Does the state need a venture capital market?

The importance of building an innovative economy in Russia has been talked about for more than one year. To achieve this goal, the state has created several development institutions at once, among them the Russian Venture Company (RVC), which is tasked with the formation and development of the venture market in our country. About how this task is being implemented, what difficulties the company has to face and whether Russia has a chance to make a technological breakthrough, the Securities Market magazine asked Yan Ryazantsev, Investment director of the Russian Venture Company, to tell.

RZB: Yan Vladimirovich, how much has the crisis affected the venture investment industry?

Ya. R. The crisis has deeply affected the venture market: the first thing that the crisis has brought to the industry are problems, the second is additional opportunities. The following can be noted as problems. Firstly, the formation of funds is difficult: many investors abandon their previous plans to participate in such a high-risk area as venture investment, respectively, fund-raising is difficult. Secondly, innovative companies have also felt the impact of the crisis: sales are falling, many large consumer companies are reducing their requests, saving, buying and ordering less. This, of course, affects innovative companies, their prospects, forces them to recalculate business plans, increase the deadlines for exiting projects. For funds, the attractiveness of investing in such innovative companies is lost. All this, of course, has a negative impact on the venture capital market. At the same time, positive trends should also be noted. Large companies are now forced to reduce their costs as much as possible, including research and development, which in turn allows small innovative companies to actually replace them in various solutions that will either reduce the cost of their products or increase their sales. At the same time, the lion's share of risky work will be done by an innovative company together with a venture fund or a business angel. For the consumer, this will result in a reduction in costs, and for an innovative company – a chance to make a significant business on new technologies. Thus, the crisis is also a time of very great opportunities. Promising innovative companies today can take full advantage of this chance and redistribute financial and commodity flows in the markets. It is also necessary to remember that many large technology companies were created during the crises. I think that despite the serious crisis that our country is going through, a number of companies will soon appear that will create new industries and revolutionize entire areas in industry and the service sector. And not only in Russia, but also in international markets. Some Russian technology companies already have very good prospects in the foreign market.

RZB: There has been a lot of talk lately about the peculiarities of the Russian economy and its complete dependence on the price of oil. Do you think that the result of this crisis could be a radical restructuring of the economy, its diversification and the transition to a more technological model?

Ya. R. Now everything depends on how much everyone wants it. In Russia, decisions on the transition to a new innovative economy should be made at all levels. And if we want this, we should achieve the goal with maximum effort. Now there are completely uncontrolled processes of interaction between various state organizations, leading, often, to the stagnation of the venture market, which indicates the absence of a clearly formulated, clear positive desire. It is difficult to understand who wants to get away from the "oil needle" and who does not. At a time when some state organizations are torpedoing the scientific, technical and venture capital market, private companies are simply disoriented and do not know what to do and which organized force to turn to, which will help to get off the "oil needle". To achieve such a serious goal, it is necessary to establish a close relationship between public policy and private business, public organizations, and the media. Now, at all levels of government and business, it is necessary to understand that there will be no other chance. All over the world, countries are currently rapidly modifying their economies, developing their innovative component, and making maximum use of expansion in international markets. And if Russia does not start actively working in a similar direction, it will not have a chance to take a significant position in the global technology market. See how some Asian states operate: they are buying up technological assets in Europe and North America, and, as a result, more and more companies appear dependent on investor countries. With our "speeds" of development, we simply cannot keep up with them. If the necessary steps and decisions are not taken in the near future, Russia will never leave its dependence on raw materials.

RZB: Is there a potential for this kind of economic restructuring in our country? You consider and select promising innovative projects. Do you think we really have a chance to build a competitive innovative economy?

Ya. R. With the participation of RVC, 7 venture funds are now functioning. Each fund can invest 15-20 innovative companies, which encourages the creation of many dozens more small innovative companies. Having studied the level of technologies implemented by companies funded by our funds, we can make sure that already today some of their developments are significantly ahead of the best world analogues. Thus, 7 of our funds, plus seed funds, plus technology cluster funds can finance hundreds of similar companies. Do we have the potential or not? Of course there is! All over the world, Russian engineers and scientists are considered the best, and no one needs to prove it. It is necessary to take the last step – to create conditions under which it is more profitable and convenient for domestic scientists and specialists to work in our country.

RZB: Recently, the Prosecutor General's Office conducted an audit of the activities of a Russian venture company, funds formed with its participation, and even project companies financed from the funds of these funds. Tell me, what is the essence of the claims made by the prosecutor's office, and what was the reason for these checks?

