20 January 2009

Russian venture company in the vastness of Russia

Published by nikst"In the midst of the crisis, we formed four funds," Alexey Korobov, CEO of a Russian venture capital company.

The cost of projects in the venture industry has fallen two or three times, and you can enter them at a huge discount, especially since banks do not give loans to developers for their development.
"Invest money in Russian venture funds?!
I'd rather take $100,000 and put it in the casino on red, the result will be just as predictable!" – so one foreign investor said to the general director of RVC Alexey Korobov a year and a half or two ago.

But now, according to Korobov, this foreigner has changed his arrogance to a lively interest and is already discussing with him in which venture projects it is better to invest money. He told Vedomosti in an interview about how the Russian venture industry has changed during this time and what role RVC has played in the changes.

Who invited you to work at RVC?Herman Oskarovich [Gref].

At that time, the main problem was related to the formation of RVC, and the main task that was set for me was the active promotion of the company in the market and absolute transparency of what we do. I believe that in two years we have coped with this task.

It is believed that people who served in the FSB are prone to excessive closeness in the matters they are engaged in. And before you, it turns out, the opposite task was set.I would not put such a stigma – "served" or "did not serve".

I like the international approach more when they say: I worked for the state. In those days I worked for the state – and now, too. Openness or closeness should not come from personal desires or inclinations, but from those criteria that are imposed on the implementation of a certain program. In the case of RVC, this is just the maximum openness to the market. If the state did not want to develop high technologies and attract private investors for this, there would be no public-private partnership, it would be possible to manage everything individually, create venture funds with the participation of one RVC and not disclose information about their activities.

But the task is to form a venture capital market and attract the maximum amount of private investment. It is impossible to do this without openness, clear rules and comfortable conditions. In addition, in the emerging market, everyone learns from each other. That's why we are open. For me, the most important result of our team's work is that the management companies perceive us as an equal partner. We have not yet had a single project on which we did not come to a consensus after discussions.

How did the economic crisis affect the activities of RVC, the company's relationship with private investors?First, the fact that we managed to form new funds in the crisis is the result of a successful program proposed by RVC.

We are present in the funds with a fairly large amount of capital – 49% of its size. A private investor sees that the state is ready to share risks with him, and is more willing to come to us. Secondly, over the past year, it has been possible to implement innovations in Russian law, and now closed-end mutual funds (ZPIF) use a system of phased payment of a share. For example, if a fund of 3 billion rubles is created, then the management company needs to receive only 600 million rubles from investors-shareholders in the first year – they usually manage to invest no more than this amount in the first year of the fund's activity.

Third: companies at the start-up stage, in which we invest, are already forced to save on everything, regardless of the crisis, and now they understand that if they do not attract financing from a venture fund with state participation, they will have no choice but to go broke. Accordingly, they are more willing to negotiate with venture funds. And often, projects that used to cost two or three times more expensive can be entered at a significant discount, which is also good from the point of view of the future exit from these businesses.

What is the fundamental difference between your corporation and other state institutions that work in the field of high technology, such as Rusnano?We are a joint stock company, not a state corporation.

I believe that it was a very correct idea on the part of the state, which allows RVC as a "fund of funds" to interact more flexibly with the market. When making any decision, we are guided by the company's regulatory documents based on corporate legislation, i.e. no additional government decisions are required to carry out our current activities.

In addition, an open joint stock company is obliged to publish its financial statements, unlike a state corporation. You can always see what you are spending taxpayers' money on.Yes, we submit reports to state bodies in accordance with the established procedure, and we also have an internal supervisory body – the audit committee under the board of directors.

Information about the two competitive selections that have taken place so far and the activities of the funds created with our participation is available to everyone. There are other differences between RVC and state corporations. The main task of Rusnano is to support a rather narrow technological sector – nanotechnology, while we face another task – to stimulate the formation of our own venture capital market in Russia.We see two fundamental goals for ourselves.

