Wednesday, January 30, 2008

Venture Capital in Russia

I spent a few hours last evening attending a panel discussion in Palo Alto on venture capital investing in Russia. The meeting was organized by the American Business Association of Russian Professionals. I was there because Russian economic development is becoming a serious area of interest and a topic on which I am doing some research work at Wharton. It took me about an hour and a half to get from Redwood Shores to Palo Alto, as 101 was shutdown the entire way at rush hour due to a major accident. The ride home was better, but 101 north was still closed most of the way.

When I finally arrived, things were just getting started. Most of the audience of about 100 spoke Russian (I do not): there was not a representative subset of the tech or finance community in the valley as a whole. I mention this because I find it odd: Russia strikes me as one of the few genuine and relatively untapped opportunities available to investors. Three factors to consider in this:

1) Russia has a very well educated population of top-notch scientists and engineers.

2) The government is dedicated to bringing private equity money and expertise into the country, developing technology businesses, and opening up investment opportunities to foreign sources (more on this later).

3)The Russian economy is growing at around 8% a year, as compared to 2-3% and slowing in the US economy. With world demand for energy continuing to grow, the economy and living standards are only going to go up.

From what I can tell from the panel, the deficits in Russia are: experienced managers, investor experience with early stage companies, and the web of specialized resources that characterize a culture of entrepreneurship. I find it hard to believe that this won’t change very rapidly.

Among the panelists were Ilya Shirokov, a young Russian Entrepreneur who shared his experiences founding the professional social networking business Moi Krug, which was acquired by the search company Yandex in 2007, and Yan Ryazantsev, Investment Director for the Russian Venture Company. The Russian Venture Company is a government fund with about 1.3 USD to invest as a limited partner in funds focused on Russian companies. My understanding of the RVC is that it will match investments in large funds with a very low required return on investment (5%). Currently, there are only two RVC backed funds. The third panelist was San Francisco VC Marc Friend, who shared his experience investing internationally, including in France, Israel, China and India.

These turn out to be useful experiences, as Russians are looking at three countries in order to learn from their successes in creating successful venture funds: China, India and Israel. There are notable differences from each of those countries: Russia’s population is an order of magnitude less than India or China and currently shrinking; Israel, though much smaller, has established a collaborative business model that is deeply linked to the US and also European markets. Russia will undoubtedly have to find its own model, but its clear they are looking at what has worked for others as a first step.

You can see the signs of change already. As of this month, the Russian laws have been updated to allow funds to use conventional capital commitments as opposed to pooling funds up front prior to investing; this was a major barrier to outside investors. Tax laws are being examined to attract investors. And there are plenty of other innovative models (the point was raised in the panel discussion that Israel and Canada match corporate R&D to stimulate investment) that could surely raise interest in Russian investment as well.

It strikes me that the biggest problem with Russia from an outside investor perspective is information asymmetry. Forget about individual deal prospecting: it’s very hard to understand what is happening in the markets as a whole. US press coverage of Russia tends to focus on either politics or Gazprom. I certainly feel I have a better handle on Israeli, Chinese and Indian markets, partially based on personal relationships, but primarily because the US business and financial press is flooded with coverage. I subscribe to feeds for several US language Russian newspapers, but I am hard pressed to understand whether I am getting accurate or biased information. It’s also unclear how to get deeply embedded in Russian business from the outside. Indeed, if you google Russia Venture Corporation, you have to go through several pages before you get a lot of solid information.

My own opinion is that all of this looks like it adds up to something special: the opportunity to participate in the start of the development of a new economic model.

1 comment:

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