Cabinet Sets up State Venture Company to Invest in High-Tech

By Maria Levitov

Staff Writer

Published: August 15, 2006 (Issue # 1195)

The Cabinet on Thursday approved the creation of a state venture company that is to invest 15 billion rubles ($560 million) in the country’s high-tech sector.

Also known as the “fund of funds,” the Russian Venture Company is set to boost technology investments and diversify the economy away from commodities. The company will create eight to 15 venture funds to be managed by private companies, Economic Development and Trade Minister German Gref told the Cabinet meeting, Interfax reported.

“We aim to attract more than 30 billion rubles ($1.12 billion) to the Russian high-tech sector by the end of 2007,” Gref said.

Russian Venture will be fully established by the end of this year and fund-management companies will be chosen by tenders in early 2007, Gref said.

Lax protection of intellectual property rights, the high risks associated with technology start-ups, and attractive returns from investing in large private companies and the stock market have all served as disincentives to investment in small, fledgling technology firms.

Education and Science Minister Andrei Fursenko told the meeting that the capitalization of venture funds at was pegged 4 billion conditional units in Russia. Conditional units can be interpreted to mean dollars or euros, or the average of the two.

“But only 5 percent of these resources is allocated toward high-tech. This is very small, [and] without government participation this percentage is not going to grow significantly,” Fursenko said, Interfax reported.

Russian Venture — expected to be set up by the end of this year — is an important first step in building a competitive high-tech sector. But Russian Venture will not do the job alone, experts said.

“There’s clearly a need for investment in this sector. It’s a question of doing a lot of things simultaneously,” said Ulf Persson, co-founder and Managing Partner of Mint Capital.

By definition, start-ups constitute risky investment because, unlike larger private companies, they have not proven their profitability. Gref said world-famous brands, including Microsoft and Cisco, emerged as a result of venture capital funding. Only a few technology start-ups are destined to become global powerhouses, however.

“Without government support, venture capital investment [in technology start-ups] will emerge in 10 years at best,” said Mikhail Gamzin, managing partner of Russian Technologies, an investment fund backed by Alfa Group.

It is difficult for start-ups looking for financing to compete with established private companies.

Private equity funds investing in companies that bring in $10 million or more in profit post 40 percent to 50 percent annual returns in Russia, Gamzin said.

Few funds invest in start-ups because there are more attractive alternatives, like supermarket chains that already have proven returns, said Kirill Dmitriev, managing director of Delta Private Equity Partners.

Start-ups investments also lose out in comparison with more liquid assets, like stocks, said Casper Heijsteeg, partner at Eagle Venture Partners.

Another issue is a shortage of managers, who can bring Russian high-tech companies from their early stage to a successful commercial company, Heijsteeg said by e-mail.

In the West, start-ups are chasing venture capitalists, but Russian start-ups must often be educated about what venture capital is and how it can be used to develop and grow the start-up, Gamzin said. “In Russia, funds are chasing start-ups,” he said.

The venture company will get its charter capital from the state investment fund, also called the infrastructure fund. Its venture funds will manage 600 million rubles to 1.5 billion rubles ($22 million to $55 million) each, Interfax reported.

State support should go hand-in-hand with a push to attract more private-sector funding for research and development to ensure that investments are made efficiently, the World Bank said in a recent report.

Involving professional fund mangers will be the key to success because, unlike government officials, they will base their investment decisions on a start-up’s potential profitability, said Pavel Teplukhin, president of Troika Dialog Asset Management.

The fund management companies will be paid 2 percent of the portfolio they manage and 20 percent of the returns they make, Interfax reported.

More importantly than just pouring money into high-tech, the venture company will create a “critical” push for addressing other problems in the sector, said Delta’s Dmitriyev, who is also president of the Russian Private Equity and Venture Capital Association.

“Often, when investors are ready to provide capital, they lobby for improving legislation,” he said.

The inadequacy of intellectual property rights enforcement is forcing some Russian start-ups to patent their technologies abroad, taking their benefits outside of the country, Teplukhin said. Having the state on the investment side may help stem this brain drain and improve intellectual rights protection, he said.