Banking on Technology

Russia has come a long way in 18 short years under a new political and economic system. However, in order to grow its economy, it must diversify outside of oil and gas. To achieve economic diversification, Russia will need to tap its other natural resource - technology.

In order to sustain its economic development and compete for global investment capital, Russia needs to continuously improve its investment environment and promote its achievements, especially in the areas of infrastructure, legal reform, reducing pervasive corruption, shareholder rights, education and support for R&D. As one example of progress, Russia recently passed landmark legislation on insider trading, an important step toward full-fledged financial transparency and market legitimacy.

Russia is famous for producing highly educated, world-class engineers and scientists. Unfortunately, during the Soviet regime, the other ingredients necessary to enable the emergence of an entrepreneurial culture in the private sector were repressed or nonexistent. However, technological innovation was consistently promoted in state research institutes and universities. Specifically, scientists were encouraged to spend a certain percentage of their time pursuing unique projects in non-core areas of study. This was out-of-the-box thinking at its most basic, and was highly productive. Ironically, or maybe not, these techniques are presently being used to maintain the innovative culture at large technology companies such as Google.

Today, several factors contribute to a renaissance of technology entrepreneurship in Russia: During the 1990's, many Russians with technical educational backgrounds left the fields of science and technology for traditional industries-where they could more easily earn a living and establish their careers. In fact, many of the country's oligarchs brought their engineering and mathematical skills to the business world and created some of Russia's largest non-technology companies. However, in recent years, this trend has shown signs of reversing.

Partially catalyzed by increasing competition in non-technology sectors of the economy, a new generation of market-oriented entrepreneurs and managers with deep technical training is entering the high-tech industry in pursuit of its objectively higher margins. They are inspired by startup pioneers, like Sergey Brin, co-founder of Google, Max Levchin of PayPal, and Sergei Beloussov, cofounder of Parallels and Acronis, who have shown that it is possible to generate faster and better returns in technology markets.

Many in this new generation of tech entrepreneurs gained experience in product development and management while working for leading western companies based in Russia, such as Adobe, Boeing, Cisco, Google, HP, IBM, Intel, Microsoft, Motorola, Samsung, Siemens, Sun Microsystems and Xerox. Others have complemented their technical skills with business training from emerging Russian business schools.

Another important factor contributing to the rejuvenation of entrepreneurship in Russia is the return of Russian nationals and expatriates from the United States and Europe. This trend began in 2000 and has continued over the past several years.

Many young Russians, who left to complete their education at western graduate programs and business schools, and fully expected to pursue opportunities in the West, began to see bigger potential in the professional opportunities in Russia.

The Internet is also breaking down traditional barriers and borders. Russian entrepreneurs can now start software and Internet services companies in Moscow, St. Petersburg or Novosibirsk just as easily as Silicon Valley. There are several examples of Russian technology companies that initially bootstrapped their way to $2-10 million in revenue by selling and marketing over the Internet; and subsequently achieved in excess of $100 million in revenue by expanding globally with the assistance of professional investors and managers. Many early-stage companies in Russia today are poised to achieve similar growth.

Together, these factors are contributing to a revival of technology entrepreneurship in Russia and represent a significant opportunity for venture capital investors.

As Russian technology companies evolve from entrepreneurial start-ups to global players, a natural synergy with Silicon Valley and other high-tech clusters will likely occur. Tapping Russia's other natural resource will create new opportunities for profitable and mutually beneficial technology partnerships.

Peter N. Loukianoff, co-founder of Almaz Capital Partners, pioneered technology joint ventures.

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