Harvard Law School - Russian Innovation Ecosystem. Past, Present, Future

Russia: land of wonders or “black hole”?Overview of the national innovation ecosystem

Ilya Ponomarev, Chairman, Innovations and VC Subcommittee, State DumaHarvard Law School 11/11/2013

Ilya Ponomarev, State Duma, 11/11/2013

History of Russia’s innovation ecosystem • At the foundation – Russian Academy of

Sciences, est. 1724 by Peter I “The Great”– Internationally oriented from the very

beginning, primarily Holland, Sweden, France, Prussia

– Universities had never been influential: • focused on education• major research done within RAS or privately

sponsored

• XIX-XX century – competition in innovation with the West– Railway system– Industrial innovations– Radio and TV– Aviation,Space and rocket science– Military research

• XIX cent. – privately (or personally) driven

• XX cent. – driven by government


Russian Academy of Sciences• Consists of several hundred research

institutes• Divided into 11 vertical divisions (physics,

chemistry, math, earth, …) and has 3 regional branches (Urals, Siberia, Far East)

• Two major “sister” Academies – Medical and Agriculture, currently merging into one

• Self-governed, organized as an elite club of academicians, and candidate academicians

• Determines directions of fundamental research and appropriates funds allocated by the state

• General subcontractor for R&D for the state, very limited contracts with industries

• Scientists employed in parallel by research institutes and universities– Full integration between education and research

exists only in some “science cities” – isolated problem-oriented R&D clusters, usually with certain military emphasis


R&D and commercialization chain in USSR• Academy of Sciences – state-guided fundamental

research– Divided into civilian and military research fields, latter

more prestigious and better funded– In certain cases military researchers could request

intelligence data

• All major state agencies (vertically structured) had their own applied research institutes– Served their industries– Procured fundamental research from the Academy– Adapted fundamental results to the requests of the

particular industries

• Agencies were responsible for technological progress within the industries– Ministry of Defense reported separatedly to Politbureau of

CPSU, and provided technology foresights

• “Construction bureaus” at particular enterprises were implementing centrally provided technologies and were responsible for inventions

• System of “specialists distribution” for universities graduates


Impact of reforms of 1990sSystem imploded:• Funding dramatically dropped, Russian

Academy of Sciences experienced unprecedented brain drain– Especially centrally based institutes

• The more prestigious particular institution was before, the less attractive it became after

• Government became horizontally organized, industries-oriented agencies vanished

• Industrial research institutes were gradually disbanded or taken over by particular enterprises

• No military procurement at all• Industrial collapse in all industries except oil,

gas, mining and metals• Constant redistribution of assets within

major corporations shortened planning horizon and made uneconomical to invest into R&D

• Russian technologies could not impact valuation of companies like Western could


Russia’s innovators key competences• IT

– Mobile apps– E-payment systems– E-learning– Financial systems– Social and media apps

• Telecom• New materials• Industrial innovations• Geosciences

• Emerging – clean tech

• Underdeveloped:– E-commerce– Life sciences


Pres. Medvedev’s call for modernization • Medvedev’s “4i” initiative in 2008

– Infrastructure– Institutes– Investment– Innovation

• Presidential address to the parliament in 2009 was focused on innovation– Most fashionable discussion topic– Now everybody is on twitter, facebook,

blogs, …

• Pres. Obama “reset” policy, also started in 2009, assumes that US and Russia are building common values– Creating a compatible innovation

ecosystem is a perfect example

• 2009-2011 were years of multiple initiatives in

Russia• After Putin’s return – obvious recess,

but most initiatives are already launched


Priority #1. Financial resources• Government created numerous financial

institutions– Equity financing

• Rusnano – $10b investment company• Russian Venture Corp – $1b fund of funds• Rosinfocominvest – $150m PE fund• Bortnik Fund – seed and pre-seed grants

– Debt financing• Vnesheconombank

– Infrastructure support• Hi-tech parks• Special economic zones• Skolkovo Foundation as an entry point

– Tax vacations:• Special tax regime for hi-tech companies• No capital gains tax for investments over 5

years

• Many large businessmen are thinking about investing in hi-tech– DST owns 10% of Facebook, recently made

Mail.ru IPO

• Some VCs are formed, many with foreign capital– Most successful Russian search engine Yandex.ru

was started with Massachusetts money


Problems with funding still exist

• Limited exits within the country

• Lack of internal demand– Foreign technologies still

usually preferred over Russian

– Government is yet to come

• Deficit of physical infrastructure– Inexpensive offices– Business services– Quality housing

• Insufficient number of experienced

investors


Priority #2. Legislation• Significant progress has been made

during recent decade– Corporate law, introduction of LLP/LLC– Securities law– State procurement– E-Commerce– IP regulation is copied from German IP law– Tech transfer law (similar to Bayh-Dole Act)– …

• Skolkovo Law unveils possibility to solve many issues “manually”– Taxation– Immigration– Construction permits

• Controversial Academy of Sciences reform– RAS is stripped of appropriation and

management function– Funding focus shifted to universities


Real problems with legislation• Law enforcement• Some Russian laws are

incompatible with usual approach legal acts:– Corporate legislation – options,

stock series– Technology transfer act –

bureaucratic • In some Acts bad wording leaves

room for unfavorable misinterpretation– Software VAT exemption act– Privacy protection act

• Main points of immediate attention– Internet crime liability definition– Bankruptcy regulations– Miscellaneous industry-specific acts

(telecom, advertisement, mass-media, …)


Priority #3: Entrepreneurship and VC • ~920+ mln. USD invested (201

deals) in 2012, 5th largest VC market in the world– ~790 mln. in IT (168 deals), ~100 in

industrial technologies (incl. cleantech), ~10 – life sciences

– 37 mln. seed, 100 mln. series A, 255 mln. B, 517 mln. C+.

