Moscow : When Sergei Kalugin, a Russian businessman, cashed out of some telecom projects he was managing a little over a year ago, he began casting around for other business pursuits.
In terms of the "next big thing", there was one crucial limitation. As he puts it: "I didn't have enough money to buy an oil company." But he adds, he wanted to do something "creative and entrepreneurial". That is when the internet beckoned.
He is now chairman of Web Media Group, which has invested about $20 million (Dh73.46 million) in a number of Russian internet start-up projects. In the process, he has become something rarely found in Russia: a swashbuckling, Silicon Valley-style venture capitalist.
Most financiers have little stomach for technology investing in Russia, which is surprising, given the Soviet legacy of high-tech successes. In spite of the potential of a large pool of maths and science talent, most consider it too great a risk.
"Venture capital is the most risky sector, and Russia is a risky country. So you're really double-dipping on the risk," says Dmitry Krukov, who runs a private equity fund for Renaissance Capital, a Moscow investment bank.
As a result, Russia, once the country of Sputnik and Yuri Gagarin, has now faded from the forefront of global technology development, as the Soviet state-sponsored infrastructure of research institutes atrophies and universities remain badly underfunded. Meanwhile, the private sector has not made up the difference.
Managerial issue
Alexandra Johnson, managing director at Draper Fisher Jurvetson, the Silicon Valley venture capital company, specialises in Russia. She believes technology underdevelopment is mainly due to the lack of good managers.
"There is a lot of money [in Russia], and a great science and engineering base, but not enough talented entrepreneurs and managers to run these companies," she says.
The unpopularity of high-risk investment in technology is an advantage, however, for those who dare. Yuri Milner, head of another VC company in Russia, Digital Sky Technologies, which recently bought 2 per cent of Facebook, says the lack of competition does not trouble him too much.
"If you've got a great project, sooner or later you'll wind up in this office," he winks, from his eyrie on the 50th floor of a chrome and glass tower high above the Moscow River.
For, whereas internet entrepreneurs in Silicon Valley have dozens of VC companies to choose between, in Russia, there are no more than a handful.
Kalugin hopes more people follow in his footsteps. "There has never been a huge market for these projects here until very recently. Internet in Russia is a serious business, and people are slowly catching on," he says.
Without Soviet-style state support, or developed private-sector sources of capital, Russian technology remains stunted. Most talented programmers leave to work abroad, rather than stay to try to set up their own companies.
Dmitry Loschinin, head of Luxoft, Russia's largest software offshoring company, identifies the lack of investors willing to invest in budding technologies as the biggest problem facing innovation in his country.
Comparing the west to Russia, he says: "To bring projects along, you need three types of investors. The first ones, who invest in the beginning, are the so-called ‘three Fs' — friends, family and fools.
There is no tech-friendly stock exchange in Moscow, although there is an attempt under way to mimic London's Aim exchange, for alternative investments. There are also no stock options, the key ingredient for the high payouts of Silicon Valley.
Nonetheless, Kalugin is undaunted. Having invested $20 million in Web Media Group, according to the company's statistics, he says he is busy developing internet projects or buying them. There are 11 in the portfolio, in various stages of development, and most are tried and tested Russian versions of successful western formulas.
Russian internet companies are successful in their market niche, and Russian internet usage rates are some of the fastest growing in the world.
The country's biggest search engine, Yandex, grew at 94 per cent in the year to August 2009, the fastest rate in the world for a search engine, according to a survey by ComScore, the internet research firm — albeit from a low base. According to Web Media Group statistics, it has 4 million unique users and 40 million monthly page views.
There are many other high-technology areas for investors with a big appetite for risk, ranging from wimax, a type of wireless network, to artificial intelligence, to nanotechnology.
Russia's political leaders are discovering that as their country increasingly lags behind the world's elite knowledge economies, they need to boost the sector.
To that end, the government created a state corporation in 2007 to fund innovation, Rusnano, based in Moscow, which specialises in nano-technology and plans to spend hundreds of millions developing and licensing technologies over the next few years.
Part of this initiative will involve the creation of a $100 million venture capital fund, established by Rusnano in partnership with VTB Group, Russia's second-largest state-owned bank, and Draper Fisher Jurvetson.
Just as Kalugin hopes other investors follow in his footsteps, so the Russian government hopes that by acting as a funder itself, it can be a model to help spur the sector, too.
— Financial Times