The first is to create a favorable environment for the development of this market, since the rules of the game have just begun to take shape here, the venture market in Russia is not developed as such, and the risks themselves in the venture industry are high, in Russian conditions are increasing. Therefore, the state now acts as one of the participants in the venture market, providing its capital and sharing the risks of investors. The second task is the involvement of private capital and the gradual withdrawal of the state as a major investor from venture funds.

Should RVC exit venture projects with a profit?Of course, being a joint–stock company, RVC cannot participate in non-commercial projects - in particular, we cannot use a grant system or other ways of transferring money free of charge to support the market.

Therefore, the main tool today is venture capital funds in the form of a ZPIF with the participation of RVC funds, the exit from which involves the company making a profit. At the same time, based on the objectives of RVC's activities, the state, as the sole shareholder, decided to limit the profitability of RVC when exiting the fund. If a private investor is interested in buying a share of RVC, we are ready to sell it for the money that we spent at the time of entry, plus 5% per annum for the period of ownership of RVC shares of this fund.

So your margin is limited to 5%? Even if it turns out more, will you still trim the yield at this level?With the current scheme, yes.

The procedure looks like this: we sign an option agreement with the management company. It, of course, has the dates of the option execution. For RVC, the sale of the stake means two things: the project was successful (since a private investor is ready to develop it independently), and the released money can be used to finance new venture projects. The life of the ZPIF is 10 years, and our option must be executed before the end of the eighth year. If after eight years the management company does not buy out the RVC share, we remain a shareholder of the fund until the end of its existence. Then the income is divided proportionally to the shares in the fund: the yield of RVC turned out to be more than 5% per annum – we get more, if less – we get less.

This model implies that some project may not make a profit for eight years, but then it will pay off handsomely in two years?Not really.

Throughout its life, the fund invests its funds in some projects, withdraws from other projects. In classical venture funds, there is a kind of rule: out of 10 funded projects, one turns out to be super successful and can cover all the capital invested in the fund, two projects have a fairly high yield, three projects work to zero, and the rest turn out to be unprofitable. At the end of the fund's life, all these results are summed up, then we can talk about the final yield. Our option agreement implies that eight years after the opening of the fund, there will be a number of profitable projects in its portfolio, which gives us the opportunity to exit the fixed-income fund. If no such projects have been formed, RVC remains in the fund. It is clear that in this case we assume the risk of failure on a par with a private investor.

The German experience of state support of venture funds is well known. In 1979, our German colleagues acted according to this scheme: if a company develops successfully, a private investor receives all the income, but the state does not transfer any money to him at this moment. And if the project was unsuccessful, the investor transfers his company to the state for 80% of the amount of his investments. This led to the fact that during the crisis in the Internet companies market in 2000, private investors began to fix losses - they preferred to lose 20%, but they were guaranteed to get 80%. It turned out that the state invested money, but not in the development of the venture market. I think our model is more stable in this sense. If the project develops more or less normally, then the state returns its funds quickly enough, plus receives a small income. If things are not going well, we can stay in the project for a long time.

But can you withdraw from the fund before the eight years are up?Yes.

Venture fund units are a public instrument, there are procedures for their exchange listing. In addition, we can directly sell our shares to some investor if the investor with whom we signed the option refuses to buy them from us. And other investors of the fund can sell their share to someone in the market - however, in this case the buyer does not acquire the right to exercise the option. This was done in order to maximally encourage a private investor to buy out the fund's shares at the time of its formation. In principle, this scheme has undoubtedly helped us to form four funds in the current rather difficult time. On December 16, RVC and private investors fulfilled their obligations to fill these funds with money. And after the completion of the formal procedures in the FSFR, new operating venture funds with the participation of RVC funds will appear on the market (up to this point, two funds worked). Another fund will start working in February: the end date of the fund's formation, fixed by the management company "Alliance-Rosno" – the winner of the second competitive selection of RVC, in the rules of trust management – January 31.

