20 November 2013

How successful are billionaires' investments in startups

Risky ambitions
Why venture investments of businessmen from the Forbes list often end in lossesElena Zubova, Forbes

About a year and a half ago, the chairman of the board of Rusnano, Anatoly Chubais, called a long-time acquaintance, Andrey Rappoport (No. 115 on the Forbes list, $950 million), to put the state-owned company in order with venture investments.

"Venture investments are casinos, so I should do this? Never!" exclaims Rappaport. He is in a good mood on the occasion of the birthday of the Skolkovo business School, he is one of its founders, but Rappoport is not ironic about his attitude to venture investments. For a whole year as the first deputy chairman of the Board of Rusnano, he worked as an anti–crisis manager - he froze the selection of new venture projects and updated the management team.

According to Rappaport, a venture manager should have a special mindset, because his success has nothing to do with economics. An investor finances a dozen innovative projects, hoping that at least two or three will give high profits and cover all costs, even if the rest will be unprofitable.

"Venture investments are for those who understand well what they are doing and have great ambitions," says Alexander Turkot, partner of the venture capital company Maxfield Capital, managing the money of businessman Viktor Vekselberg (No. 4 in the Forbes list, $15.1 billion).

Many entrepreneurs from the Forbes list have made a lot of money on venture projects. These are financial investors of Facebook and DST funds Alisher Usmanov (No. 1, $17.6 billion) and his partner Yuri Milner (No. 102, $1.1 billion), Leonid Boguslavsky (No.191, $500 million, Ozon, Yandex), founders of Internet companies Arkady Volozh (No. 94, $1.15 billion, Yandex), Vyacheslav Mirilashvili (No.114, $950 million, VKontakte) and Andrey Andreev (No. 127, $800 million, Badoo).

However, much more often venture investments of Forbes list members are loud PR and a graveyard of innovative projects.

Partnership with the State"Venture is a matter of investing in a new technological solution that may or may not work out," Viktor Vekselberg says in an interview with Forbes. "The success of a product depends on the market, competitors, regulation and luck."

His first experience in this field looks more like a joke. In 2003, the first Soviet millionaire Artem Tarasov, who had returned from emigration and was familiar with Vekselberg from the cooperative movement, asked to work for him. And for a few months Tarasov headed Renova Innovative Technologies LLC, offering Vekselberg to create a Center for Global Innovation on the basis of the Kurchatov Institute. No one took this project seriously, even at Renova.

In 2010, already President Dmitry Medvedev invited Vekselberg to develop global innovations through the Skolkovo Foundation. And the businessman undertook to prove that Russian startups will be able to compete with Apple, Google and Siemens. The Skolkovo Foundation, a partnership between the state and private business, should become a Russian innograd, an analogue of Silicon Valley. In 2010-2020, the Skolkovo Foundation should receive 502 billion rubles, of which 136 billion rubles from the state and 366 billion rubles from private investors. So far, Renova has invested 3.5 billion rubles in the project. The complete cessation of state financing is planned by 2025.

Venture investments in the development of the concept of this project were supervised by Vekselberg's adviser, former Financial Director of the Renova Group, Joseph Bakaleinik. It is not surprising that after the launch of the Skolkovo Foundation, venture projects appeared at Vekselberg himself. One of the first residents of Innograd – the Scientific and Technical Center of Thin-film Technologies – was established on the basis of the A. F. Ioffe Physics Institute with the participation of the Vekselberg company "Hevel". This company was supposed to produce solar modules using the technology of the Swiss company Oerlikon owned by Vekselberg, which spent 100 million francs on scientific research in 2012 alone and has 96 patents. And the solar project was originally conceived to load the capacities of Oerlikon, says a source in the company, but it did not go well.

The Hevel project worth 20 billion rubles was launched in 2009 and is 51% owned by Renova, 49% by Rusnano. The company started building a plant for the production of photovoltaic modules, but their prices collapsed due to the efforts of Chinese manufacturers, and it became clear that the cost of production would be too high. Then, instead of photovoltaic modules, the shareholders of Hevel decided to build solar power plants. In May 2013, the Government adopted a resolution on the return of investments in the construction of renewable power plants at the expense of consumers. According to the calculation of the company's management, with a capacity of 600 MW, Hevel will occupy 40% of the solar energy market. Shareholders increased the company's capital by a quarter, to 10 billion rubles, in addition, Renova provided a loan for 5 billion rubles. "The market has opened, and now Rusnano may not work, but at least it won't lose," says Rappoport.

