Russian Venture and Russian nanotechnology

Venture financing of the nanotechnology industry in the Russian Federation: state, problems, prospects
A.M. Kamalov
Bulletin of Chelyabinsk State University. 2009. № 9 (147). Economy. Issue 20. pp. 89-95.

The Concept of socio-economic development of the country until 2020 refers to the transition of the Russian economy to an innovative type of development. One of the priorities of the Concept is the development of the nanotechnology industry in Russia.

Solving any global problem in the economy requires a certain infrastructure. History shows that the tasks assigned to the state could be successfully solved only with the construction of a rational infrastructure (nuclear project, space project, informatization of society). For each task, the necessary infrastructure was created on the basis of already existing structures using many previously established elements and methods of interaction.

Nanotechnology is a science–intensive direction, which, according to experts, will radically change our understanding in many spheres of human life. Production based on nanotechnology will cause revolutionary changes in the social sphere as well. The development of this industry is associated with serious financial resources, so it is important to use them rationally, and the infrastructure of the nanotechnology industry is of great importance here.

Management structure. This is development management at the state level, the state program and its implementing elements. These are coordinating bodies that determine the main priority areas. Currently, this structure has mostly developed. A state program has been adopted, head centers have been created in the directions, relevant councils have been organized in the Academy of Sciences, ministries, the Chamber of Commerce and Industry, etc.

Investment structure. These are not only sources of financing, but also an effective system of interaction between innovators and investors, information accessibility, ensuring the rights of all participants, etc. Of course, venture funds play a dominant role here.

In Russia, venture funds began to be created in 1994 on the initiative of the European Bank for Reconstruction and Development (EBRD). By the end of 1996, there were 10 regional venture funds. In 1997, 12 venture funds operating in Russia formed the Russian Venture Investment Association (RAVI). Development institutions are being created to increase the volume of investments in knowledge-intensive sectors of the economy. One of such institutions is JSC "Russian Venture Company" (RVC), established in June 2006. in accordance with the decree of the Government of the Russian Federation in order to stimulate the creation of its own venture investment industry in Russia, the development of innovative sectors of the economy and the promotion of Russian high-tech technological products to the international market. RVC has two main functions: the selection of the best venture management companies on a competitive basis and the acquisition of shares of venture funds created by these companies.

In 2007, there was a noticeable revival in the Russian venture capital investment market. The Russian market of venture investment in innovations in 2007-2008 amounted to about 8-12 billion rubles. (taking into account the funds created by RVC for 6 billion rubles.).

State funds have been formed – RVC and Rosinfokominvest with a capitalization of 30 and 29 billion rubles, which will be used to finance innovative projects, respectively. Two years ago, the state corporation Rosnanotech was established.

In 2007 Venture funds under the management of Alliance ROSNO Asset Management and Troika Dialog have started active activity. Intel Capital and Cisco funds have also become more active. However, the current Russian regulatory framework practically excludes pension funds and insurance companies from venture business, whereas the activity of risk capital can increase only if long-term financing sources are available.

Venture fairs play an important role in the venture financing system, which help attract investment in the innovative sector of the national economy and help Russian developers integrate into the global venture capital market. The fair is an annual event where dozens of companies from different fields of activity and different regions of the country, selected from a significant number of applicants, hold their presentations for a group of representatives of investors and consulting organizations.

Another problem is the fact that many projects in Russia are assessed by Western experts as small, whereas the costs of expertise usually do not depend (or do not depend much) depends on the size of the project. Because of this, many projects are not considered due to possible high unit costs. At the same time, the venture investor is forced to carry out a large amount of functions related primarily to the formulation and development of business processes in the invested company, which should be compensated by more favorable terms of participation in the new organization.

The lack of activity of the Russian stock market can also be attributed to the significant reasons for the slow development of venture business. For most companies with venture capital, an investor's exit strategy through a public offering of shares will not be available. Buyouts, mergers and acquisitions of companies will remain the dominant strategies.

Another negative factor is that in many projects, the issue of developing incentives for investors is not given due attention, and the emphasis is mainly on the technical advantages of products.

One of the most significant problems is the poor information infrastructure of venture capital (for example, information about the availability and specialization of various financial institutions that could consider projects from a given region or industry, the requirements that are imposed on projects).

To date, there are practically no venture funds in Russia that are ready to invest in relatively small investment technology projects with the amount of required financing from $ 300,000 to $2 million. Such funds are too large for the Assistance Fund, which mainly provides loans for the initial stage of development in the amount of 50 to 100 thousand dollars, and too small for venture financing organizations operating in our country, which are aimed at projects with investment volumes of 2-3 million dollars, and in most cases these projects have little attitudes to new technologies.

