A little over ten years ago, I found myself sitting on a sofa with Russian businessman Mikhail Fridman in the corner of a London hotel. We shared a pot of tea and chatted about the weather. Then, as corporate governance in Russia was a topical issue at the time – Standard & Poor’s rating agency was just trying to launch a new corporate governance scoring system for the country – I asked him how long he thought it might take for governance and the like to change in Russia. A generation, he had suggested.
Ten years on the market is grappling with similar issues, even as the world’s biggest corporate venturing firm Intel Capital is celebrating ten years in the market. At Intel Capital’s fireside chat today, Alexander Galitski, co-founder and managing partner of venture capital investors Almaz Capital Partners, reckoned that Russia was now into its third generation of entrepreneurs: the first being his generation of ex-industrialists and ex-academic technicians; the second being the generation of entrepreneurs who had never had a link to industry, but who just started life as entrepreneurs straight out of college – such as the man sitting on the sofa beside him, David Yang, founder and chairman of software company Abbyy. The third generation now coming to the fore, said Galitski, were those entrepreneurs who had been born in a new country, with no link to the Soviet past.
Yang related how he had started Abbyy in 1989 while he was a fourth year student. Then in 1998 he was prompted by his investors to leave Abbyy and start up a new computer device company, Cybiko. From then on, says Yang, Abbyy started to grow faster without him, and the experience was instructive. “At some moment,” said Yang, “a company should be taken over by people who are more pragmatic than the founders. Founders need to leave their companies, like a parent should let go of the hand of its child at some point.”
Marcin Hejka, managing director of Intel Capital for Eastern Europe, Middle East, Africa and Russia/CIS, observed how important this circulation both of capital and of expertise was, from the perspective of building a new economy ecosystem in any country: “When a startup achieves an exit, it generates a couple of people who become rich and who have a lot of expertise, having gone through the whole process. Then they establish new start-ups or they become investors and it creates a chain reaction.”
No such circulation existed 10 years ago in Russia , but was just starting to be seen now, said Hejka. However, it was recognised that there still need to be more exit IPOs. Leonid Boguslavsky, founder and chief executive officer of Ru-Net Ventures pointed out that while the IPOs of Mail.ru in 2010 and Yandex in 2011 were important events, they had not yet led to significant reinvestment flows.
Hejka continued: “10 years ago, there was no evidence that Russia could produce billion-dollar-plus exits in the technology space. In emerging markets, the evolution of exits typically starts with the acquisition of a local company by an international acquirer, then a local company will go public, and then finally a local company will start making local acquisitions. In Russia, we have been through the first two stages and now are starting to see local companies make local acquisitions.”
Despite these promising developments, old issues regarding Russia’s image and perceived risks still dog the market. In particular, the negative impact on valuations of Russian startup businesses by international venture capital investors was noted by speakers, and the need in Russia to build up reputation over the next ten years.
“Our tomatoes are cheap compared to other tomatoes,” said Galitski, “which is why it is important for us to have partnerships with Intel Capital and international venture capital firms.”
Boguslavsky added that his firm had seen a startup company in Brazil, similar in type to a successful one in Russia, but smaller and losing money, which had been given a valuation twice that of its Russian peer.
For all that, Russia has changed markedly over the last ten years. As Hejka said: “In early 2000, there were only 5 million internet users in Russia. Now there are 80 million. The volume of change is difficult to notice if you do not take a step back. Russia’s growth has been phenomenal. Even the weather has improved.”
