Major Russian companies must co-operate more with startups by setting up special venture funds to finance their projects, Russian President Vladimir Putin has said.
“I hope these will not remain empty words. I ask you to make this happen, and as soon as possible,” he is reported by Sputnik News as saying at the St. Petersburg International Economic Forum on Friday (2 June),
Putin also urged the government and Russia's parliament to approve legislation that will define the ways big companies could acquire shares in startups.
“Big business, in its turn, must have a clear legal mechanism of buying small investment companies and acquiring shares in their capital," said Putin.
Russia needs start-ups to diversify its energy-based economy. The country is recovering from a nearly two-year recession in which the economy shrunk. Last month the IMF said it expects the economy to grow 1.4% this year.
There is reason to channel more financing to start-ups. Ernst & Young survey data in a 2014 roundtable discussion reveals that 20% of SMEs in Russia cited access to finance as a key obstacle, with half of these attributing this to the high cost of borrowing.
Figures from the Russian Venture Capital Association's 2016 yearbook reveal that the number of seed and startup investments backed by venture capital (VC) funds fell from 172, or two thirds of all VC and private equity investments in 2014 to 123 (57%) last year.
The amount in funding also fell from $43 million or 4.8% of all investments in 2014, to $16m or two percent of total invested capital.
Worrying is that funding for start-ups has also fallen in those deals in which the state has been involved in largely through a fund-of-funds - the Russian Venture Company - set up in 2006.
It fell from over 40 deals in 2014, to 27 (of the 56 in total it funded) in 2016. The volume of investments also fell in successive years since 2014 – to $8.3m in 2016, almost a third of what it was in 2014.
In addition the value of exits has fallen greatly between 2013 when it was at $4.8bn from 20 deals, to last year when it was $595m from 46 deals
Corporate acceleration programme
The Russian Venture Company is already working with big companies, through its Generation S accelerator initiative.
Last year there were eight such accelerators which are carried out in partnership with major Russian companies which use the accelerator to hunt for new innovation ideas. Russian companies are then pooled together and work with the accelerator and start-ups.
Each accelerator works on a specific “track” or area such as a the creative technology track which includes solutions for education, advertising and gaming. The Generation S programme is now in its fourth year, but it's only in its second year involving corporates.
About 120 startups have been selected this year with each big company taking on between 10 and 15 of these.
Last year a quarter of participants were able to attract funding. Graduates include robotics firm Promobot, medical startup Motorika, NanoServ which offers cleaning services for heating systems.
Part of the idea, says Deputy General Director, Development Director of the Russian Venture Company Gulnara Bikkulova is to provide VC investees with an easier way to exit to big companies.
“Indeed, we know that there is a big problem in the Russian venture market — the one with exits. The venture investors hope that at some point Russian corporations will be so interested in Russian technologies that they will make up a large share of strategic investments in the market. But the pace of it, unfortunately, is very slow,” says Bikkulva.
The percentage Russians involved in starting and running a firm of less than 3.5 years old was at its highest last year since the Global Entrepreneurship Monitor (GEM) began tracking the country in 2002.
But at just 6.3% of working-age adults, according to the 2016/17 GEM report, it’s still among the lowest for any emerging economy in the world, putting it 56 out of 65 countries. The rate may worsen – just 2.1% of adults plan on starting a business in the next three years.
WayRay founder Vitaly Ponomarev, told Reuters last year that he had about 500 meetings before landing venture capital. Ponomarev puts it this way: “There are people who have money in Russia, but they don't want to be involved in anything complicated”.
Timm is a South African who writes on small business. He has not visited Russia before. Click here to sign up for the monthly Small Business Insight newsletter.
Stephen Timm is a