In addition, research conducted by the National Association for Innovation and Information Technology Development (NAIRIT) has shown that more than 70% of Russian innovative developers do not trust venture funds and do not want to work with them. (In a brief message about the latest NAIRIT report, slightly smaller figures are given – VM). The funds want too much and give too little to make cooperation profitable. As part of the business plan, they require not only a description of the scope of application of this technology and calculations of expected economic dividends, but also a fully calculated production plan and marketing promotion, and some even confirmation from the first potential customers. Thus, venture investments, in fact, turn into an ordinary bank loan, but are paid for exactly as venture investments.

In addition, today, in conditions of expensive money, foreign investors overestimate their assets in terms of risks. The crisis of monetary liquidity reduces the investment opportunities of money companies, investors are reconsidering their attitude to risks in general and to venture capital in particular. During the crisis of monetary liquidity, venture projects as particularly risky have little chance of finding investors. The economic downturn, one of the elements of which is the difficult situation in the financial markets, leads to the fact that it becomes more difficult to organize an exit from portfolio companies in the most developed Western markets. In such a situation, basically everyone is focused on survival, not on dynamic development, so innovative projects in this situation may not be so in demand.

Having certain specifics, venture projects also dictate a special approach to their evaluation. Venture investments are financial and economic relations between an investor and the authors of a venture project. Consensus in these relations is achieved by many criteria that do not always coincide with the traditional ones. The main task of the evaluation is to reach a compromise between the investor and the founders of the company. The content of the evaluation process consists in a comprehensive study of the parameters of the project being evaluated, the main assumptions embedded in the model of forecasting financial flows, market behavior and much more that is contained in the business plan.

The first few years of the existence of an innovative project, when the risks are maximum, it is most difficult to attract financial resources, there is a negative cash flow of the project, which in the language of venture business is called the "valley of death".

High-tech start-up companies do not have a history of development and, as a rule, do not have a positive cash flow at the initial stage. They are characterized by a high degree of uncertainty, as they work in new or emerging markets and develop new products that are often completely unknown to a circle of potential customers.

Continuous technological changes and short product life cycles complicate the task of reliable forecasting and increase cost volatility. It is often impossible to apply traditional business process models or find analogues to such companies. A special place in the process of evaluating such projects is occupied by competitiveness factors that allow identifying the strategic advantages and disadvantages of the project and, ultimately, determining the rates of return and multipliers involved in calculating the value of the investment object.

When evaluating a venture project, it is necessary to assess not only the potential of a technology that does not yet exist, but also the consumer benefits created by a product that does not yet exist, the reaction of potential buyers to a radically new product, the reaction of competitors to it, whose business it threatens to undermine, the size of a market that does not yet exist, as well as the personal qualities and entrepreneurial abilities of the project leaders. In such conditions, the success of the project depends mainly not on financial resources, but on the effectiveness of the management team and their skills in the field of venture, rather than traditional business management. Therefore, when evaluating a venture project, it is necessary rather to evaluate not the resources, but the ability of the project team to bring it to a victorious end.

When evaluating traditional investment projects, when the size of the market, the size of the required investments, the projected returns and the degree of risk are fairly easy and accurate to determine, more or less standard evaluation procedures can be used. Although the role of the appraiser's experience and intuition is also great here, since the main work is done by the method of structured calculations.

In the case of venture projects, the situation is completely different. Radically new technologies and products are being created here, which are designed to revolutionize the market. There are no analogues of this product or technology, so there are no opportunities for the appraiser to apply a comparative approach within the framework of the project evaluation. No matter what extraordinary benefits a new product creates for the consumer, it will face serious resistance both within the company and in the market. Internal uncertainties are associated with the management features of venture enterprises, which are fundamentally different from traditional corporate governance. Also, at an early stage of the development of a new technology, it is impossible to predict how realistic it is to create it and what difficulties will arise in the course of promoting a newly created product on the market. External uncertainties are associated with the fact that a radically new product will have to revolutionize the market, but first of all – to destroy the old foundations: to change the habits of customers, to break the established ties of potential partners, to change the sales and service infrastructure tailored to old products, etc.

The younger the venture project, the greater these uncertainties, and whatever valuation methods are used here, they can only give a very rough estimate, which in real life may differ tens or even hundreds of times from the actual results both in the direction of overestimation and underestimation of the project cost.

Thus, the evaluation of venture projects is a kind of art rather than a science. Here, the value of the appraiser's experience and intuition is much higher than in the case of evaluating traditional projects. Moreover, the appraiser must have significant experience in the field of innovation, since the traditional experience of conducting evaluation procedures is often not applicable here.

