Blog: Kendrick White's Blog
| Kendrick White, Marchmont's General Director, Nizhny Novgorod
I had such an interesting set of meetings last week. After long preparations and much organizational work, I finally had an opportunity to meet the CFO of a large industrial group with 10 factories spread across Russia.
While I could find little info on this group to prepare myself, one of our partners assured me that this was a very serious group with hundreds of millions of dollars in annual sales. They made big metal things with lots of electronics inside, nothing secret in their production, but you know, they had really serious owners behind this group “very well connected” as they say.
After such descriptions from my partners who were organizing the meeting, I had ideas of huge capital requirements for modernization and innovation. This was, after all, a potential national champion in the making – a future global leader. What a chance to be able to meet with one of the top managers, and discuss strategic planning…
What a let-down. The blank look on this guy’s face when I asked him about capital requirements, strategic plans, innovation R&D, improvements of any kind said it all..
“We only need new cheap credits to replace our current expense credits”, he drawled.
“What about competing in global markets.” I naively asked?
“We only need to fulfill government orders, from budget organs. This is what our owners told us to do.”
So I pressed on asking if they needed additional project financing or perhaps VC partners to help their suppliers to improve the quality of their inputs and lower costs, but all I got was “nyet!”
Later that week, back in Nizhny Novgorod, I met with a group of young entrepreneurs. They were all excited and had fire in their eyes!
They had continued to invest all of their profits from several trading businesses built over the last ten years into the development of a revolutionary new IT product, one that was seriously disruptive and exciting!
Now they needed about $ 1.0m in VC financing to take the project to the next stage. Unfortunately there are few investors for such small projects here in Russia.
I was hard pressed to advise them so I told them about the upcoming Russian Tech Tour www.techtour.com, which will invite over 50 European VC fund managers to review Russian projects later this year in September.
This is going to be a big deal for Russia and attract a lot of attention, but could they hold out for another six months?
But they needed the money ASAP. The crisis was sapping the profit out of their original businesses, and they didn’t have the cash flow to finance this project. Sadly. I had to tell them that in this environment, with so much money to be made in speculative Russian stock market plays on Russian “blue chips”, few funds were interested real innovation here.
What an irony--people are so used to making and losing money here quickly, that the culture of patient angel investor support for a fledgling business is considered too risky. I only know of a handful of such angels and even they are having difficulties in today’s environment.
So here we are in a country that has hundreds and even thousands of large scale enterprises that badly need innovation and new products, but for some reason are unable or unwilling to spend money to invest in their development and commercialization.
There are literally billions of dollars sitting in a larger number of mid-scale PE funds ready to finance expansion and large scale production for late-stage innovation, but many of the companies which SHOULD be seeking this money to upgrade themselves, show little interest to do so.
On the other hand, Russia has hundreds of thousands of brilliant young scientists and entrepreneurs in desperate need of start-up and early stage expansion capital and guidance, but there are few high net worth individual investors willing to take on the risk of such projects.
Why are these two sides of a single coin unable to find a common ground? What’s wrong with this picture? If you have any ideas on how to unlock this secret, please fill me in!!
Comment | Existing comments (2)
This country is vast and the opportunities here are extraordinary. And if you grew up or lived abroad in the US, the UK, Europe or parts of Asia, where the rules of the game are more or less understandable after centuries of capitalistic trial and error, it’s easy to spot new market niches or opportunities here which are still open to rapid development.
This has led me on countless occasions over the years to new investment ideas and exhilarating discussions with business partners - only later to be met with countless frustrations when I’ve been told, “Great idea, but we can’t do that here” or “this would be wonderful, but the laws here forbid us from fixing this problem in this way”.
Why? If it can be done elsewhere, why can’t it be done here?
This is the root problem inhibiting the realization of countless entrepreneurs dreams of building a family business, and then growing it first regionally, than nationally, then securing partners and investors, and “boom” going international or reaching for the public financial markets.
Intelligence, creativity, resources, “out of the box” thinking – they are all here, but yet at nearly every turn, the 1,000 plus year-old culture here rears its head and speaks with two opposing voices - one always in control and eager to place even more limits and the other endlessly working to come up with ever more creative ways around the bureaucracy and artifice.
Take for example labor laws.
My own small company needed not less than six admin employees to manage the daily reports required by the authorities. I could hardly fathom what had to be reported in such minute detail to the local tax, banking, and who knows which other authorities.
And all to show who was working, when, how many hours, pregnant or not pregnant, on vacation (where?) or in their place, on time? And why? Who else cares about all of this? It’s my company, right?
But no, because there is so little trust between parties, all facts and figures must be checked and rechecked, and then cross checked again. Taxes must be assessed, fines must be found, liars and cheaters identified and dealt with, all in the guise of a “cat and mouse” game between those in authority to control and those trying ceaselessly to work around it.
Of course the normal practice of regulating economic behavior in any market economy is essential to its efficient workings, this goes without saying and bureaucracy does naturally exits everywhere.
But the absurdity and impractical nature of some rules and regulations which I have experienced here, or at least their local interpretation, lead me to wonder why they exist in the first place, and why such rules were written so ambiguously and open to so many different interpretations to start with? I guess old habits are hard to break.
And for me as an honest entrepreneur – well, I’m just caught in the middle, again being told “no, unfortunately, we can’t do that in this way!” Oh, well, another great idea bites the dust.
But several days later, when my friends and I are together in the banya, and we are talking about some new products just hitting the markets in New York, and we began to think of how these products could be produced here, with better quality, faster reactions, and cheaper!
But again, we face barriers.