After that, the total capital that will be offered to the venture market by seven funds with the participation of RVC will reach 19 billion rubles.The investment declarations of our funds clearly specify the technologies in which funds can be invested.

These are IT, biotechnologies, environmental management, transport, aviation and space systems, the same nanotechnology, as well as critical technologies from the list approved by presidential decree.

What are critical technologies? Is it something secret?No, critical technologies are not always secret.

The list itself is a public, open document. It's just that the state considers these technologies vital for the development of the country, with them the country can remain competitive in the international arena, but they can be used in both civilian and military industries.

But can you finance some military technology?Among the areas in which our funds can invest is "Security and counter-terrorism", and the projects that our management companies are looking for on the open market may be somehow related to military technology.

But we do not have the purpose of producing products for military and defense needs.

Are RVC representatives on the boards of directors of management companies that have passed the competitive selection?No.

By law, RVC is just a shareholder of closed-end mutual funds under their management. However, we define a list of information that management companies are obliged to provide to us. In general, of course, we have much more information about the activities of the management company than other shareholders or shareholders in ordinary funds. We take an active position in this relationship. RVC representatives are members of investment committees of management companies, however, only with the right of advisory vote, but of course we see management companies as our partners, and they are ready to listen to our opinion when discussing projects selected by them for investment, and we, in order to make our opinion as reasonable as possible, involve third–party experts if necessary - specialists in the relevant fields.

Does RVC have its own scientific or expert council?We have a group of experts that we regularly involve.

But in general, the structure of the ZPIF does not imply any additional add-ons like a scientific council from one of the investors. It's just unnecessary. One of the criteria for selecting a management company as part of our competitive selections is the presence of a professional team of venture specialists. Moreover, our requirement is that venture specialists acquire at least 1% of the fund's shares at their own expense. This motivates them to succeed, because if the project fails, then their money disappears, and if the project is successful, they receive 20% of the profit.

If a multi-level coordination at the scientific council is introduced in this system, it will simply slow down the adoption of investment decisions. Our peculiarity in contrast to Rusnano – we do not finance expensive projects. Our specialization is projects at the start–up stage, or even at an earlier stage. The volume of one transaction involving RVC funds, as a rule, does not exceed 170 million rubles, while in Rusnano, if you remember, all transactions start from 1 billion rubles.

Anatoly Chubais says that he specially selects such projects now to ensure transparency of his work by definition of a closed state corporation. In this case, transactions must pass through the board of directors. What-no, but still publicity.It's just different approaches to publicity.

We provide it at the stage of selection of management companies. Then they start looking for projects, and at this stage publicity is not needed, otherwise the deal may simply not take place. It's just that our task is to select the best management company. If RVC also strictly controlled the selection of investment projects, the question would arise: why did you then so strictly select managers? Wouldn't it be better to simply create one large state investment fund that will manage everything? Therefore, from the very beginning we agreed to the role of an ordinary investor without special rights – this allows RVC to stimulate the activity of private investors in the venture capital market.

Which projects from the selected management companies, in your opinion, are the most interesting?I think that if the project is funded, it means that it is already interesting.

We see that the funds finance projects of a very different industry orientation and in different regions, not only from Moscow or the Moscow region: the diversification by region is quite wide. ** In the venture business, all the interest is, as a rule, a high income. And venture projects usually develop in such a way that only after three years it is possible to talk about their commercial prospects. If we look from the point of view of the state, then, in my opinion, basic industrial technologies that need to be brought to a high quality level are of great interest.

Similar technologies exist in Western markets, and Russia is forced to purchase finished products produced there on their basis. We make sure that the Russian technologies supported by RVC funds are not just copies of Western developments, but carry innovation and are competitive. In general, I prefer not to delve into stories about specific projects, since this is the prerogative of management companies.

Well, really, no project has personally hooked you?Venture capitalists still have a task to make money.