Structure of innovation generation. The elements of this structure should ensure a continuous flow of innovative projects. Such elements include: universities, special zones, incubators, commercial structures, technological, innovation and consulting centers, collective use centers, etc.

The Federal Agency for the Management of Special Economic Zones (RosOEZ) and the Russian Nanotechnology Corporation signed a cooperation agreement. Now a unique production in the field of nanoindustry will be able to develop on the basis of technical and implementation zones. Development companies will have the opportunity to immediately start implementing projects, bypassing the stage of infrastructure construction.

So far, single enterprises in the field of nanoindustry are operating in Russia, and they create 0.2% of the world's products. By 2015 Russia should produce nanoproducts by more than 4 trillion rubles. and only during 2015 – by 1,350 billion rubles.

In total, there are 13 SEZs in Russia, four of which are classified as technical and implementation. It is on their basis that projects in the field of nanoproduction will be able to develop. The document indicates that a training and retraining center in the field of nanotechnology will be opened in the special economic zone on the territory of Moscow. The Federal Agency and the State Corporation decided to jointly participate in the implementation of a program to train specialists in the field of breakthrough development and technological work.

Elements of the nanomaterials and alternative energy industry will be created in St. Petersburg. They include a center for the collective use of equipment, a business incubator, a scientific and educational center, and an expertise center. It is also planned to develop the base in one of the priority strategic directions of the leading countries of the world – "Mechatronics and Robotics". A scientific and technological center will be formed in Tomsk, which, among other things, will include a center for the promotion and popularization of nanoindustry products. Perhaps the most ambitious project will be implemented in Dubna. There begins the formation of a nanotechnology cluster, including a center for the collective use of equipment, the organization of training at the university, a business incubator for small enterprises of the nanoindustry. The agreement includes the intention to contribute to the solution of housing issues for those working in the nanoindustry in the territory of the special economic zone.

According to the head of RosOEZ, the construction of the infrastructure of one technical and implementation zone requires an average of 12-15 billion rubles. on the terms of co-financing by budgets of different levels. An enterprise that has received project financing from the Rosnanotech Group of Companies, getting into the TVZ, will receive the conditions of a free customs regime and tax breaks. But the main advantage is that the state undertakes to build the entire infrastructure, and enterprises only equip their areas.

Scientific groundwork. Nanotechnology is based on fundamental research in such sciences as physics, chemistry, biology, materials science, electronics, medicine, etc. The range of these studies is very wide, therefore, in conditions of limited funding, an important task is to identify the main promising areas, eliminate unjustified duplication, and horizontal coordination of research centers.

Education and personnel. It is generally recognized that there are no more effective investments than in human capital. The education system defines the most important resource of innovative development of the country. A specific feature of nanotechnology is its interdisciplinarity, which requires specialists coming to the industry to implement innovative projects, interdisciplinary thinking, a broad outlook in related industries, possession of modern analytical and technological tools.

Universities that train specialists in the field of nanotechnology also implement professional retraining and advanced training programs. An important component of the activity in the field of education is the training of specialists in the field of economics, management, entrepreneurship and commercialization of innovative projects. Fundamental and practical training of specialists in the field of creation and management of high-tech businesses, as well as the transformation of fundamental scientific ideas into protected intellectual property and competitive high-tech products is conducted in this direction.

Propaganda in the nanotechnology field should shape the attitude of society towards this industry, prepare it for those cardinal future changes that are inevitably associated with its discoveries. A balanced approach should be formed not only to positive changes in society, but also the negative consequences of their application should be revealed and measures for their compensation should be developed.

Legislative framework. The main obstacles to the successful development of venture business in Russia today are, first of all, the imperfection of the legal framework regarding the protection of intellectual property, copyright of both the investor in the implementation of a venture project and the developer of the project. When the rights to an intellectual property object arise from performers – research institutes, universities or public authorities – there is not always the possibility of its patent consolidation. There are no relevant specialists in their staff, and their involvement on a contractual basis requires lengthy competitive procedures approved by the Federal Law "On Placing Orders for the Supply of Goods, Performance of Works, provision of Services for State and Municipal Needs." In addition, there are no expenditure items in the budget classification of Russia that allow funds to be allocated for patenting intellectual property objects.

In the legislative framework, in the field of legal regulation, it is necessary to eliminate all obstacles to intellectual property and patent protection, legislatively ensure the interest, including commercial, in the implementation of intellectual property objects of all project participants.

