RUSSIAN BUSINESS ANGELS

Dr. Alexander Kashirin - Chairman of the Board of The National Union of Business Angels of the Russian Federation

(RUSSBA)

12 November 2007 Boston

FIRST ANNUAL US-RUSSIA BUSINESS ANGEL SYMPOSIUM

Boston Region Open Doors (BROD)

Business Angels of Russia. The current state.

• Business Angels (BA) are not formed as a part of society, the state or the economy

• Fragmented – some BA with a poor interaction between each other

• UNIDENTIFIABILITY of BA- There is no concept of “business-angel” in society nor the

state as an investor-subject of the economy, - Potential investors (by availability of capital) do not identify

themselves as BA – lack of information, knowledge and experience

• Financial insufficiency – a small volume of funds in the BA sector

Business Angels. The information deficit.

• Introduction of the BA term into the everyday language• Creation of a positive BA and SIC (small innovation companies)

image in the public consciousness – the architects of the economy of knowledge, economy of the future, the benefit for everybody: the citizens, the society and the state

• Explanation of the essence of BA and their activity, one team (BA, inventors and managers) and aim, new relations, confidence, mutual aid and respect

• Capital formation in the BA sector, demonstration of the BA profitability, availability and history of success

• Important social function: investment in intellect and science, creation of the new enterprises and workplaces

“Invest in the innovation Russia”

Business Angels and venture funds. The balance requirement

RVC (Russian Venture Company) 30 milliard rubles

RIFICT (Russian Investment Fund for Information and Communication Technologies)

1.5 milliard rubles

Regional Venture Funds 6.4 milliard rubles

Private Venture Funds (foreign jurisdiction)

5 milliard rubles

TOTAL ≈43 milliard rubles

The venture investment volume in Russia.The nearest future. Evaluation

Business Angels and venture funds. The balance requirement

ROSNAUKA FTSTP (Federal Target Scientific Technical Program) (seeding stage)

2 milliard rubles

BORTNIK Fund (seeding stage)

1 milliard rubles

Business Angels 0.5 milliard rubles

TOTAL: 3.5 milliard rubles

The business angel investment volume in Russia.The current situation. Evaluation

Investment statistics. Business Angels and venture funds

Number of projects submitted for investment

Of them – number of the invested projects

Average investment volume

Business Angels

10 1 10 million rubles

Venture Funds

10 (100) 1 40 million rubles

Business Angels and venture funds. The balance requirement

• A need for the volume of the investment in the seeding stage. Evaluation100 milliard rublesThe calculations have been made based on the need for the availability of a certain number of start-ups for the existing venture capital volume. The start-ups are formed out of the invested “seed” companies, not all of which find out the venture investmentCONCLUSIONThe business angel investment is a growing market in Russia which has a significant commercial interest for investors for the foreseeable future

Proposals● To increase the financing of the existing government “seed” financing programs;● To the extent of the existing investment government programs – to allocate a part of funds for the financing of the innovation companies of the seeding stage● To develop the new programs to the extent of the state-private partnership, including the creation of the seed financing funds (seed funds);● To perform work on the business angel sector support and development due to the arrangement of the conditions for the capital transition to this sector from the other trades on the basis of forming the normative-legal and economic conditions adequate for this task;● Promotion of the participation of big corporations in the fund investment in the seeding stage

Business Angels and venture funds. The balance requirement

Potential for the business angel investment in Russia

Number of the dollar millionaires in Russia:

Officially – 88 thousand

Minimum (assessment) – 100 thousand

Maximum (assessment) – 400 thousand U$D millionaires

Assessment of the volume of the potential business angel investment in Russia

• 10 thousand can potentially become business angels (10% of the minimum)

• Average volume of the investment of one business angel in the innovation business is 100 thousand US dollars

• Potential investment resource volume – 1 milliard US dollars = 25 milliard rubles

Business Angels of Russia. The investment problems• The low innovation sector competitiveness, availability of more attractive

ways of capital investment (real estate, finances, trade, public catering, transport, communication, power engineering, etc.): High profitability Short payback terms Low risks

• A new undeveloped investment tool: No pledge or guarantees Long money and high risks Poorly studied investment approaches and methods Insufficient qualification of business angels as the venture investors

• Investment resource taxes:Natural persons:

WagesSST (Single Social Tax) – 26%Income Tax – 13%

Dividends – 24%Legal entities:

Profit Tax – 24%

Business Angels of Russia. The investment problems (continuation)

• Poor protection for minority shareholders• Business angel status uncertainty in public authorities

and consciousness – as a participant (player) in economic processes

• Lack of interaction and partnership of business angels in implementation of the government programs and projects (Assistance Fund, FTSTP, etc.)

• Lack of the business angel investment knowledge, experience, culture and traditions

• Lack of the information of the business angels’ successful histories

• Difficulties in the entry, management and exit from the innovation business

Business Angels. The investment media problems• Significant tax burden for small innovation companies• Extremely complicated, volumetric and volatile

accounting• Uncertainty with the rights to the intellectual property

created for public funds (adopted Part IV of the RF Civil Code, Articles 1552 and 1556, means the transfer of rights to the state)

• Organizational, legislative and financial problems in the process implementation

Company registration Patenting Certification Customs clearance, etc.