But even in the new market, Hevel already has serious competitors. In September 2013, the state held a competition to select the projects of power plants that will receive support. Vekselberg's company won about 100 MW, while it was bypassed by two companies that received 270 MW of capacity. These companies rely on the money of a syndicate of investors under the management of Bright Capital, among others, the Minister for Relations with the Open Government Mikhail Abyzov entrusted his money to her.

The Sulzer machine-building concern is considered a successful example of venture investments in Renova. Thanks to the nitriding technology developed by the company's employees, allocated to a separate startup Sulzer Metco, in the first year of sales of automotive components, their volume amounted to € 40 million.

Not only Renova is engaged in venture investments, Vekselberg also has several specialized funds. One of these venture funds managed by Maxfield Capital is focused on the IT sector. The managing partner of the company, Alexander Turkot, used to work at IBM, and then Vekselberg offered him to head the IT cluster at the Skolkovo Foundation. "After several months of work, I couldn't figure out where I was – I thought I was on a clean–up day," says Turkot. – At the end of 2010, we signed the first contracts, and I was still not in the state."

When the work became routine, Turkot asked for free bread, and Vekselberg offered him to manage his fund. His investors are not only Renova, but also Vekselberg himself as a private individual, who invested $ 25 million. The volume of the fund is about $50 million.

The fund was launched in early 2013, the first investment was the purchase of a developer of cloud services Jelastic and a company creating an animated messenger based on the ideas of director Timur Bekmambetov. Both companies are residents of the Skolkovo Foundation. Several more deals are on the way, including the operator of the mutual lending system in the peer2peer format. The benchmark of the internal rate of return of the fund is 30% per annum.

"Venture is an investment for enthusiastic, gambling people,– Turkot believes. "It is unclear how to evaluate a project when there is no cash flow." He relies on his experience and investment sense – there should not be more than half of the fund's unprofitable projects.

Another industry fund, Biomed, with a volume of $150 million is still being formed, the anchor investor Renova is investing $25-50 million. Its managers also have operational access to technologies and developments passing through the Skolkovo Foundation. The money was invested in Bioscale, a developer of bimolecular detectors, founded by Edward Crowley, rector of the Skoltech Institute.

It is too early to talk about the results of long-term investments. The life span of Biomed is six years with a possible increase of two years.

Venture for a corporation"If you go first, you can burn out, but you can also get the jackpot.

And you can get very unpleasant dividends... and the label of a loser. But I'm getting involved because I'm bad," Vladimir Yevtushenkov, the owner of Sistema AFC (No. 23, $6.7 billion), said in a 2012 interview with Forbes.

Yevtushenkov followed the path of an innovator back in the years when many future leaders of the Forbes rating were cooperators. In 1990, he headed the Moscow City Committee for Science and Technology (MCNT). Three years later, the enterprises established by the committee joined AFK Sistema. Now AFK includes several high-tech enterprises, about 350 researchers are engaged in developments, the company has over 100 patents. In 2008-2010 (the company does not disclose more recent data) Sistema has spent more than $4 billion on modernization programs: in telecommunications – MTS, Comstar, Skylink, CMM, in microelectronics – Sitronics, RTI, in biotechnologies – Binnopharm, in fuel and energy complex - Bashneft.

The largest Western companies support innovation not only through research and development centers (R&D centers). They send hundreds of millions of dollars to corporate venture funds. For a company, this is not so much a means of making a profit as a way to diversify the business and maintain leadership.

Yevtushenkov also had such attempts. In 2003, AFK launched the venture fund "Sistema Venture" with a volume of $30 million. Yevtushenkov entrusted this money to the former director of the Steel Research Institute Dmitry Rototaev. The Fund focused mainly on the purchase of intellectual property.

In three years, the foundation has collected more than a dozen patents in various fields of engineering, electronics and medicine. Among them are the wound-healing drug Streptolaven, the Aquadisk water purification system. The Foundation also intended to patent the development of ultra-bright diodes with the involvement of a member of the Scientific council of the AFC, Nobel laureate Zhores Alferov.

