Maxim Godzi has had the chance to work alongside plenty of foreign investors through his role as director of the InCube startup incubator. In a recent article, written for Russia Behind the Headlines, he exposes three of the most commonly held misconceptions about Russia’s startup market. This is a summary of his ideas. You can read the whole article here.
Misconception: “Startups are vying for investors’ attention”.
The reality: Russia has an abundance of two things - all sorts of investors, whether they be venture funds or business angels, and half baked, deficient startups.
However, there is a serious shortage of viable projects. Russia’s startup community has been closely linked with popular youth trends, such as hipsters, and also with politicized youth movements, like Seliger and the Zvorykin project. Startupers from this community tend not to be willing to take on the responsibility or put in the hard work that investors demand. At the same time, those who have the best ideas (researchers, engineers, university graduates) are not even thinking about starting up companies.
This lack of worthy projects means that Russia’s many funds (50 sprang up in 2012 alone) spend the majority of their capital paying their own employees. There are more shovel sellers than gold diggers. Godzi even witnessed an official $100,000 angel investment in a project that didn’t even have a basic financial plan, which he considers an act of desperation.
Misconception: "The most lucrative venture deals happen in the earliest stages".
The reality: Unlike in the US and Europe, where constant competition to snap up hi-tech ideas makes pre-seed investments the most potentially profitable, the phenomenally high level of risk associated with pre-seed investments in Russia means that this is not the case.
While in the US and Europe the crucial factor in a project’s success tends to be the quality of the idea, hence the need to get in early, in Russia having a good idea is not enough. Russian research institutes and universities have been accumulating ideas with the potential to become venture projects for 30 years, but few have done so, largely because those who came up with the ideas have little culture of running a business in the early stages. Therefore it is often wiser for investors to wait until entrepreneurs have proved their business-savviness before committing funds.
Misconception: “Startup growth rates increase with investments proportionally.”
The reality: Although Russia has a pervasive market economy and a high degree of deal making freedom, there is still not the same correlation between investments and startup growth rates that you can find in Europe and the US.
This is usually because Russia-specific challenges impede effective scaling. For example, the delay between the signing of an agreement between company founders and investors and the receipt by the company of real cash can be as long as six months to a year, while just incorporating a company still takes at least two weeks. These delays slow projects down, waste money and encourage passivity on the part of entrepreneurs, who are forced to do so much waiting.
Russian projects, lacking a developed business culture, also often struggle to accurately estimate the amount of money needed for development. They often forget to consider an entire business area, and therefore dramatically underestimate the amount needed for initial development.
What should be done?
Godzi points that, in InCube’s experience, it is not the amount of investment but the accompanying participation by the investor in running the company’s business that has the most serious impact on startup growth and scaling.
Investors can dramatically increase a project’s chances of success by offering smart money, professionally drafted terms and conditions of investment, contacts, expertise and direct participation.
Russian projects can be successful - many have travelled to Silicon Valley and competed successfully with the world’s best projects. However, they often require more input than foreign investors are used to.
Godzi reckons that investors keen to invest at an early stage in Russia would be better off avoiding large scale startup events, and focussing on student and young scientist conferences instead. Equally, projects with potential can be found online (for example, in RusBase.com's database).
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