The inherent cultural conflicts existing in this society have been passed from one generation to the next. It’s an ingrained, on-going effort by the center to hold control over the geographical integrity of the largest country on the planet.
Then add the fact that there are more than 100 different national ethnic groups here, each with their own individual cultures and traditions, and it’s no wonder that Russia has such a problem adapting to the 21st century global economy and emerging as a leading innovation economy.
The realization of any innovative idea requires fundamental trust by all parties. There needs to be a functioning, fair, legal system that that people respect. And there needs to be public and private support for alternative financing for each stage of an enterprises evolutionary development, from seed capital to public markets.
If an entrepreneur is constantly fighting to get around the bureaucracy and overcome an arbitrary legal system, and I am not even talking about the problem of corruption here, but rather just the struggle to initiate something new - then how can a culture of innovation take root and grow?
Innovation, by its very nature is a wide spread, bottom up process involving entrepreneurs taking risks at every stage of a products development. The end result can be the creation of a new innovative winning design which can change the world – and make the creator as rich as Bill Gates or Sergei Brin.
Top down approaches to scientific development definitely have their place in history. A fine example is the US’s Manhattan Project and NASA’s moon launch program, as well as many other such analogous projects from the Soviet Union - where this approach achieved paradigm shifts and history changing results.
But these efforts alone need to be developed in parallel with the individual efforts of millions of young entrepreneurs seeking to compete openly against one another in their own efforts to fulfill their own dreams.
The energy and initiative created by this search for individual recognition, personal freedom and wealth is the leading motivational factor in the creation of any successful innovation economy, and this is what needs to be fostered in Russia for this country to adapt to the rapidly changing world we live in.
Take for example Silicon Valley – how did it get its start?
The US government played a key role some 60 years ago in investing in numerous research programs there, lavishing federal money on R&D and production contracts from the US military.
What happened next? Individual entrepreneurs were invited in and given the freedom, and incentives to create their own private businesses on top of this foundation. Business angel investors sprung up and helped launch the dreams of such entrepreneurs as Mr. Hewlett and Mr. Packard. Does HP ring any bells?
On top of this, California’s liberal commercial and taxation laws, coupled with massive investments into an extraordinary local education system, focused on technology and business entrepreneurship, created what is today one of America’s top Innovation Clusters.
Many more have sprung up around the country in the last 50 years; in Chicago and Evanston, Illinois, in Boston along Silicon Alley, and in Austin Texas, where innovation, creativity and liberal business laws and government support have encouraged risk taking.
I believe that Russia has every chance to follow this same development model and can also create some of the world’s leading innovation clusters in places such as Nizhny Novgorod, Tomsk, Novosibirsk, Chelyabinsk and the areas surrounding Moscow and St Petersburg.
But for this plan to develop in earnest there needs to be a fundamental understanding of what makes such a system work – and that is the trust which must exist between the parties.
Without trust between entrepreneurs and regulators, between innovators and business angles, between central authorities and regional officials – the system itself will not function properly and achieve positive results.
A top down approach on its own, will certainly stimulate innovation development, but will likely miss the boat entirely in creating an efficient, diversified innovation driven economy.
But for now, back to the banya – to realize our brilliant new ideas, we actually need a factory space and imported equipment…and I should further investigate the local banking regulations, ahhh … well, maybe I should save that for another blog...
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Comment | Existing comments (1)
What should I tell my children about my experiences in Russia? That this is a “boom and bust” country of extreme experiences … and emotions?
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| Posted 23:26, 13 Mar | Comment
It’s hard to say. So many of my friends--Russians, Americans, Scandinavians, Asians—are having the same experiences in their countries.
“Here we are again, another crisis to deal with!”
Most of these friends are pure entrepreneurs, men and women who took the leap of faith in 1991 and 1992 … when things were even bleaker than today.
There we were, an entire new generation of risk takers born from the images of Boris Yeltsin, sitting proudly, nervously on the tank, listening to the soothing words of Yegor Gaidar.
Some of these friends back then had no other calling but the idea that Russia was the place to make a quick buck. Sad, but true. To many this country represented one of the last Klondike expeditions, a golden opportunity to make a fortune! Some did, and we know some still trying, but the effort and ideal is always the same, to gain some golden access to some quick riches.
Most of these people eventually moved on to other adventuresome destinations. Russia is not for the impatient or fool hearty; Russia is for those who believe in a “cause”.
For some it’s personal, for some it’s philosophic, or for a greater good, for others like me, it’s because we believe in a better future for Russia and its next generations who will have to live in this world long after we have gone.
In any case, chalk this up to “idealistic pragmatism”.
Coming back to my children - they are too young to read now—so I’d like to use this blog as an opportunity to eventually explain to them what exactly this roller coaster life in Russia has been like to an American father and Russian wife.
Beyond my children, this is platform I hope will ultimately help many of our friends and families to understand exactly what we have all gone through as ex-pats living in Russia.
This is not a country where it is easy to adapt. Russia evolves, and either you evolve with her or like a lost child, you won’t find your way.
I think one of the reasons Russia is so hard for so many people to cope with it its uncanny ability to absorb external qualities which other countries would never even consider.
It’s like watching a patient accept an organ which his body rejects. What a most remarkable experience!
One question I keep asking myself is how is it possible for a country to be simultaneously as selfish as anything Ayn Rand could have dreamed up and at the same time a most collective experience for an outsider to wonder at? Am I alone in these feelings?
|This blog is usually available in English and Russian|
| Welcome to my blog. I have always been sure of the business potential of Russia's regions. Here I share my thoughts on this, based on my 17+ years living and doing business here.
Mr. Kendrick D. White (49) has over 20 years of professional investment experience in Russia and is the founder and CEO ... - read more
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