Yevtushenkov called the employees of the Venture System search engines and scouts, and the fund itself resembled an intelligent vacuum cleaner. Together with the Russian Academy of Sciences, the Foundation announced a program to support innovations in the field of information systems, radio and optical systems, helicopter complexes and medical technologies. The program was designed for a period up to 2010, but by 2006, Sistema Venture had quietly curtailed its activities. The decline occurred after Rototaev and part of the projects moved to the Moscow City Committee for Science and Technology. The most discussed project was an ion cannon for cloud dispersal based on the Chizhevsky chandelier. After the arrival of Sergei Sobyanin, an external surveillance procedure was introduced into the ICNT, and Rototaev, the co–author of the patents of former mayor Yuri Luzhkov, was fired, paying more than 2.5 million rubles - a "golden parachute".

Sistema had other venture projects. In 2006, the company created a fund of 200 million rubles for small business projects in the Kama region together with the Ministry of Economic Development and the local administration. In 2007, AFK launched a venture Coral/Sistema Strategic Fund for a period up to 2014. The company invested $16.5 million in it, the fund invested in foreign high-tech companies. In 2009, Sitronics created a venture fund in Armenia for $40 million to finance radio engineering developments for the local Mars plant, which was planned to be provided with orders from the Greek Intracom Telecom (a subsidiary of AFK). The total investment volume is approximately $100 million. What is the result?

Sistema does not answer this question. Sistema AFC is not actively engaged in venture investments. At least for the last three years that I have been working at the company," Mikhail Shamolin, the company's president, says in an interview with Forbes. According to him, venture funds are mainly experiments of individual initiative employees of AFK.

Shamolin believes that there is no demand for innovative technologies in Russia, so the creation of venture funds is a hopeless business. "Venture investments are not an element of corporate strategy right now," Shamolin says. "Sistema is mainly focused on transactions with a value of $200 million and the potential to create billions of dollars in value."

Officially, the company reported a loss in only one venture fund. ZPIF "New Technologies" with a volume of 612 million rubles was launched in 2009 jointly with the state Russian venture company. MTS-Bank owns half of the shares. The bank reports that during this time the value of the asset has depreciated by half and it is for sale.

The Fund invested in the St. Petersburg company "Seismic Shelf" as a developer of technology for bottom exploration of oil fields.

Theoretically, Sistema has the same base for the development of venture investments as Vekselberg in Skolkovo. Together with Rosatom, the company created the Sarov technopark near Nizhny Novgorod. In the technopark, the maintenance of which costs the "System" 1 billion rubles annually, about 30 residents (20 times less than in Skolkovo), no violent activity is conducted there.

E-venture"The main problem of Russian innovations is that few people need them.

When there is no competition, when there are many monopolies from small to large, it is always easier to raise the tariff than to think about innovations," businessman Mikhail Prokhorov (No. 10, $13 billion) said in an interview in the summer of 2013. This is perhaps his most pessimistic statement over the past 10 years, during which he was actively interested in the topic of innovation and venture capital investments.

Big disappointment – from big ambitions and failures. Prokhorov's first innovative project in 2003 was hydrogen energy. This topic was fashionable, economists and futurologists believed that it could start a new economy of the XXI century.

According to the plan of Prokhorov and his then partner Vladimir Potanin, the hydrogen project was to bring their company Norilsk Nickel to a new market for palladium, which is used in hydrogen fuel cell electrodes. Norilsk Nickel entrusted scientific developments to the Russian Academy of Sciences within the framework of the joint program "Hydrogen Energy and Fuel Cells".

"During the cooperation with the Russian Academy of Sciences on the hydrogen project, about $40 million was spent, we read a bunch of highly scientific reports, but it did not come to the introduction of any development," recalls Mikhail Rogachev, head of the Russian Foundation for Technical Developments, former executive director for Innovation at Onexim. To put scientific ideas into practice, the partners bought the American company Plug Power, a manufacturer of fuel cells. In 2006, Norilsk Nickel paid $241 million for 35% of its shares.

In 2007, Prokhorov and Potanin began the division of assets. Prokhorov wanted to keep Plug Power for himself in order to continue developing in the field of hydrogen energy, he was ready to spend another $ 500 million on them. Potanin got the company, but it never became a source of demand for palladium. Plug Power operates in a narrow niche of production of fuel cells for warehouse equipment. The company's loss since the beginning of 2013 amounted to $18 million, capitalization has fallen more than 10 times since 2006.

