Kendrick White, CEO of Marchmont Capital Partners, Nizhny Novgorod, Russia, answers questions of VentureVolga.com
Mr. White, it’s believed that to launch a successful IT startup you don’t need anything but brains and a laptop, and that IT is looked upon as one of the most perspective sectors of Russian innovative economy. Would you agree with it?
Yes, I agree. It’s true for the main reason that it’s a shorter turnaround period, a shorter investment time horizon, it requires fewer capital resources for the investors backing such projects. And what is most important, it utilizes Russia’s greatest resource which is its intellectual power in mathematics, algebra, physics and so on.
What would you say about Nizhny Novgorod, the place you live and work in, in this regard?
Nizhny Novgorod is one of the top leaders in the country in creating new IT businesses along with Moscow and Saint Petersburg. The city has a huge competitive advantage compared to other regions in Russia.
What IT products are created here?
The IT sector represents very high tech R&D. I would point out the leading role of IT in a space telecommunications and other spheres; it is not only software and games.
How big is the share of start-ups from NN in the Russian IT market?
According to the recent statistics, NN was the third city in Russia for initiation of IT projects. I was extremely proud and happy to learn that. Nizhny used to be the third capital of Russia with its local industrious merchants first and then due to its economic reforms in the 90s. But over the last 20 years I saw Nizhny fall from its position from the standpoint of economic output, population, while other areas in Russia such as Yekaterinburg and Novosibirsk grew faster. However, there is a huge potential for Nizhny Novgorod to return to a prominent position in Russia because I firmly believe that it could be one of the top innovation clusters in the country.
Provided that the problem of start-up commercialization is solved?
I’d say it is related not only to IT technologies. The problem of commercialization concerns other high tech sectors of Russian economy. They require longer term investments, a longer investment horizon, not 2-3 years but 5-7 or more. If you look at biotechnologies, genetic engineering, chemical sciences, material sciences, these technologies take much longer to create new products for global consumer markets but they are coming also as Russia is at the leading initial stages of developing its innovation economy. The more entrepreneurs and business angels risk their money on high tech and IT and they start to get returns, the more it will stimulate other investors to follow the example and invest in other spheres of technologies. Over the coming ten years I expect this process to blossom.
If it is so easy to launch an IT-project, why don’t we see a lot of success stories such as IPO of Yandex on NASDAQ? Or we just don’t know about them?
I think there are a lot of successful stories but these people are still building their businesses. We begin to hear stories beyond Yandex about Kaspersky, David Yang and ABBYY Labs or Sergey Belousov, senior partner of Runa Capital. I think there is a new generation of IT start-uppers. One of the problems for Nizhny Novgorod is that young entrepreneurs tend to very quickly move to Moscow because of the very close location, compared to start-up entrepreneurs in Tomsk where it’s not so easy. In my opinion, Nizhny is more beautiful than Moscow and there is much better quality of life. I hope that they decide to stay here rather than move to Moscow. There are a lot of success stories in Moscow though a lot of them are actually about entrepreneurs from Nizhny Novgorod.
Obviously, there is lack of information about successful entrepreneurs. My objective with my media company is to highlight such stories of young start-uppers and also teach about this. I try to go to universities to show that it’s possible to set up a new company here. And we need to show young people that there are a lot of examples of that kind.
Some experts say that some Russian success stories do not become Russian ones because young programmers go to Silicon Valley and become American entrepreneurs, such as Google with Sergei Brin. How would you comment on this?
It’s a very disturbing trend. It’s understandable — if there is no hope in Russia people will look for where they can use their brains, experience and education and they will go where they can start their companies in an easy way. But in this situation it’s not very good for Russia. So I want to see Russia improve the climate here.
Government should understand that start-up entrepreneurs are not like oil and gas, something to be taken from the ground and sold. They are bright intelligent people and they have a choice to live wherever they want. To create a real innovation economy, the role of the government is to establish fair objective rules of the game. That means intellectual property protection, property rights, a fair judicial system, antimonopoly legislature, wonderful educational system, good infrastructure – these are the things that lower risks. Lowering risks makes it easier to do business and make money. So the idea is to create the system that makes it easy for private individuals to make money. There is no future for state capitalism.
The government should lower taxes for companies that invest in innovations. It creates motivation and develops innovation market in Russia. So the main goal is to stimulate the local innovation market and not just tell start-uppers to go abroad and sell their products to Europe, Israel and America but to create the demand inside of Russia from industrial companies. From this standpoint Russia’s entry to WTO will be an absolutely critical factor because it will increase competition which is the key to innovation economy. If we can create the markets inside of Russia, it will be easier for Russian innovators to sell their products to Russian buyers. And then when the markets are established, they can export their products to other markets to all over the world.
What stimulation measures should be taken to improve the situation?
Several key policies should take place. One is complete revision of tax policies that can encourage industrial owners to invest in themselves. Secondly, there should be complete revision of intellectual property rights. The largest fine of violation of intellectual property rights in Russia is 160,000 euros. The largest fine in America is more than one billion dollars. People should know in Russia that the court will believe and protect you so all those laws need to be fixed.
The third area for improvement is currency laws that nowadays make it almost impossible for entrepreneurs to actually create licensing agreements with Google, Android or Icestorm. They are all electronic therefore you cannot present such papers to the bank in order to set your bank account in currency. So they need to go to Cyprus to open a bank account and then take money in the suitcase and factually become a criminal by bringing their money secretly. So laws need to be fixed as they shouldn’t feel this way.
If this is going to change, there will be a reverse process. Russian entrepreneurs will come back to Russia from Silicon Valley because their families are here, the roots are here, and — let’s face it – it’s a great place. Instead of the brain drain there will be a brain gain.
You’ve once mentioned a pre-seed program for Russian start-ups Marchmont is going to participate in. Would you please give some details about it?
In the last two years I came to understanding that Russian business angels are mostly too young to provide necessary advice. They are ready to invest some money in projects but they still need to see a business plan, financial model, market assessment, commercialization strategy and a team of people. And in most cases a start-up innovator doesn’t have those things. Maybe they have a brilliant intellectual idea but they still need a business plan. Being that there are not enough business angels, I’ve decided to create the proof of concept center. The idea was originally created more than 20 years ago in the University of Colorado by Mr. David Alan and since then other universities started to create their own versions of that. The most prominent of them is Deshpande Center in MIT.
If you can’t assess who needs the technology and how to commercialize it into products which people need, then you cannot begin to make a financial model and assessment of evaluation of that technology. Therefore the most important role of the proof of concept center is to assess commercial viability of any given technology. If it proves to be fantastic then the center has to help an entrepreneur make a business plan, a market survey, intellectual property protection and a company itself. Then the center packages all of this into a very nice business plan and presents it to investors. That’s exactly what Russia needs.
Is there hope that such a center will be open in Nizhny Novgorod?
I’ve proposed my partners creation of a pre-seed proof of concept center which I would like to be based in Nizhny Novgorod. It will become one of the critical catalysts in this region to support early-staged technology commercialization. We can present projects to business angels clubs, the Venture Partner program of the Russian Venture Company, Runa Capital, Almaz Capital as they all are looking for projects. There is no lack of money in Russia but there is lack of qualitative business plans. The proof of concept center will package projects specifically for Russian investors and I also hope that it will become an agency that helps to seek out and identify technologies to be applied inside Russian enterprises.
Prepared by Ekaterina Romanova, Alexander Blagov