And the state, among other things, has to support the development of high technologies, to which the venture business has historically gravitated.** Our management companies currently have 13 invested projects in their portfolios. There is, for example, the creation of a logistics system with tracking the movement of an object, which uses the GLONASS satellite system. The transport with the goods is moving, and you can see the fuel consumption, the location of the cargo and even the climatic conditions in real time. This is suitable for urban transport, and for large carriers, including Russian Railways. It is gratifying that the project is focused on Russian GLONASS: this is the case when a large technological development pulls a lot of other related technologies being developed in our country.

But all our other projects deserve attention, although, as I have already said, they are small in terms of funding. Of course, there are certain problems associated with this. Often, in the companies in which we invest, both the developer, the owner, and the director are one person. And in Russia, unfortunately, there is no tradition that such companies are willing to contact external investors. They are afraid of absorption, they are afraid that over time the idea will be stolen, and they will be kicked out… This factor is now quite a hindrance to the development of venture business. It will take some time before everyone understands: a venture fund has no goal of becoming a business owner. His goal is to develop the company to the stage when its value will grow significantly, and then exit the project by reselling his share to someone else…And this someone will just steal the idea from the developers, and they will be kicked out of the company.

It turns out that the fears are justified.I believe that our management companies treat project developers correctly.

Option agreements are also concluded with them: if the company develops successfully, the authors of the project get control over it. The venture fund will earn money and leave the company, but the initiator of the project will remain its owner and will continue to build relationships with the investor of the second stage himself – this is good insurance. Without such agreements, transactions simply would not have occurred. This is important because in the current economic conditions, innovative companies, especially from small businesses, will not be able to attract other financial investors besides venture funds.

Banks, even in the best years, such companies tried not to lend: there is no revenue, or it is small – the company has been on the market for only two or three years. Bankers have always said: you create a product, bring it to the market, show a high profit – and then we will give you loans. And entrepreneurs answered: we will show you all this – we have calculations, a business plan, but in order to produce at least a trial batch of goods, capital is needed. It is clear that the negotiations ended in nothing. In principle, RVC, through venture funds, was supposed to make up for the lack of capital in this sector. And now, when banks refuse to lend to anyone at all, funds with the participation of RVC are practically the only source of capital.Will you hold new contests among management companies?

We were really going to hold the third competitive selection.

We have already modified the selection rules taking into account past experience and mistakes.

What mistakes did you make?For example, at the first competition, we had a task so that investors simply came believing in the program.

The second stage is for investors and teams of venture specialists to come and show the feasibility of the projects proposed as part of the application. And at the third competition, we would like to see management companies that will attract not one, but several private investors to create a fund.

But at the same time, as our experience shows, now the selection of management companies takes eight to nine months for objective reasons: in order to reliably evaluate the company and go through all the procedures established by law, it simply will not work to spend less time. This is fraught with risks for the management company and the private investor. Firstly, the investor signs a commitment to finance the fund for nine months in advance, and for a fairly large amount, in a difficult market, these are uncomfortable conditions. Secondly, we require managers to provide real projects, whereas it is clear that no project will exist on the market without financing for nine months, except for an unsuccessful one. The usual period in the venture market from the beginning of negotiations to the start of financing is three to four months, and sometimes it is necessary to make a decision faster.

Therefore, our proposal is to preserve the principle of publicity of the selection, greatly reduce the time and cancel the binding of the selection to a specific date. We want to make a permanent open window for accepting applications. In RVC, of course, it will be necessary to increase competence and create a permanent investment committee. Such a committee is a traditional practice of all state–owned venture companies. We plan to propose to the board of directors at least four times a year to consider proposals selected by the investment committee – RVC should continue to form funds and implement other forms of support for small high-tech businesses, even at this difficult time.

At the same time, in my opinion, there are many state corporations (Rostechnologies, United Shipbuilding Corporation, United Aircraft Corporation, the same Rusnano) that could also invest in venture funds created with the participation of RVC and private investors. These state corporations are one of the main consumers of high technologies, and one of the main problems of the Russian venture capital market is that the management companies of venture funds, as a rule, do not have access to serious consumers of the innovative product that their portfolio companies produce. For our management companies, the issue of leaving the first portfolio companies will arise in three or four years.Have you discussed this idea with state corporations?

