7Last year, one of the most conservative and important organizations in science and technology, the Russian Academy of Sciences, founded its own innovation agency, which testified to a significant rally in Russian innovation. The equally sluggish Industry, Science and Technology Ministry held the first federal innovation project competition. Eleven subject areas have been chosen, and the Finance Ministry has allocated $40 million to the endeavor. The Industry, Science and Technology Ministry itself is undergoing structural reform, and a Department of Innovation Development, headed by well-known specialist Boris Simonov, has finally been created within the ministry.
Though the plan to develop the venture industry the ministry came up with more than a year ago has never been approved, setting up venture capital funds has come into fashion in Russia. While not a single fund existed in 2002, three appeared on the Russian market just last year. In June, Alfa Group announced it was setting up a venture fund, Russian Technology, with $20 million in capital, a significant amount for Russia. The Tekhsnabexport Concern, the largest supplier of enriched uranium on the world market with close ties to the Nuclear Power Ministry, created the $10 million Venture Investment Fund on a share basis with the Industry, Science and Technology Ministry. 
Western investors also became more active last year. Last May, Intel Capital, the venture division of the major IT manufacturer, opened an office in Moscow. Delegations from numerous investment funds came to Russia. Three forums on promoting Russian high-tech were held in the United States in six months.
Russian big business is trying to work with science and technology directly, bypassing the venture approach. Late last year, the Russian Academy of Sciences and Norilsk Nickel, one of Russia’s largest producers of nonferrous metals, signed the Program for Research and Development of Hydrogen Fuel Cells, which will last 10 years and cost $40 million. Meanwhile, Yukos opened an industry institute that was the talk of the academic community due to its state-of-the-art equipment and salaries for star scientists comparable to those in the West. 
As venture funds appear and corporate R&D increases across a variety of industries from oil to agriculture, finding a national model for managing technological progress becomes an increasingly important issue. There are models of every description out there, ranging from the ultraliberal Anglo-Saxon approach that favors venture funds to the “étatist” model that favors administration by state and big capital and huge breakthrough projects on a national scale.

A Failed Venture?

Despite the efforts of large Russian and Western investors, there are still no examples of successful venture capital projects in Russia. Vladimir Bernshteyn of Alfa Group told Expert that in the six months of its existence, Russian Technology has yet to find a single project worth funding. On the other hand, innovation companies are still wary of the venture system. Last year, 500,000 euros in prize money from a German innovation company went unclaimed, as Russian innovators refused to sell the controlling stake in their company at that price. This is a common occurrence.
According to Pavel Osipov, general director at Amphora Laboratories, which won the Russian Innovations Competition held annually by Expert, venture capital in Russia tries to get involved in a project too late in the game. Venture investors see the higher risks and the difficulty of opting out of a project due to the lack of institutions such as IPOs. They therefore demand a controlling stake in a company that has already created a new product and need funds for marketing, not R&D. In the West, venture investors traditionally come onto the scene when inventors have just applied for a patent. “No venture capitalists would come to you at that stage of development in Russia,” Osipov told Expert. “They appear when you already have a working prototype, a team, and three or four patents. But then you have already created a product and simply don’t need venture investment. You need strategic partners capable of conducting good marketing campaigns. Why do we need venture funds that operate like the investment department at a bank and then get certain powers, simply to increase risks? Bank departments don’t demand a share in the company. It is much easier to deal with a passive collection of investors or to build alliances with manufacturers in the industry who have precise knowledge of the market. Not only, in our opinion, does venture financing not fit Russia, we have concluded that in general this model for investing in high-tech is fairly questionable. If you look at the history of companies supported by venture capitalists, you see that only one in 10 companies gets to a wider market. You have to ask why the other nine never saw the light of day. There are simply no statistics on this,” Osipov said.
Yet another company that won Expert’s Russian Innovation Competition, Fomos Technology, seems to be the exception that proves the rule. “We didn’t want our decisions to be made outside of Russia, and secondly, there are already well-established companies in other countries,” Vladimir Alenkov, president of the Fomos Technology Group, explained. “We tried to figure out if we could make some organizational innovations in order to keep foreign investors from getting a critical stake in the company. We were able to attract funds into a public joint-stock company in Russia, without selling our controlling stake. The bylaws and board were set up to encourage trust. We can open a line of credit for a large amount of money in only two to three days. It was good interpersonal relationships that led the Americans to set aside their usual approaches to investment and give us independence. For us, independence means more money.”

Too Early to Say

The mismatch between standard venture investors and innovation companies is not happening because venture capitalists get involved too late and demand too much. When looking at Russia’s most successful venture companies, it becomes obvious that they all grew out of the world-class scientific institutions of the Soviet era. That is why they have a unique competitive advantage in Russia’s re-emerging market. Venture funds simply don’t know how to deal with this phenomenon. Whether the Industry, Science and Technology Ministry, currently focused on selecting national mega-projects, knows what to do either, is also in question. When all is said and done, efficient intellectual production in basic science does not equal a strong lobby. The uniqueness of the directions Russian scientists are exploring is forcing Russian innovation companies to cover the cost of supporting the national innovation infrastructure. An average investor might show some interest in basic scientific research of course, but at best as a patron. The tiny Russian innovation industry is investing resources in post-Soviet research institutes and labs because otherwise it will cease to be innovative.
“We can’t grow as quickly as the venture funds want, because we have to develop our staff, and that means supporting basic science,” Konstantin Rudakov, head of the Forexis Company and corresponding member of the Academy of Sciences, told Expert. Forexis creates software that can easily determine which bank is reliable, which cellular customers will run to another company next month, which supermarket customers will like a new product, for whom a certain region will vote, and which trader on the exchange will sell short. The mathematical theory behind Forexis’ programs was developed in the 1950s and published in scientific journals 15 to 20 years ago. It is so complicated, however, that only students of mathematician Yury Zhuravlev have mastered it. “We can afford to hire a programmer for $3,000,” Rudakov argued, “but we will have to work with this person for five years before he will understand what we want, how we set our tasks and how we accomplish them. But then he will be able to synthesize algorithms better than anyone else on the planet.” 
From the point of view of an average investor, the thought of tiny companies supporting unique post-Soviet scientific research is utter nonsense. Yet for the emerging Russian national innovation system it’s a fact. Perhaps at some later point, when the government starts providing serious support for the innovation infrastructure, we will be able to judge whether venture funds or mega-projects are more effective. Until then, it seems worthwhile to pay close attention to the odd but already popular business approaches that have evolved without state guidance or venture investment. Their main motivations: supporting basic science and keeping decision-making inside Russia.

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