Russian startupers often consider Silicon Valley to be like a ‘heaven on earth’ for startups - a place teeming with staff, investors, mentors, infrastructure…
But is it really like that? At a recent press breakfast Russian investors who had recently visited the Valley gave their verdict on the Russian startup ecosystem and how it matches up with the most famous startup ecosystem in the world.
The investors all took part in “Secrets of Silicon Valley: Theory and Practice of Investing in Tech Startups”, a conference organised alongside Russian Innovation Week 2013.
Oleg Seydak - Partner at Flint Capital
We’re all trying to copy Silicon Valley. But it turns out that we’re trying to blindly copy a work in progress, even though we are starting from a different place and we don’t know the final destination.
Our main problem is that we don’t have all that they had. Silicon Valley funds were initially founded on corporate funds, which have access to a developed capital market and face competition in their specific niche. The average size of a local IT investment fund in the Valley is more than $100 million, not to mention biotech, robotics and other funds. So they have a much better developed and more professional capital market, an exchange with greater liquidity and the potential for strategic purchases.
They acquire new companies not just to absorb a project’s income, but to get ahead of their rivals, to occupy a new niche, to create something new and, ultimately, to achieve greater capitalization.
Over here people often say how great it is that everything there is valued in tens, or hundreds of millions of dollars. But actually, it isn’t great - it’s a problem for them.
This is because it forces investors to work towards billion dollar exits, to depend on a project becoming a star. In the hope of finding such a project, investors throw small sums at all sorts of different startups. The market’s dependence on enormous exits makes investors dependent on IPOs and strategic purchases. The more that I learn about this set up, the more I try to warn my partners away from this model. Our market is different. We’re starting from a different place. We need to find our own way, build our own model.
The investment business model in the Valley is facing a crisis at the moment which I don’t think we will ever have to face.
Innokenty Belotski, managing partner of Cloud4Auto
The venture industry in the US is facing a crisis. According to statistics, in the last ten years half of venture funds have been unprofitable. So investors, having committed money to funds, have ended up with less money than they put in. It is now much, much harder for new funds in the US to raise money, because there aren’t many investors willing to take such big risks.
Why did this happen? Because for a time, funds managed to raise too much money, and they valued startups too highly - one good presentation was enough to raise a few million dollars.
Pavel Glushenkov, Investment Director at InVenture Partners
The venture industry in the US is older than I am, and so while it is all very well to criticise it, the most important thing is to learn something.
In the Valley there are still lots of successful funds that don’t adopt the “raise money and spread it around 200 - 300 projects” approach. Instead, they invest in a maximum of 15 projects per year, and each partner focuses on just 3-5 companies. Gradually they bring their companies up to the desired level. As a rule, it is these funds that make the biggest profits.
For example, Mohr Davidow Ventures, which has a portfolio worth $800 million, is considered a seed fund. But it doesn’t have 700 projects in its portfolio - it has just 40. Why? Because they understand that offering seed money, and then expecting a company to attract further rounds from other investors just won’t work. They know that they have to continue supporting their projects themselves. On average, they end up investing around $12 million in a project, but sometimes up to 20 or 30 million.
I advise our venture funds to adopt a similar approach - to accept that projects are a long process whose growth from small startup to billion-dollar company needs to be carefully planned. It’s also important to remember that though you might manage to sell your technology or your team to a private company or individual, without both you’ll never achieve an IPO.
In the Valley funds invest in order to get a stake in a profitable company, not to quickly get one over on someone.
Alexander Borodich, Director of FutureLabs
In the Valley there are thousands of Stanford, Berkeley and MIT graduates. They arrive with their ideas and are channelled into the Valley infrastructure - which often means an incubator like Plug&Play - where they get a $25,000 to $50,000 micro-investment and they use it to prove the potential of their idea. The accelerator then helps the team get a seed round.
In Russia we don’t have this infrastructure, and our technical universities produce few graduates capable of turning their idea into a genuine project within a few months. Our graduates often don’t have the business or project management skills to make things happen.
What can we copy from the West’s experience? We must remember that, while there is a global market for private companies, there isn’t one in Russia. We can prepare a project here and sell it in Europe or America.
But we can’t expect a Russian project to raise investment from US funds. It is no secret that, in 99% of cases, American investors won’t even consider investing in a Russian project. In order to raise investment in the States a Russian company has to move the whole team to America, register the project there and only then does it have a chance.
In this context, it’s clear that we need to build a similar infrastructure here. We need education centres to train techies and entrepreneurs. Projects also need workspace and expertise - especially in business, marketing and accounting.
Pavel Glushenkov reckons that Russia still has a lot to learn from the good things about Silicon Valley, while Alexander Borodich, Oleg Seydak and Innokenty Belotski think that, if Russians have anything to learn, it is from the Valley’s mistakes, in order to avoid the investment crisis that the Valley is currently facing.
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