Established with the hope of bringing Russia’s powerful tech know-how to the world and encouraging entrepreneurship, Skolkovo is working to overcome the hurdles
Back in 2010 when former President Dmitry Medvedev put his signature on the official order to launch the Skolkovo Foundation, there were many around the world who had their doubts on whether Russia was really ready to join the international startup community in full force.
Charged with the massive undertaking of laying the groundwork for diversifying Russia’s economy through the startup and technology sector and driving a move towards entrepreneurship, the Skolkovo Innovation Center is at the forefront of an effort to bring the country into the marketplace of the new century.
The Russian technology sector has traditionally been viewed as top tiered, with a strong background in the hard sciences and universities pumping out brilliant engineers and developers. However due in large part to the aftershocks of the Soviet era that persecuted those with an entrepreneurial spirit, startup culture there has been slow to form. Now this new generation is being propelled forward to build businesses and compete on the global stage with heavy backing by the government. Moreover, they are putting their money where their mouth is, bringing together significant financial and human resources to help it succeed.
Roughly a 30-minute drive outside of central Moscow, passing by a walled-off golf course belonging to a well known oligarch and through the grassy fields, the multi-colored structures that form the core of the center come into view.
In attending this year’s Startup Village two-day event and speaking with returning journalists, the sense of progress was palpable with remarks on how much things had changed since their visit the previous year.
The core cluster buildings are up and running, and newer buildings are still being worked on in the surrounding fields, including those by large companies that are looking to be close to the innovation center. During our visit, Deputy Prime Minister Arkady Dvorkovich stopped by for the opening of Boeing’s newest pilot R&D and training center before coming to meet with journalists.
On a tour around the property, with its 2.6 million square meters gross build-able area of land, the scope of the project became clearer. A massive office building with space for 200 startups, rental housing for workers, a high-priced business center, research facilities at the Technopark that is still under construction for large corporations like Sberbank, they are all being built and more importantly paid for.
According to the Foundation, the government has so far invested 123 billion rubles, the Foundation added another 7 billion, investors in the infrastructure side have added another 15.2 billion, and finally the companies using the facilities have thrown in 13.5 billion of their own, bringing the total to 158 billion invested thus far.
The message that Skolkovo and Russia are dead set on being open for business on the global stage smacks you in the face like a brick wall. Coming from Tel Aviv, observing the scale of the work being done felt overwhelming.
MEET THE RESIDENTS
Home to the 1530 Skolkovo residents, the term for the companies that have been accepted into the project, these four buildings house the IT, Biomed, Nuclear, Energy, and Space departments. To be accepted into the program and receive the economic benefits, each team has to present their ideas to a 10-person panel of experts, and if six of them believe the concept to be innovative and the potential to run as a business, then they are in.
Igor Bogachev, who serves as a VP at the center and is the executive director of the IT cluster, spoke with Geektime about how Russian startups are approaching the global market and addressed some of the challenges that they have faced along the way.
He tells Geektime that this process of accepting new members can be a double edged sword since it forces them to spread around equal amounts of resources to all the members, regardless of their chance at success. But the upside is significant as well, with Bogachev saying that requests to join have risen 30% from the previous year. He adds that the strong numbers forces them to learn to work more effectively with what they have and push to bring in more investors.
There is the added check that when a company becomes a resident, they have to seek out external funding as well, meaning that the foundation is there to help but cannot be counted on as the sole lifeline for a startup.
If finding companies to participate has not been Skolkovo’s challenge, they have faced many others. Since they were building this from the ground up, like all initial projects — especially those connected to the government whose old bureaucracies that does not exactly push for speed and efficiency — they were hit with delays. Getting the four primary buildings up took three years to complete. Among the setbacks that Geektime found out about from other sources were conflicts with the golf course-owning oligarch who took over the original grounds for the site, forcing the project to make adjustments and accept delays. The foundation faced criticism in the press for their slow pace, raising doubts about the seriousness of the project.
However Bogachev says that they turned these bumps into forward momentum, using the time to consolidate a strong cadre of companies, mentors, and financial backers. This includes a partnership with MIT that created the Skolkovo Institute of Science and Technology (Skoltech) that advances the research and development efforts by bringing in professors from around the world. On the money point, he tells Geektime that they now have 70 VCs, both domestic and foreign, that are working with resident companies.
One of these VCs is Sistema Venture Capital, which just last month funded Skolkovo resident and visual recognition startup VisionLabs to the tune of $5.5 million in their Series A. While not a huge round by global standards, it is a very respectable sign of confidence in the companies that are coming out of the Skolkovo family.
Another is Maxfield Capital, which was founded by Alexander Turkot. Before starting his VC, Turkot spent years at IBM and opened up the IT cluster at Skolkovo. The fund has already backed two resident startups, NFWare and Jelastic, with around $1.5 million invested. Splitting his time between the U.S., Israel, and Russia, Turkot is one of the players helping to move the Skolkovo scene forward, bringing a sophisticated understanding of the global markets and a keen eye for identifying potential in companies.
The key obstacles Russian startups face in going global
Bogachev says that there is a trust deficit in Russian technology that countries in more developed ecosystems do not have to contend with, stymieing their growth.
“In Israel you can build small thing and actually sell it to the United States company quite fast,” he explains. “So in Russia you should go through the Russian Market, build the technology and then go into another market to prove that it works not only in Russia because nobody believes that Russia is good enough.”
This leads to a longer path to growth that can be discouraging for startups. He says that they will instead choose to go to more reliable markets than smaller ones where they have a better chance of succeeding.