Prokhorov's next project was to be nanotechnology. The businessman became keenly interested in them after in 2007 President Vladimir Putin, in a message to the Federal Assembly, called nanotechnology a priority area for the development of science and technology.

In January 2008, Prokhorov announced that he would spend up to $ 100 million on the construction of the scientific and technical complex "Staropetrovsky" in Moscow with an area of 15,000 sq. m. However, it did not go further than statements. Claims to the site where the building of the old research institute was located were made by Potanin's managers, who were engaged in the division of the partners' property. As a result, instead of scientists, employees of Norilsk Nickel and its pension fund settled there.

At the same time, Prokhorov announced the establishment of an expert council on nanotechnology, which included several dozen scientists. Over a couple of years, the council has reviewed hundreds of projects and selected several promising ones, but only one was implemented – the Optogan LED manufacturing plant. LEDs are the development of Russian scientists, from 2004 to 2009 the company "Optogan" was financed by foreign venture investors. In 2009, Onexim (51%), Rusnano (17%) and Yakutsk Regional Investment Company (33%) became its co-owners.

According to the business plan, Optogan should become profitable in 2013 with revenue of 1.5 billion rubles. At the end of 2012, revenue amounted to 1 billion rubles. Alexey Kovsh, Vice President of Optogan, says that the company will show operating profit for the first time in the fourth quarter of 2013. What is the main reason for the failure of the business plan? LED lamps save energy, but they are expensive and pay off only in two to four years, and consumers in Russia are not ready to reimburse costs for years.

In 2013, Rusnano was supposed to withdraw from the project, but in 2012 the company decided to buy out an additional issue of Optogan by 2 billion rubles and increase its stake to a controlling one. Onexim became a junior partner.

Prokhorov's latest venture project is the people's car. He promised President Medvedev the release of the E-mobile in 2012, later the CEO of the developer company "Yarovit" Andrey Biryukov announced a shift in the start of sales for 2015 due to "problems with the American contractor for the production of bodies." Biryukov was fired, and Andrei Ginzburg took his place. In the summer of 2013, he presented a test model of the car.

The parameters of the prototype are very different from those announced in 2010. Initially, Onexim promised a rotary-blade engine (RLD), although there was no serial production of an RLD modeled 100 years ago. Prokhorov told about a guy from Siberia who brought an RLD engine with a piston that did not touch the cylinder. "We were quietly stunned. Now he is our partner, everything is good in his life – he will have a percentage of sales," Prokhorov said in an interview with Vedomosti newspaper. The partnership did not take place. According to Valery Senko, Investment Director of Onexim Group, the engine could not be finalized.

As a result, instead of the RLD, the prototype has a dual-fuel (gasoline and gas) internal combustion engine. Instead of the stated consumption of 3.5 liters of fuel per 100 km – seven liters. Twice as much was the curb weight – 1350 kg. The project budget has been increased from €150 million to €240 million. "The serial production of a car requires $1 billion and five to seven years," says Sergey Tselikov, director of the Autostat agency. "The initial guidelines were impossible."

Sources in Prokhorov's entourage note that before the start of his political career, he was keenly interested in innovations, delved into details and listened to experts, but he made investment decisions exclusively himself.

Large scaleOn February 11, 2010, Vekselberg, Yevtushenkov and Prokhorov flew to Tomsk to take part in a meeting of the presidential Commission on modernization and technological Development of the Russian economy.

Prokhorov announced the project of an innovative hybrid car, Yevtushenkov's presentation agitated to support residents of technoparks through venture funds. Vekselberg did not have a presentation, he listened to President Medvedev, who called on businessmen to submit proposals for the development of a technology center like Silicon Valley.

Since then, the president has been replaced, the updated Council for the Modernization of the Economy began to meet much less frequently, and the words "modernization" and "innovation" have lost their political meaning. state-owned companies have been appointed as the main conductors of innovation. Gazprom promised to invest $1 billion in venture projects by 2020, Sberbank launched a venture fund for $500 million, announced the launch of a venture fund and Rushydro, FGC has similar plans, and Rostelecom has established the position of director of venture products. It seems that private investors have less and less space in this market.

If you want, you can read on the Forbes website the "top 10" Russian venture capitalists - 2013 with the main indicators of their activities and even with photos – VM.

Portal "Eternal youth" http://vechnayamolodost.ru20.11.2013

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