– Tendency to shift towards later stages– 5 mln. - average deal

• 12 exits, ~370 mln. USD, incl. $100 mln. in 3 large deals

• During last 3 years – several major IPOs (incl. Yandex and Mail.ru), most major telecom and IT players are public (usually NASDAQ, NYSE and LSE)

• Most investors are either former PE people, or former entrepreneurs


Situation with investment targets• Huge Soviet legacy of

technological ideas– Primarily in places like

Novosibirsk Akademgorodok

• Insufficient knowledge and experience in protecting IP

• High desire of researchers and their students to get involved in commercial activities, but– Lack of experience – Unadequate self valuation– Limited knowledge how to follow

the market and find niches

• Strong deficit of smart money


Main problem of Russia’s innovation ecosystem – human resources

• No entrepreneurs, even less – experienced serial entrepreneurs– High entrepreneurial potential of Russians is

focused on avoiding government regulations – Russians are willingly taking economic risks, but

current institutions punish such behavior• Lack of international business experience and

proper connections– No success stories to follow– Language barrier

• Education reform is controversial– Education, research and industry are disconnected– Heavy impact of brain drain– Demographic crisis of 1990s starts to hit– No adequate business schools, professors with

first-hand experience• Negative legacy

– Decreased level of people’s geographical mobility– Excessive concentration of business activity in

Moscow, colonial policies towards other regions– Housing and utilities deterioration


Skolkovo project1.To develop Russian

innovation ecosystem by creating a universal entry point to– Make Russian businesses global– Attract international businesses

to start R&D and hi-tech manufacturing

2.Create in Russia new companies and/or their divisions, to develop new hi-tech services and products

3.Develop Russia’s human resources: attract foreign specialists and support local talents in hi-tech


Skolkovo’s key principles• Project is managed by a non-for-profit

Skolkovo Foundation, governed by a special law

• Project participants receive set of business services as well as certain incentives for companies with revenues up to 3 bln. Rbl. (USD $100 mln.):– 0% profit tax, VAT, property tax– 14% (vs. usual 35%) social payments– 0% custom duties

• Each department is supposed to grow into self-sustainable operation– Education– Research– Commercialization, tech transfer and business

development– Investment– Real estate

• Each service is to be provided on competitive basis

• Business model is developed as a private-public partnership, but assumes separation of public and private funds. After a while Skolkovo Foundation should become independent of state funding

• At heart of the project – SkTech – “Russian MIT”


US-Russia cooperation to develop innovation ecosystem

• In 2009, contacts between Russian and MA organizations, incl. MIT, began to outline practical cooperation. Rusnano develops close cooperation with MIT for training and discusses joint projects

• Jan. 2010 Russian Government delegation, led by First Vice Prime Minister visits MIT. Decision to initiate Skolkovo Project has been made

• Feb. 2010 US State Dept. takes “RusTechDel” delegation made of 10 West Coast CEO’s (incl. eBay, CISCO, twitter, …) to Moscow and Novosibirsk

• March 2010 - another Russian delegation in Cambridge/Boston– Cooperation agreement signed with Novosibirsk hi-tech park– Russian sponsorship for MassChallenge.org business plan

competition – Negotiations begun with MIT to become a co-founder of

Skolkovo Project• April 2010 – Massachusetts Senate invites Pres. Medvedev to

come to MA• May 2010, Delegation of 20 prominent venture capitalists to

Moscow (VC Trip), supported by State Dept. No participation from MA.

• June 2010, Skolkovo Board of Directors announced - 6 Russians, 6 foreigners, incl. 3 Americans – all from West Coast.

• June 2010, Pres. Medvedev visits Silicon Valley, not MA.– Several high-profile agreements were signed– President ordered to open Skolkovo project office in Bay Area– Agreement with MIT signed in US Chamber of Commerce

“lobby,” not main hall, and only after enormous pressure from Russian side

• September 2010 – NYAS delivers report “Yaroslavl Roadmap 10-15-20”

• 2011 – Skolkovo Institute of Technology established together with MIT

Why cooperate and Why now? • Russia’s 5 technological priorities

match MA core competences:– Biotech and life sciences– Cleantech - new energy sources– IT and supercomputing– Space and telecom– Nuclear technologies

• Russia can become resource for manufacturing facilities, R&D personnel, scientific advances to be commercialized, clinical trials– MA can host Russian corp. offices, tech

holding companies, provide training to entrepreneurs and financing of new companies.

• Russia’s domestic market, especially for new energy and biotech projects with underlying layer in nanotechnologies, is very promising

• Right now major Russian businessmen are looking to form joint ventures to invest into hi-tech, and actively touring West – primarily Silicon Valley