The Russian economy is fairly large: roughly 143 million people or 273 million if you include the surrounding CIS Russian speaking countries. While this might appear to be a good thing, it is mixed if you are developing tech for businesses. He says that there are a limited number of big B2B customers like banks that these startups can sell to.
So while a startup can perhaps survive on the business in this kind of market, they may not feel the incentive to seek out customers from outside their bubble. Failure to reach out for more is the difference between a sustainable business and one that is truly scalable.
Then there is the difficulty of language and culture. Russia has been closed off for a long time, and they lack the ties to the rest of the tech market. Unlike other parts of Europe where countries have smaller populations that speak their language, and English is more prevalent, Russia’s size meant that they did not have to integrate to the same extent. The downside is that many companies find it difficult to produce products for the global market and are discouraged from doing so.
Culture presents other barriers that Russians will have to overcome. Fears and taboos surrounding failure — a constant reality in the startup world — were cited time after time from different sources. There is also a lot of mistrust when it comes to perceptions of giving companies funding. In the beginning of the Skolkovo project, there were stories of a number of companies who were nowhere to be found after receiving money as a part of their residency. However, this was thankfully a short lived problem that was not repeated.
These days the problem is that the startups are not getting the sales and funding that they should be. None of the Russians had an answer as to where the breakdown was occurring between the solid products the companies were producing and their ability to close deals.
Pekka Viljakainen, a Finn who serves as the advisor to the president of the foundation, offered a theory to reporters at a small press conference on the second day as to where the issues may lay.
“Sometimes there is an unrealistic expectation from the Russian entrepreneurs and this is our educational task. While Skolkovo has funding, there is also a private component. There is a kind of illusion that when you go to Silicon Valley or even Helsinki that the private part comes automatically. I would say from my own stand point that there are quite [a few] options, even here in Russia to have the private component. But you have to hunt it down.
“If in Silicon Valley you have to do 54 pitching sessions before you get the funding, here some Russian startups might say after three pitches ‘ok, no funding’. When I started my company years ago, I had to do at least 150 pitches to get some money. So it is also our educational task to prepare our startups to, let’s say, business realities because they are coming from the science world with not so much a business [background]. So it is not so much a black and white issue. I think there is an increasing number of the private funds also available,” Viljakainen noted.
Currently 10% of the resident companies have received Series A funding. Considering the wide range in the time that companies in that cadre have spent as a part of the foundation — between two months to five years — it is not a bad number. But Bogachev says that he want to double that and reach 20% based on where he sees the capacity of the cohort of companies now to be selling their products.
Whether or not these companies are in fact reaching their sales potential is another question.
Taking a proactive approach to coach success
One of the most important things that Skolkovo is doing is giving their residents a gentle push out the door to seek out international markets. “When the product is ready, we start to push them outside because we understand that they will find the customers in the country with or without our help,” explains Bogachev. “But if we will not create the opportunities for them and to push for them to go to the other markets they will probably do it but only in two to three years time.”
He says that they encourage them to speed up the process and not waste time in reaching out. “We tell them ‘why wait?, you should go now: Make a presentation, get it ready, make yourself ready to pitch in English, show us your potential customers in this particular country [and] let’s help you to set up the meetings.’”
“This strategy actually works for us because we in 2013 [had] 10 companies selling outside of Russian speaking countries, and then in 2014 we had 40,” Bogachev boasts.
Part of this effort to push them abroad includes taking their teams on the road. Less than a week after the Startup Village, the foundation brought a group of 11 cyber security startups from Skolkovo to the Infosecurity Europe conference where they presented their companies and met with groups like TechStars and Startup Bootcamp.
Good cause to be optimistic on Russia
Despite the concerns, my visit to the Startup Village left plenty of room for optimism for Russia’s entrepreneurial scene. There were a number of young stand out characters that I met during my trip that to my mind exemplified a change in the right direction.
Margo Bogdanova who works at CINEMOOD, a company that makes small projectors with content for children, is one of them. They recently ran a successful Indiegogo campaign that received over 150% in funding. While not working in the heavier B2B side that the country is known for, Bogdanova had a vibe to her that spoke in comfortable English, not just in her control of the language but with the inflection of entrepreneurship in how she talked, on par with her peers from the Silicon Valley set. She understands the importance of marketing to the West and is not afraid to venture into the consumer market.
Then there was Ilya Sachkov, the founder of cyber security firm Group-IB. As one of Russia’s leading threat intelligence companies, they have made a name for themselves going after cyber criminals in the Russian speaking space and list clients like Microsoft and Citibank on their website. That Russians have a strong cyber sector is nothing new: think Kaspersky Labs. But in speaking with Sachkov, it was clear that he brought more to the table than just being another researcher. The way that he spoke of cooperation with law enforcement and partners on a global stage, working to curtail the work of gangs that have turned hacking into a lucrative business, made plain that he envisions taking his company to the next level.
Where Russian startups will be by next year’s Startup Village is hard to tell. Along with the challenges discussed above, sanctions and increasing tensions with the West are in the back of everyone’s minds. The extent to which they will affect the burgeoning ecosystem is unknown.
But Skolkovo’s initiative in breaking through these barriers is impressive, and they continue to surprise. Each year a new section of the property seems to be completed and more companies join the field. Perhaps most importantly they have a strong team on the backend striving to push forward, being their advocates and promoting their companies, changing the industry’s perspective on Russian startups.
This is a bear of a mission and success is still uncertain, but if and when this powerful ecosystem wakes from its hibernation, the world had better be ready.