Ya. R. The prosecutor's office really has claims, including fair ones. Last year we did a lot of work, but the funds allocated by the state to RVC were not used as efficiently as they could have been. I would like to do more: launch more programs, finance more projects. But many of the programs planned for launch are now in a "frozen" state, because a series of internal corporate events, decisions of the board of directors, changes to the charter, investment policy, etc. are needed for their approval. Unfortunately, we have not been able to optimize these processes. This suggests that we need to drastically reduce the time and money spent on conducting and implementing various programs to support the market.

We believe that the claim of insufficiently effective use of funds can be accepted, but not quite in the form in which it is declared. The dissatisfaction expressed by the prosecutor's office was that the company places funds on bank deposits. If we cannot place them on deposits, then in what form should we keep them? In cash? All the money is in banks, and as long as these funds are in bank deposits, they at least generate income, which in turn reduces the risks of our investments in funds. And the charter does not allow other types of temporary investments. Venture investment, as you know, carries very high risks, and by placing temporarily available company funds on bank deposits, we can reduce these risks. We are asked why this capital is not used for its intended purpose? This is an incorrect statement of the question. Having signed an agreement according to which the company is obliged to pay regular contributions to venture funds after some time, it is obliged not to spend these funds. They cannot be invested in another project, buy any shares with them, or spend them for any other purposes. This money must be available, so for us it can be said that it does not exist. They are in the bank – to secure our obligations. At the same time, there is money that is not tied to any similar obligations to funds. The company faces a lot of tasks for the development of the market, and we must solve a huge number of systemic problems as soon as possible, for which certain funds are intended. Our company is not currently participating in programs that require regular subsidies from the budget. We are a public company owned by the state, which has been allocated certain funds to solve a very difficult task. Our plans include the creation of funds: "seed", late stages, technological clusters. During our work, we have gained quite a lot of experience and can make such funds in a short time, for example, in 3 months. instead of 9, as in the previous contest. But the opinion that we could even theoretically invest all our funds in funds last year is wrong. It would be unprofessional and would mean the risk of losing all the public money invested in RVC.

RZB: It is rather strange that the state, which is directly interested in the diversification and modernization of the economy, consciously creates additional political risks in the venture market. What do you think could be the reason?

Ya. R. I would not say that the state. On the contrary, a number of decisions have been taken in the Russian Federation to diversify and modernize the economy. Apparently, not everyone understands this course. I would answer with the words of Krylov from the fable about the lamb and the wolf: "You are to blame only for the fact that I want to eat." That's all our fault. We manage quite a lot of capital. And this, apparently, is the main reason why we found ourselves in such a situation. If RVC were a private company, naturally, it would have to spend on very serious measures to protect such capital. We believed that there was no need for a state development institution to independently develop schemes and ways to protect capital. And we didn't have time to do it. It turns out that this is our flaw.

RCB: What are the results of the audit?

Ya. R. This is a very interesting point. As I understand it, after checking the Prosecutor General's Office, a corresponding act is drawn up and signed. However, according to the results of the inspection, we were provided with a certificate – an ordinary information document. Then the RVC and the Ministry of Economic Development were given a presentation, as well as a warning. Judging by the comments of experts, these documents are advisory in nature. It is quite obvious that the reaction of some media and online publications is completely inadequate to the results that were presented after the inspection. The work of our company is checked by auditors, there is an accounting department, an audit board under the board of directors, an audit commission and the board of directors itself. Internal control over the movement of funds is so tight that I can hardly imagine how gross violations of specific articles of regulations can appear. Nevertheless, the comments and recommendations of the Prosecutor's Office have been taken into account and a special plan has been drawn up to eliminate shortcomings. Work on this plan is underway. Of course, it is extremely difficult to do this in the absence of the general, financial and executive directors who resigned after these events. Unfortunately, financial thrift has eclipsed thrift in relation to professional personnel.

RZB: How did the Ministry of Economic Development react to this situation?

Ya. R. The Ministry commented on this as follows: the company will analyze the existing shortcomings and implement a plan to improve the efficiency of its work.

RZB: : What are RVC's plans for 2009? Are there any other investments planned?

Y. R. First of all, it is necessary to prove to the market that RVC funds are still launched, they are out of risks, including administrative ones, these funds and innovative companies in Russia can work safely. The second is the creation of seed funding funds, whose main task is to assist small development teams and provide them with the first investments to create companies and work with large venture funds. And, of course, this is the creation of the infrastructure of the venture market, i.e. the maximum information saturation of players in the market about the best practices of doing business, intellectual property protection, management of innovative companies, the organization of distribution networks on an international scale, etc. And finally, information assistance in establishing numerous contacts between players in the market. Projects should be launched to form the venture industry as a system.

RCB: Innovative technologies are a fairly broad concept. Which industries are currently the most interesting and promising?

