the angel investing movement in St. Petersburg, the main snag that obstructs the process are people who don’t bother to learn—or maybe lost in what we call “the fatty 2000s”—the skills of doing their own business.

She talked about a substantial percentage of project ideas her organization has to ditch each year. Oddly enough, it’s not flawed technology that causes the St. Pete angel investors to jettison projects. The problem is that ”people who are behind the projects turn out to be not ready or willing at all to build a real business; they do not understand a tad of their markets.” Hence the investors’ recent move to set up a separate legal entity to train such innovators in the ABCs of business.

”People are the key missing link here; that’s where the tight spot is. We might get a terrific technology, but if an investor is looking at a project team, in which none has ever come close to doing business, that’s a most scary situation for the investor. We have faced this with both the grown-up and the young; age matters little here. Russian angel investors judge projects by people who present them. I remember one investor saying, “I’m ready to invest—but on the condition that the project gets a true CEO. He’s a great guy, the technology developer, and I have no doubt he won’t cheat and will approach government regulators; but he just doesn’t understand the difference between “approach” and “get a contract,” he just doesn’t get it.”

Any project needs people who have tried their hand at business, who know what accountancy is all about, who realize that funds that have been borrowed have to be repaid, and just spending money is not enough without making it.

The bottom line here is that we have very few young people in today’s Russia who want to do business and understand what it’s all about. There are few entrepreneurs in this country. Twenty years ago, there was a whole army of those who were eager; today, it’s much easier to sit comfortably on a salary. We have realized that unless we start to bring on board mature people, well-seasoned in something and entrepreneurial enough to try something else, there will be no projects at all.”
Oleg Kouzbit, managing editor: “I’m glad you join us here and take The Bridge walk for Marchmont’s weekly review of the Russian regions’ innovative present and future. Stay close and you’ll find out more of how Russia is bridging the existing gap between its researchers and businesses.”
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Locations: Nizhny Novgorod

Tags: angel investor (1) / Eduard Fiyaksel (1) / Louisa Alexandrova (0) /

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