Moscow to bet $577M on tech ventures

Putin: looking to pick winners.

The massive government programme, which began accepting applications for funding on 26 March, is an attempt to import the kind of state-sponsored capitalism employed successfully in Finland, Israel and some other Western countries to promote technology development. There, government funds managed by professional investors have co-invested with private VCs, to help local tech companies grow.

Under the programme, a newly formed, state-funded Russian Venture Company will create a series of closed-end mutual funds in partnership with private venture capitalists. The funds will, in turn, hire professional managers to pick and manage investments in individual Russian technology companies. The fund managers, according to a summary of the programme published on RVC’s web site, www.rusventure.ru, will make their investment decisions independently of RVC and the government.

Can it work?

“The purpose is to expand new technologies in Russia, and to create businesses on the basis of research results – exactly the same goal as the public funds in Western countries,” said Esko Aho, president of Finnish innovation fund Sitra and a member of the new Russian investment company’s board. He added, in an interview, that the Russians spent a lot of time collecting information about how Western funds, including state-backed ones such as Sitra, operate before launching their programme.

But it’s an open question whether this can work in Russia. In its favour, Russia still has one of the world’s largest science and technology sectors – albeit one in decline after its Soviet-era largesse. Currently, researchers comprise 7.1 per cent of the country’s full-time employed workforce – about the same percentage as Germany and France, according to the Organisation for Economic Co-operation and Development. And, despite years of economic and political turmoil, the country manages to spend 1.17 per cent of its gross domestic product on R&D – about the same percentage as Italy.

But the country lacks a developed venture-capital industry – meaning that the first participants in the programme, now applying for co-funding under a rapid-fire application deadline of 15 April, may end up being Russian private-equity investors with no track record in venture capital, and little understanding of the care and feeding of small, high-risk technology companies.

In fact, the programme’s public documentation so far appears to reflect some confusion about the basics: it says its target is to get 80 per cent of the funds invested in “early-stage companies” – but then goes on to define them as companies with annual sales of up to 150 million roubles, or $5.8 million. In Western Europe, very few early-stage companies have sales of that scale – especially if they are in research-intensive sectors like biotechnology, and can spend years in clinical trials before selling a single pill.

Incentives for private investors

Still, it’s a novel approach for the Russians. Yigal Erlich, a prominent Israeli venture capitalist who, with Aho, is one of two non-Russians on RVC’s seven-member board, called the programme “part of the infrastructure” that Russia will need to develop its technology industry. He noted that the government is offering “some very good incentives” to attract private investors. For instance, the government is putting up half the capital for each fund, and promising to let the private investors, if successful, buy out the government “at a negative or zero real interest rate,” according to a presentation on the programme by Vitaly V. Petrov, of the Ministry of Economic Development and Trade. Petrov was speaking on 28 February at a Russian–Japanese trade conference.

But to succeed, Erlich said, the Russians will need to involve experienced Western venture capitalists. That, he said, may require clarifying some legal questions, such as whether foreign participants can operate through offshore limited partnerships to protect their investments. At the start, however, the programme’s focus appears to be domestic: only a few Russian publications reported on the programme after a Moscow press briefing in February. The Ministry of Economic Development and Trade, which manages the programme, didn’t respond to Science|Business requests for comment.

RVC, the government vehicle for running the programme, was incorporated last July as a Russian joint-stock company, according to the documentation on its Web site. Besides Erlich and Aho, its seven directors include three top government officials, a Russian journalist, and a local financier, Alexei Korobov, its CEO. The journalist is Konstantin Remchukov, a former Kremlin advisor recently named editor-in-chief of Nezavisimaya Gazeta newspaper. The government officials are Economic Development and Trade Minister Herman Gref, Education and Science Vice Minister Dmitry Livanov, and Igor Artemiev, chairman of the state Antitrust Committee.

Winners to be picked in May

Under the plan, RVC is accepting applications now from private venture investors to form a series of closed-end mutual funds. Each mutual fund will have assets under management of 1.2 billion roubles to 3 billion roubles ($46 million to $116 million), according to Petrov’s presentation. Of those sums, RVC will contribute 600 million to 1.2 billion roubles for each fund, in exchange for a 49 per cent stake. Private fund managers are to contribute the rest.

Bidding to be in the programme’s first round – involving 4.8 billion roubles – began on 26 March and ends 15 April. About 20 companies are expected to bid, according to Russia’s Prime-TASS news agency. Winners will be announced on 14 May.

The sectors to be covered are security and counter-terrorism, biotechnology, medical technologies and equipment, nanotechnology and new materials, information and communications technology, environment, transportation and aerospace, and alternative energy. Each mutual fund has five years to invest its money, and must spread it among at least eight companies, according to the RVC summary.  The companies must operate in Russia.