Ya. R. The most interesting and promising, in my opinion, are the technologies of parallel data processing and digitization of the surrounding space, i.e. when it is electronic: everything has its own address, its own labels, each person, knowing his place in space, will be able to receive information about everything that surrounds him. This will require the creation of new systems of mass parallel computing, etc. This is a completely different programming paradigm, in the future a very large sector, which, in turn, will require the development of special microprocessor technology, more miniature devices. This process can give immediate results in medicine, contributing to the transition from treatment to prevention of diseases. Significant breakthroughs, I think, will be in the field of creating new effective medicines. This trend is likely to help new serious, technology companies to appear. Biotechnologies, as well as alternative energy, seem to me quite promising areas. Promising projects for the creation of new materials, including those made with the help of nanostructures, which would find their application in mechanical engineering, energy, chemical industry, automobile and aircraft construction. Serious progress can be made in robotics and production automation. New materials and new technologies can affect the development of space technology. In fact, there are a lot of promising areas now, it is impossible to list them all. However, for their development in large numbers, competent enthusiasts, their own technological entrepreneurs are needed. Where can I get them? Only one thing can solve this super task – the restoration of the system of children's and youth technical creativity in our country. This is the main innovative technology.

RZB: The venture investment industry in Russia is quite young. What problems, in addition to administrative ones that have appeared recently, do you have to face and how do you manage to solve them?

Ya. R. The main difficulty is the mentality of Russians who do not have tens or hundreds of years of entrepreneurial experience behind their backs. Another problem is insufficiently effective corporate and investment legislation. For foreign specialists, international funds and corporations that may be consumers of products or players in the technology and venture capital markets in Russia, domestic corporate law is absolutely not transparent. They face prohibitively high transaction costs in the Russian market and therefore do not seek to enter it. Entrepreneurs do not prepare their projects well enough and present them to foundations. Investors are often not competent enough in this area, and many of them simply do not have the necessary experience to manage "smart" money. They consider their participation only as financial. In fact, a venture investor should be the same entrepreneur as his partner, bring a huge amount of knowledge, business connections and experience to the company, and not just money. We strive to solve these problems. Changing the legislation and training a large number of investors and entrepreneurs is a very difficult task, now we are working, so to speak, in the "manual" configuration mode, and so far we manage to cope with it. So, we have formed 7 funds at a very high rate. I hope that more similar structures will appear on the Russian venture capital market. Further, there is a powerful synergetic effect and, as a result, explosive growth of the high–tech sector of the economy.

RZB: There is also the RUSNANO state Corporation, which, in principle, has similar goals in the development of innovative technologies. Does RVC cooperate with it or is such cooperation planned in your plans?

Y. R. The mandates that the government has issued to RUSNANO Corporation and RVC are somewhat different. RVC is engaged in the creation of funds investing in innovative companies that work in areas on the list of critical technologies. RUSNANO has a clearly defined, but also ambitious task: the state corporation must achieve serious results in the nanotechnology sector. This means that all intellectual resources and financial flows should be concentrated on this task. The list of technologies that RVC is interested in is quite large, including nanotechnology, but our company is primarily engaged in the development of the venture market through the mobilization of human capital. The venture market is primarily entrepreneurship, so we are working on the development of technology business and preparing favorable conditions for this, regardless of which industrial sector this business belongs to. To finance its projects, RUSNANO State Corporation attracts business partners to equity participation and uses various tools, primarily direct investments in the project. As a fund of funds, a Russian venture company does not do this, and this is the difference between our organizations. RUSNANO has a wider range of tools, but focuses on a specific technological area. Our company does not have such a set of tools at the moment, nevertheless, we must develop various technological industries precisely by means of entrepreneurship, developing the practice of trust management of capital. I believe that RUSNANO and RVC are complementary, complementary state programs. Thus, many companies "grown up" by RVC funds may well become the subject of attention from RUSNANO and the object of co-investment at a mature stage of development.

RZB: Despite the difference in approaches to the development of an innovative economy, RUSNANO and RVC have a common problem that is probably easier to solve together. There are many wonderful scientists and specialists working in Russia who do not know and do not know how to conduct business and sell their developments. Perhaps it makes sense for you to organize a joint educational project?

Ya. R. We are at a fairly early stage of the development of such institutions. Naturally, we are in direct contact, and at all kinds of events and conferences, we exchange opinions, but everyone should do their own thing. We are all united by one big goal – the creation of an innovative economy. However, RUSNANO and RVC are not enough solutions to this problem. Apparently, some additional tools will be developed. Everyone should become a master in their field: RVC tries to comprehend the secrets of mastery in its own, RUSNANO – in its own. Later, all this will be historically combined as one common result.

Portal "Eternal youth" www.vechnayamolodost.ru17.04.2009