Venture investments in Russia: personal experience
How Konstantin Fokin spends money on a ventureBusiness Magazine
In mid-June, at the first meeting of the newly created commission for the modernization of the economy, everyone got a hard time from President Dmitry Medvedev.
Business, according to the president, is poorly motivated for innovation and is more focused on "buy-sell" schemes. The state's business is also not going well. "Neither small firms, nor established technology parks, nor venture companies, nor other mechanisms have brought results," Medvedev said. "All of this basically exists only on paper."
Entrepreneur Konstantin Fokin has many reasons to attribute the presidential criticism partly to his own account. Firstly, he is still a co-owner of a trading business that started in the early 1990s in the most banal way for those times – with the resale of all kinds of sneakers and amaretto. Secondly, he managed to try himself as an investor in small innovative companies, and in 2003 he even created the first network of business angels in Russia according to the Western model. Thirdly, in 2005-2007 he had a chance to work as an official of the Ministry of Economic Development, where the subject of his concerns were state-sponsored venture funds, business incubators and technology parks. And he later even personally "steered" one of the technoparks for two years. And fourthly, Konstantin Fokin is still very directly related to venture investments in high-tech companies. Now, as the president of the Second Russian Tech Tour, he is preparing a visit to Russia by representatives of sixty foreign venture investors. This impressive landing party will arrive in Russia at the end of September for the viewing of Russian projects and will ride along the route Moscow – Kazan – Tomsk.
In a word, Konstantin Fokin knows firsthand the "gags" that arise in Russia with the creation of an innovative economy, and he considered them from all possible angles – both as an official and as an entrepreneur. He shared his observations with Business Magazine in three monologues.
Protection from an officialOne day I woke up and thought: should I go to work for the state?
This happened at the end of 2004. By that time, we had just launched a network of business angels. It was then that I discovered that in Russia there is practically no, in official language, infrastructure for supporting and developing small businesses. I spent a month trying to find out who is responsible for it in our country. It turned out that the Ministry of Economic Development had just allocated a little (for the scale of the country) money for this venture, and fresh ideas came in very handy. I actually came to the ministry from the street and suggested: let's work together! They answered me: so come up with a model of state support for small innovative companies over the New Year holidays. This is how the model of regional private-public venture funds was born. The concept was surprisingly quickly "sold" to the then Minister German Gref. With difficulty, but the Ministry of Finance was also convinced.
At that time, two fundamental things were put into the model: officials should not make investment decisions in any case, and private owners should have some kind of economic interest in order to become more active in this field. The logic was very simple. There is a state that is ready to spend money to develop something - technology, industry, small business. The state honestly admits to itself: I have the resources, but no competencies. But the competencies are on the market. So the only correct approach is for the state to tell private owners: take a resource (for example, money), apply your competencies and develop.
In practice, it looked like this. A special closed-end mutual investment fund (ZPIF) is being formed. The state acts as a shareholder and gives money to it – no more than half, the rest is contributed by private investors. Since it is impossible to directly withdraw money from the state budget, we gave it to the region, and the region created a non-profit organization, calling it the "development assistance fund ..." And already this fund on behalf of the state became a shareholder of the ZPIF. And a professional management company with the required competencies and "understandable" to the authorities (licenses, reputation, etc.) is selected on a competitive basis to "steer" the ZPIF on the principles of trust management. This private management company is directly interested in the growth of the value of assets and the efficiency of investments, because it receives remuneration in the form of a certain percentage of the value of assets. In this model, the state acts as a highly restricted partner with no influence on investment decisions. Perhaps, for the first time in the history of Russia, the state has given its money to a private trustee – and in the venture market. The state itself is always ready to invest in some nonsense - through stupidity or corruption. And a private trader does not invest, he is more reasonable in this sense.
Do you think everything went smoothly? Traditionally, there is no shortage of people in Russia who want to manage public money. In a number of regions, there were attempts by local authorities to drag some of their own firms that did not have the required competencies into the role of a management company. At times I had to insist: guys, these funds should become a beautiful story, forget about personal interests!
As a result, there are now more than twenty such funds operating in Russia. Exactly the same model is used in the work of a Russian venture company. In addition, the regions began to use this model in other unexpected areas, which we did not even think about. Muscovites, for example, have created a guarantee fund based on it, which promotes lending.
In reality, I have only a few things in my life that I am proud of. The launch of a program of public-private funds as part of a small team at the MEDT is among them.
Incubator with a henWhat we've really done is with business incubators.
Do not think that less nonsense is being done abroad. Here, it would seem, is England. I arrived at Cranfield University two years after I graduated from the School of Management there. I look: there is a new building on campus – a business incubator. I asked where it came from. It turned out that some people from the regional development agency came and asked: "Do you want money for an incubator? The conditions are simple: build, rent to startups for free for five years, and then do whatever you want with the building!" Naturally, the university agreed. "We will lease it for five years, and then we will arrange an audience there," they say.
The fact that the state is not the most effective manager for its own money is also true for England. So blindly copying their experience is not the most sensible thing to do. EURADA (European Association of Development Agencies. – Editor's note) recently published a report in which she cited this figure: The state never evaluates 70% of European development programs for effectiveness at all – it just gives money and makes sure that they are spent in a targeted way. More than half of the programs, the effectiveness of which was still evaluated, are ineffective.