We didn't discuss it.

But, in general, it is clear that they are all busy with the problems of becoming, so now is not the best time for such a proposal. Let the time pass, then perhaps we will return to this topic.

How often does the RVC Board of Directors meet?There were 16 meetings this year.

Decisions on the selection of the winners of competitive selections are made at face-to-face meetings, as well as decisions on the development of the company, but many meetings are held in absentia.

The board of directors of RVC includes former Finnish Prime Minister Esko Aho and the founder of the Israeli venture group Yozma, Yigal Erlich. Do they help RVC with their contacts in the foreign venture industry? They are very respected people in this environment.In 2008

For example, we have met with several Israeli foundations (Naiot, Yozma, Tamir Fishman, Walden), and one of them, Tamir Fishman, is present in one of the management companies that passed the competitive selection. Mr. Erlich is actively involved in the positioning of RVC in the venture capital market of Israel and pays quite a lot of time and attention to the product line that RVC has. We often meet outside of board meetings. Recently, for example, he came to us, and we discussed how RVC should act in the current situation.

What did he advise you?We have just agreed that we need a more flexible mechanism for selecting management companies and we need to shorten the selection period.

He advised paying attention to international markets so that RVC could adopt foreign experience and enter into foreign projects. Israel has achieved great success in the venture capital industry by acting in this way. And now, as Ehrlich tells us, there are many promising projects on the market that are very cheap. Accordingly, it is necessary to think about how to enter the capital of international venture funds or directly invest in some projects and engage in the transfer of Western technologies to the Russian market. RVC does not have such a mandate yet, but since Ehrlich is on the board of directors, I think he will raise this issue, and we will discuss it.

Is it probably Ehrlich who attracted Tamir Fishman to participate in the RVC competition?No, he did not attract, although they are, of course, familiar, and when we have any questions regarding Tamir Fishman, we have the opportunity to seek assistance from Erlich and get objective information from him.

As for the attraction, rather the matter is as follows: the participation of Mr. Ehrlich and Mr. Aho in the board of directors of RVC showed foreign investors and venture capitalists that Russia will develop its venture industry according to international rules.

Why did "Tamir Fishman" have such a strange story with the first partner – "Financialist"? (In the spring of 2008 "Tamir Fishman" refused to create a venture fund with "Financialist", after the company's president Oleg Shvartsman publicly announced his participation in the velvet reprivatization under the patronage of veterans of the special services – Vedomosti.)

There is nothing strange about the story. It became possible due to the imperfection of Russian legislation. As I have already said, the only investment tool for RVC and private companies turned out to be the ZPIF. But only a Russian management company licensed by the FSFR can create a ZPIF. This is an unconventional model for foreigners, not quite clear to them. Tamir Fishman would have been happy to create a venture fund in Russia, but was forced to look for a Russian partner with a license from the FSFR. I think she just chose a partner badly. And when the question arose at Tamir Fishman about whether they were ready to bear the increased risks associated with the lack of professionalism of the Russian partner, taking into account also the consent to participate in the EBRD fund and other international investors, everyone said: no, it is better to abandon the creation of the fund.

Tamir Fishman came to the next competition with another partner – Centrinvest Group.

Did Finanstrast have venture projects at the time of the competition?No, he was not a participant in the venture market.

And for us, this company was interesting only because it was chosen by Tamir Fishman to participate in the project – this is why Finanstrast won the competition.

Can Sberbank participate in funds with the participation of RVC?Maybe, of course.

But I would like investors to come to us with minimal state participation. It is gratifying that big business represented by the management company "S-group", which won the second competitive selection, has shown interest in the development of the venture industry. It is obvious that large financial and industrial groups now understand that without the development of modern technologies it will be difficult to win in the competition. Ultimately, our goal is to attract so–called smart money: when an investor brings not only capital, but also their competencies. Now our management companies are closely connected with investors – shareholders of the fund. I think that after some time, our management companies, provided they work successfully, will be able to attract funds from outside investors. It just takes time.

