Page 130 - IFR Opportunities in Russian capital markets

CHAPTER VENTURE CAPITAL 09 Background
Venture capital, as it is understood by Western investors, does not exist in Russia. Rich Russian businessmen are investing huge amounts of money into new ventures and domestic private equity activity dwarfs that of organised foreign funds, but with so many opportunities available to existing businesses few businessmen have bothered to take on the additional risks of starting entirely new business in high risk sectors.
This is all about to change in 2007, once the Kremlin pumped in US$500m of seed capital to create a venture capital business from scratch. In addition to oil and minerals, one of Russia's biggest assets is its intellectual capital; the Soviet Union had many failings but its university system produced world-class scientists and engineers. Much of this potential has been lying fallow for most of the last 15 years and the state-sponsored Russian Venture Company is designed to realise this potential by providing money to scientists with good ideas.
Kremlin officials have done their homework and Krill Dmitriev, head of the Russian Private Equity and Venture Capital Fund Association (RPEVCA), says he has been in high demand recently: “Venture capital is in its infancy, but there is a lot of excitement over the government programme which could be a great help.”
The curiosity of foreign venture capital funds has been piqued and several funds were flying into Moscow in 2006 to find out more about the Kremlin's programme.
Dmitriev has been active in bringing together Western venture capitalists with top government officials, who met in September 2006 with Minister of Science and Technology, Andrei Fursenko, and Russia’s economic guru German Gref to explain what they need to make venture capital funds work.
“What Gref is trying to figure out now is if venture capital can be used to transform the Russian economy”, says Dmitriev.
Home-grown venture capital
Dmitriev estimates the amount invested into traditional early-stage ventures will reach US$200m this year, up from US$140m in 2006, but he says that since the Kremlin has pushed venture capital funds to the top of the agenda he expects it to turn into a US$3bn business within three years.
So far, virtually none of Russia’s venture capital money has come from dedicated venture capital funds that are systematically looking for big returns from small companies at a very early stage of development.
Most venture capital is from big domestic companies investing into new technologies on the fringe of their main R&D projects. For example, Norilsk Nickel has been funding research into hydrogen cells and oil company Yukos backed a study into ways to change gas into oil.
The small number of private equity firms working in Russia also dabble in start-ups, but most of the venture money is invested by oligarchs or minigarchs – businessmen who have made US$100m or so and are backing small projects as much for fun as for the return.
“There are a lot more projects than there are venture capital funds and almost no-one was looking at start-ups a few years ago. It is a fund manager’s market and they are spoiled for choice”, says Viktor Frumkin, co-director of Bridgetown Foods, which makes croutons (a popular Russian snack food) and eventually went into business after raising money from the leading private equity fund Baring Vostok Partners several years ago.
Early successes
Even so, the Cold War legacy means that Russia still boasts world-class scientists and there have already been several successes.
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