With Russian business incubators it turned out like this. Herman Gref visited Singapore, I think, looked at the incubators, and he liked it. He returned, gave the command: we will do this with us! And to make incubators in our Russian understanding is to build. And construction began, which continues to this day: more than 150 objects throughout Russia. The Ministry of Economic Development has become one of the largest customers for construction projects! The autumn before last I was fishing near Astrakhan, so there is the most beautiful building in one of the fishing villages – a brand new business incubator. I would like innovative companies to sit there, but there are simply no such companies in the village. That's why they sell flowers, wedding dresses, fish, watermelons…
It seems to me that we have made two big mistakes with regard to business incubators. Firstly, they should still be managed by professional, private structures interested in the final result (that is, in the survival and growth of resident companies). Secondly, business incubators are not about walls at all. To be honest, it didn't immediately occur to me that business incubators are actually about people. About people who can help other people "start" with their own business. The property complex is absolutely not necessary here, because startups can sit anywhere, and saving on rent does not greatly affect the fate of a newborn company. And successful professional businessmen can greatly influence it, who for some reason begin to help startups with their experience, money and connections. Do you think that officials and specially created state offices that manage our business incubators are able to build such a system of relationships?
As a matter of fact, there are no special problems with office space in the country. And if the state wants square meters to get to novice businessmen cheaper, let it subsidize the rent; why build? At that time, the management of MEDT did not dare to admit these mistakes and correct them as quickly as possible. Because of my unwillingness to do what I don't believe in and at the same time can't change, I ended my career as an official.
And then the Muscovites offered me to manage the newly built technopark in Strogino. Caught "on weak": you've been telling us for two years what to do – so go and do it! So I went.
We immediately set a clear guideline for the closest possible partnership with private business. The ideal situation, in my opinion, is when each resident of the technopark has an experienced "mentor" in any form: a private investor, consultant, representative of the fund. It was necessary to create a lively intellectual and investment environment there. It will not work without this "soft component" of the technopark. And we started inviting representatives of respected private companies to the expert council. The problem is that good, sound companies try to stay away from the state. These are only those who do not grow up themselves and are used to living on handouts, they are always happy to join some state program. We called, persuaded, invited. And slowly it began to turn out. The expert council, consisting exclusively of private traders, played a key role in making decisions on enrollment in the technopark residents. There wasn't even a consensus needed. If someone said: I like this company, I will do it, that was enough. The state followed the opinion of private business directly – and this principle is still not implemented in many places.
In general, it is important for the technopark that the main people there are not officials, but residents themselves – these entrepreneurs, inventors, mathematicians with crazy eyes. And we have consistently defended this position, up to conflicts with the Moscow government. For example, the capital's officials strongly insisted on the monopoly of Internet and telephony services in favor of one of the providers. And this is always a lot of money for tiny services. Imagine: here we dream of growing world-class companies, and some of the officials are trying to solve their own selfish issues. Is this how serious things are done?
Our technopark was filling up very slowly. According to the plan, we were supposed to go into the plus for the fourth year. And then we had a strategic misunderstanding with the Moscow government. We were told that we should achieve self-sufficiency at least today, and preferably yesterday. This meant that it was necessary to open the doors and fill the technopark with anyone, and in addition to raise rental rates. We said that we simply would not do this, because, firstly, it is impossible to change the rules of the game and tear residents at the market rate, and secondly, Moscow, in principle, can afford not to earn money on this - otherwise what is the support? In the end, our team was simply squeezed out of the technopark. I really want to believe that what has been done will not be in vain.
Before the private trader in hellI do not agree that the state needs to act as a participant in the high–tech market; rather, it needs to create rules and be a guarantor of their immutability.
You can intervene very carefully – in exceptional cases and for a limited period of time.
In my opinion, the mechanism of co-investment is the most acceptable in this area. Moreover, this mechanism should be absolutely simple and understandable for market participants. A private investor puts his ruble into the project, and the state gives him a ruble as co-investments, that is, adds liquidity to him through the lever. And the private investor himself will try to make an assessment of the project, because he risks his own money.
The only thing that the state will need to do is to select private investors with whom it will work according to this model. In other words, it is necessary to do due diligence (reliability check) not projects, but investors. The mechanism "twisted" in the opposite direction, when the state selects projects, and then tries to find a private co–investor for them, is the way to a dead end. This is probably possible for large projects and large investors (and Rusnano's first experience proves it), but it is almost impossible to do this with hundreds and thousands of relatively small projects. Let there be one mechanism for large projects with investments in the tens and hundreds of millions of dollars, and another for small ones, possibly through a system of intermediate funds. But this is how we activate the work of thousands of private investors at an early stage. The model will turn around, and everything will rise from head to foot. It is also important to make sure that, with the success of the project, a private investor earns more. And then many will try to take advantage of this opportunity. When, all other things being equal, the investor will have the opportunity to choose – to go, for example, to "nano" or "not nano", he will choose the first, because there the profitability is artificially increased by the state. I see no reason why such a scheme cannot work with foreigners. For example, in September we will bring sixty foreign investors to Russia as part of the Second Russian Tech Tour. For them, investing in technology is a core activity, they have experience and connections at the international level. It should be a gift for Russia! They all have open mandates for Russia. Tell them: if you find a high-tech project here, we will add our ruble to each of your investments for a minimum yield. Will they work more actively in Russia? They will!
For some reason, there is a myth that in times of crisis, venture activity fades. And so, and not so: even now there is clearly more money in our country than there are projects. Based on my own practice, I can say that every good project finds money (by the way, not too good either). Last year I liked one beautiful project, relatively little money was involved in it. We quickly "blinded" a small syndicate of investors from three people with different competencies, made an offer. But they turned out to be... fifth in the queue of investors. And you say: crisis! The private sector is doing fine with seed and venture investments. But thoughtful and balanced state assistance will not hurt.
Portal "Eternal youth" http://vechnayamolodost.ru27.08.2009