And where is the RVC money placed?We have a procedure for placing free money approved by the board of directors, in many ways similar to the procedures of other state corporations.

There are requirements for banks on their own capital and rating assessment and for offers of the best rate. Now our money is partially stored in Sberbank, VTB, Uralsib Bank, MDM and Promsvyazbank.Were these banks selected by competition?


In fact, we have formed a pool of 15 banks that meet the requirements for equity and rating assessment. We send them information about which funds and for how long we are ready to place. They answer what deposit rates they are ready to offer us. The last placement we had about three months ago was 13.2–13.7%, which I think is a very competitive level at that time.

For how long do you place free funds?We place them based on the terms of our investment obligations.

And we try to make it short-lived: with the current uneven market, the term of RVC deposits does not exceed one year.

Does RVC provide annual bonuses for management?No, they are not provided.

We have salaries and bonuses when we achieve some significant results.

Which ones, for example?The fact that we were able to form four funds in the midst of the financial crisis, I believe, is largely the merit of our team.

It took a lot of effort to make this event happen. But, I must say, we have relatively modest salaries in RVC. I have heard from private business the proposals that Rusnano makes to venture specialists – of course, we are lagging behind: we have two or three times less.

Well, Rusnano has several times more money than you do.

This does not mean that Rusnano earned this money or worked better than RVC. It just happened that way. In general, if we move away from the topic of salaries, it seems to me that the state should have a uniform policy for all state structures working in the innovation field: VEB, RVC, Rusnano, RosOEZ. It is necessary to coordinate the efforts of the state in this industry.Biography

Born in 1967 in Leningrad.

  • In 1986-1988 he served in the army, in 1993 he graduated from the Academy of the Ministry of Security of Russia with a degree in law and served in the FSB until 1998 Of Russia
  • 1998 – Vice-President of the "Branch of the International Union of Economists in St. Petersburg"
  • 2001 – Adviser to the First Deputy Plenipotentiary of the President of the Russian Federation in the North-Western Federal District
  • 2004 – Chief of Staff of the Budget Committee of the State Duma, then – First Deputy Chairman of the RFBR
  • 2007 – appointed General Director of JSC "Russian Venture Company"

Why did Korobov learn Burmese"I used it only once: in those years when I was studying, there was a delegation from Burma, and the usual cultural program in Moscow was provided for it – the Bolshoi Theater, sightseeing," Korobov says with a smile.

 – But the Burmese language has never been useful to me again. Although it was a good exercise for the mind: it is the language of the Tibeto-Chinese group, tonal, like Chinese. And writing is a kind of transition from hieroglyphics to the alphabet." Teaching such a rare language at the Academy of the Ministry of Security, according to Korobov, is explained by the fact that during Khrushchev's time Burma was building socialism. "But, in general, that was the end of it: as always, socialism led to a military coup. As I understand it, the military junta is still in power, and this, sadly, has slowed down the development of the country," he concludes with regret.

Olga Proskurnina, VedomostiThe Russian venture company – the state Fund of Funds – was established in 2007.

  • 100% of the shares are owned by the state.
  • capital – 30 billion rubles, of which 9.31 billion rubles were placed.
  • RVC participates in the capital of seven funds – VTB–Venture Fund (fund volume – 3.06 billion rubles), Bioprocess Capital Ventures (3 billion rubles), Maxwell Biotech (3.06 billion rubles), Leader (3 billion rubles), Tamir Fishman C.I.G. Venture Fund" (2 billion rubles), "C-group Ventures" (1.8 billion rubles) and "New Technologies" (3.06 billion rubles, under formation). The share of RVC in each fund is 49%.

Portal "Eternal youth" www.vechnayamolodost.ru20.01.2009

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