The problem of demand for the results of innovative projects is acute for our country. Industry's interest in innovation cannot arise spontaneously. It is determined by the level of development of technologies in general, competition and demand of the population, its purchasing power and many other reasons. On the other hand, it is this interest that determines the degree of participation of private capital in financing venture projects.

Awareness of manufacturers about achievements in the innovation sphere plays an important role in the formation of demand for innovations. Moreover, the commercialization of innovations should not be restrained by legislative and other regulatory documents.

The special role of GC "Rosnanotech". The creation of the Rosnanotech Group of Companies is a natural step in the implementation of the state program for the development of innovation in Russia. The role of this corporation cannot be limited only to the distribution of budget money for venture nanotechnology projects. The Corporation, together with other participants, should determine the ideology of the development of the nanotechnology industry, its priorities and, as one of its components, its infrastructure, and contribute to the development of the infrastructure of the entire innovative economy of the Russian Federation.

Despite a number of serious problems, the main positive factors influencing the development of the innovative economy in Russia include:

1. a large number of projects brought to the stage of commercial use;
2. the presence of a significant number of projects with significant export potential, which greatly facilitates the task of attracting the necessary funds;
3. the presence of a significant scientific and technological gap from the global average in a number of industries, which still persists, despite the long-term chronic shortage of funds in the field of high technology;
4. highly qualified personnel.

Despite all the existing problems, a political and entrepreneurial climate favorable for venture investment is gradually being formed in our country. A number of steps taken by the venture industry community and government agencies at various levels contribute to the development of small and medium-sized businesses, which, in turn, can give impetus to the development of the Russian economy as a whole. In the current situation, it is necessary to implement a number of measures necessary for the development of an innovative economy:

• creation of a legal basis for the activities of venture funds, as no regulations have yet been adopted regulating their activities, as well as for venture investment by pension funds and insurance companies;
• changes in accounting that are necessary to ensure that the financial position of the company is correctly reflected in the accounting data, as well as so that the company can attribute to the cost of production the costs of research and development, internal investment, etc., which will increase investor confidence in the companies in which they are going to invest;
• development of acceptable methods for forecasting the effect of innovations, as well as state support for the examination of innovative projects and the development of consulting services for small enterprises in the scientific and technical sphere, which are the primary recipients of venture capital, which could increase the number of projects that meet the requirements generally accepted among venture investors;
• the development of an information environment that allows small innovative enterprises and investors to find each other, as well as stimulate cooperative ties between small and large enterprises;
• transparency in the taxation of income and capital gains in order to avoid double taxation, as well as the creation of financial incentives for investors investing in unquoted enterprises on the stock exchange, in the form of tax incentives and state guarantees for loans and investments for small enterprises based on advanced technologies;
• activation of the secondary stock market in order to ensure the liquidity of investments in venture capital and to enable invested enterprises to receive further investment;
• lower interest rates, as investing in venture capital is more attractive at low interest rates, which increase the value of equity and increase remuneration;
• assistance in improving education in the field of venture activity by training specialists in relevant business schools and universities, since today there is a shortage of professionals in this field of economic relations in the country, and this measure would increase literacy in the selection of investment projects to be financed;
• fostering a venture culture among entrepreneurs in small and medium-sized businesses so that they attract risky capital for promising projects instead of relying on internal financing or obtaining loans;
• financial support in the form of targeted grants, as well as tax incentives for research and development, which can assist projects at the stages of ideas and manufacturing, prototypes, when the prospects for obtaining commercial loans or venture financing are not determined;
• encouraging a more even distribution of risk capital activity across regions, as the difficulties associated with finding good investment offers experienced by many venture capitalists may be partly caused by the geographical discrepancy between offers and venture capital needs arising from the concentration of risk capital and investments in certain regions;
• development of measures to regulate and control the venture investment process.

At the moment, a number of actions are being carried out in Russia aimed at further development of the venture industry. In particular, new venture financing instruments and infrastructure elements of the innovation system are being developed. The development of new venture financing instruments and infrastructure elements of the innovation system is carried out in a number of areas. Firstly, it is the use of the "seed" investment mechanism through the creation of seed funds - venture funds that have less stringent restrictions compared to the existing rules of closed–end mutual funds. Seed funds are created to invest in small venture projects that do not have a detailed study of the business plan. The emergence of LED funds will allow you to invest money directly in scientific developments to turn them into a commercial product. Secondly, in the near future, it is planned to launch a number of infrastructure elements of the innovation system, in particular, an information portal to ensure access of domestic enterprises to information about venture capital markets. Thirdly, new educational programs aimed at popularizing venture investment and training managers for venture investment and financing are needed.

Portal "Eternal youth" http://vechnayamolodost.ru12.11.2009