Business Angels. The investment media problems (continuation)

• Antimonopoly adjustment problems (unique products – one producer)

• Absolute lack of knowledge and experience in the innovation project implementation by scientists and managers

• Lack of the office premises, shop floors and equipment under the terms acceptable for small innovation companies

• Lack of the innovation business culture and traditions

The National Commonwealth of Business Angels is formed under the initiative by the Russian Association of Direct and Venture Investment (RADVI) under the patronage of the Committee for Investment Policy of the Chamber of Commerce and Industry of the Russian Federation (CCIRF) (the date of state registration – 27 December 2006)

Member of the European Business Angels Network Member of the Russian Association of Direct and

Venture Investment

RUSSBA (Commonwealth of Business Angels of Russia) unites the following in its ranks:

• The business angels and venture investors of the small innovation companies of the early stages of development (the seeding and the initial stages)

• Other natural and juridical persons that promote the implementation of the RUSSBA goals and objectives

RUSSBA. What is done in 2007I. Organization activity• About 50 became the RUSSBA members• 3 regional networks are created and included into the RUSSBA• The RUSSBA development concept is accepted

II. Project activity• Number of the applications for investment – 350• Number of the applications which failed the expert selection – 169• Number of the applications being under rework by the project authors at the RUSSBA

recommendations – 116• Number of the applications being at the stage of preparation of a business proposal for investors –

34• Number of the Presentation sessions held – 2• Prepared and submitted to investors (business angels and venture funds) – 20• Under negotiation with investors – 9• Got invested – 2 About 80 articles and interviews are published in the printed mass media The State machinery officials, the RUSSBA members and partners made over 100 speeches and

statements at forums, conferences, round tables, symposiums, seminars, etc.

III. Propaganda activity• Development of the RUSSBA “Angel-Investor” trade journal (5 numbers)• 2 books are prepared and published by the “VERSHINA” publishing house: “Venture Investment in Russia” “In Search of a Business Angel. The Russian Experience in Attracting the Starting Investment” 1 brochure – “The White Book of the European Business Angels Network” (translated from

English)

Program activity

Preparation and holding of the Moscow Venture Forum on 19-21 June

•First in Russia. The seminar-training for the Russian business angels – “Practical experience of the innovation company investment by the US business angels”

In the course of the seminar-training the participants familiarized themselves with the practice of work of the leading private investors of such business angels network as the Alliance of Angels (USA), examined by the certain examples the methodology for the selection and accompanying of innovation projects, got acquainted with the typical mistakes upon the investment and obtained the certain recommendations as for the project management

• The Conference – “Financing the small innovation companies at early stages”. The sponsor is Microsoft

In the course of the Conference the problems and opportunities for the innovation project financing were considered based on the Russian and foreign experience. The presentation of the RUSSBA Seed Investment Fund.

• The first presentation session of the RUSSBA

There were the presentations at the session made by 6 innovation companies of early stages for the investment by business angels and venture investors. The companies passed the competitive selection and expert training by the RUSSBA.

RUSSBA. What is done in 2007 (continuation)

RUSSBA. What is done in 2007 (continuation)

The “Investment Memorandum for the RUSSBA Seed

Investment Fund” is developed and the managing team

is formed

The following are developed and being implemented:RUSSBA Manpower (Personnel) ProgramRUSSBA Regional ProgramTechnology of working with innovation projects

RUSSBA Regional Program

• The object – assistance to the regions in the creation and/or further enhancement of the innovation development tools.

• Provides for the performance of the joint work on:

- the selection, assessment and preparation of the innovation companies’ presentations with transferring the RUSSBA “Deal Flow” technology on working with projects in the regions

• Holding the SBAR Regional Presentation Session

• Creation of the regional business angels network and training on such theme as “Introduction into the Business Angel Investment” The program implementation period – 1 year The negotiations are being carried on with some of the

regions

RUSSBA Manpower (Personnel) Program – “Energy and Experience”

The object – forming the personnel body of the innovation managers:

• “Energy” – a practical probation of the final year students, post-graduates, graduates from the institutes of higher education at the RUSSBA and their further work as the innovation managers and/or co-owners of business

• “Experience” – an attraction of those experts, consultants, advisors, managing directors/executives, innovation company co-owners, entrepreneurs and businessmen and corporation managers who (for different reasons) have stopped with the active work, as well as those managers who want to participate in the innovation business development along with their direct work.

Arrangements in 2007-2008

The arrangements taken place in 2007:19 May, KAZANJ, TATARSTAN• The International Investment Forum – “The Russian Regions – the Growth

Strategies”19-21 June, Moscow• The Moscow Venture Forum12 October, Saint-Petersburg• The Russian Venture Forum30 October, CCIRF, Moscow• The Seminar-training for business angels• The 2nd RUSSBA Presentation Session

The arrangements planned for 2007-200812 November, Boston, Massachusetts, USA• The First Russian-American Symposium of Business Angels

• The National Congress of Business Angels of Russia (March)• The Moscow Venture Forum (June)• 5-6 RUSSBA Presentation Sessions• 5-6 Seminars-trainings for business angels

The arrangements planned for 2007-2008 (continuation)

• Workout of: The RUSSBA SECTORAL Program The RUSSBA Program on cooperation with venture

funds

• Creation of the RUSSBA Seed Investment Fund

Dear Colleagues and Friends!Dear Colleagues and Friends!

We invite the investors We invite the investors – business angels, venture funds and other investment – business angels, venture funds and other investment tools – tools – to become the RUSSBA members and open a new perspective and to become the RUSSBA members and open a new perspective and profitable investment tool for themselvesprofitable investment tool for themselves

We will help you to master and develop the business angel investmentWe will help you to master and develop the business angel investment

We invite those small innovation companies We invite those small innovation companies of early stages which look for of early stages which look for the investmentthe investment. . We will help to get you ready for the investment and find out a We will help to get you ready for the investment and find out a business angel or a venture investorbusiness angel or a venture investor

We invite corporations to interact with small innovation companiesWe invite corporations to interact with small innovation companies