Feature

Making pancakes: How Russia plans a technology sector to rival Silicon Valley

On the outskirts of Moscow, nestled among the dachas of oligarchs and politicians, and next door to Chelsea Football Club owner Roman Abramovich’s personal golf course, Russia’s bid to become a global player in technology is taking shape.

According to Bloomberg’s league table of the most innovative countries in the world, Russia ranks only 18th – ahead of China but behind not only most of its global competitors, but also relative minnows in the world economy, such as Norway, The Netherlands and Austria.

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In the days of the Soviet Union, Russia had a reputation for engineering and technology that was embodied in heavy industry and its space programme – albeit focused on domestic markets. But in the post-communist world of the past 20 years, the country has struggled to convert that heritage into international success.

Niche software firms such as Kaspersky in IT security and Parallels in virtualisation have been role models to an extent, and Russian software developers compete for offshore outsourcing work. But the Russian tech scene lags well behind that of the US and Europe.

To address that gap, the Russian government is putting a reported £10bn over 10 years into the Skolkovo Innovation Centre – an ambitious project to create, from scratch, Russia’s equivalent of Silicon Valley.

"We lack the feeling of the 'gold rush' in Silicon Valley – that critical mass of success stories," Alexander Kuleshov, a director at the Russian Academy of Sciences, told delegates at the Skolkovo Startup Village event in June.

"The role of Skolkovo is to create success stories to give the incentive to invest in further success stories."

A global player

Over the next five years, 400 hectares of building site will become home to the startups that Moscow hopes will help it stake its claim to be a global player in technology. The site will include a science and technology university, in partnership with MIT; residential facilities for students, startup workers and their families; research and development facilities for international partners, including IBM, Cisco, Intel, SAP and Siemens; and co-working spaces for startups to develop and grow their business.

At its heart is the Hypercube, a purpose-built environment where startups have office facilities and access to the best mentors and advisers that Russia can offer. The incentives for startups are highly attractive – zero corporation tax for up to 10 years, non-refundable grants of up to $10m, marketing support for overseas trade fairs and exhibitions, and access to international investors.

The Russian government has recognised the importance of technology to its global economic standing – Skolkovo is a pet project of prime minister Dmitry Medvedev, who kicked off the project in 2009 when he was the country’s president.

Moscow is also investing £2.8bn to roll out fibre broadband to every town and village with more than 250 residents – some 13,600 settlements – and is giving away radio spectrum for free to expand 3G and 4G mobile networks.

This is a serious statement of intent, backed also by the billions accumulated by Russia’s oligarchs, one of whom, Viktor Vekselberg, is chairman of the Skolkovo Foundation, which dispenses government cash for the project.

Skolkovo focuses on five areas: information technology, energy, biomedical/healthcare, nuclear and space/telecoms. The project boasts the involvement of more than 2,000 startups already, bringing over 1,000 new technologies to market.

A new generation

At the sociological heart of Skolkovo are the graduates coming out of Russia’s science and tech-oriented universities – the first generation of workers who have never lived under communist rule.

“We have a new generation in Russia who are more creative and less held back by the past,” said Sergey Polyakov, CEO of the Foundation for Assistance to Small Innovative Enterprises. “A lot has changed in our country in the last 20 years.”

But Skolkovo sets its standards high and most startups that apply to be part of the programme fail. Only one in six applicants have been accepted, and of those, only one in four have received grants.

Startup case study: Ivideon

Ivideon is a cloud software platform that allows users of webcams and CCTV to stream images across the web, providing storage and archive facilities for videos, and alerts from home- or office-based motion sensors.

A US rival, Dropcam, has been the subject of speculation about a possible buy-out from Google, as the search giant looks to expand its “internet of things” portfolio.

Ivideon’s smartphone app has 500,000 users globally, and the company’s products are embedded in webcams sold by global giants Philips and Samsung. The firm now has about 100 staff, and is looking to open offices in Silicon Valley and Shenzhen, China.

“There is more international money coming into Russia,” says Vladimir Eremeev, managing partner of Ivideon. “If you create something popular among users, it doesn’t matter where you come from.”

Ivideon uses a partnership model to break into new markets – teaming up with national or international companies that offer its software using their local knowledge. “Russians are better inventors than salesman,” says Eremeev.

The company has worked with Skolkovo, receiving marketing support and advice, but Eremeev recognises there is a long way to go before the startup programme gets close to achieving its ambitions.

“Skolkovo is still young. It is too early to expect great results. But it is interesting to meet other early-stage startups,” he says.

The IT cluster, for example, has 320 startups under its wing, which have already generated 12bn roubles (£200m) in revenue, according to senior project manager Vasily Sizov. 

A panel of 126 business and technology experts – 35% of whom are foreign – vet applicants to the scheme. Sizov says the key criteria include the innovative nature of the technologies, the global competitiveness of the products, the international outlook of the startup, and the skills and capabilities of the team.

The IT cluster focuses on nine areas: big data, high-performance computing, software development tools, information security, communication and navigation systems, cloud, search and recognition systems, new ways of data storage and processing, and human-computer interfaces.

“We help with expertise, to mitigate project risk and attract investors,” says Sergey Khodakov, head of information security foresight in the IT cluster.

“Five years ago, there were plenty of [startup] companies, but venture capitalists didn’t want to invest in them. It is harder for people who have lived in Russia all their lives to understand the cultural difference with [places like] Silicon Valley, so it is better for them to work with Skolkovo,” he adds.

“Now we have international companies that want to work with us here – they see the opportunities.”

So what is it like for the startups? Does Skolkovo make a difference?

What startups say

Vladimir Eremeev is managing partner of Ivideon, a startup that makes cloud software for streaming and storing webcam and CCTV images, and has worked with Skolkovo.

“Many Russian startups understand the technology deeply but don’t understand how to sell it to investors,” he says. “The main role of Skolkovo is to turn technology into products that can be sold everywhere.

“Russian startups say they have similar issues, but sometimes all the problems are in their heads – they make problems that don’t exist. But we don’t have the startup ecosystem like in the US. There, you know how to go from seed to IPO. In Russia, that snake is cut into pieces and some pieces are missing.”

But Skolkovo is already making a difference, says Eremeev’s colleague Ilya Pukhov, vice-president of business development at Ivideon. “Many great things have been done – government support, making IT popular, creating government relations with startups,” he says. “If we look back in five years, we will see a completely different picture.”

Startup case study: Algomost

Algomost is a crowd-sourcing platform for big data analytics. The platform connects to 200 data scientists – Algomost calls them “solvers” – who develop customised algorithms for data mining.

For example, a retailer might want to create an algorithm to analyse sales of a particular product line; Algomost will source potential solutions from among its solvers and work with the client to exploit the results. CEO Michael Leviev claims one of its customers has improved accuracy of shelf-life forecasting by 40%, while a medical equipment firm improved its diagnostic results 20-fold.

“We can get the best algorithms, in the shortest time, for the best money,” says Leviev.

The startup has been involved with the Skolkovo Innovation Centre for a year, and as a result has expanded into Asia, finding new partners through involvement in a roadshow in the region. Leviev is planning to open an office in Hong Kong.

“Skolkovo lets us get additional qualities – access to expertise in intellectual property, marketing, and so on,” he says.

“It’s not so important which country you start in, it’s about your ambition and where you are aiming. Thanks to Skolkovo, all we need to do is bring the talent.”

Algomost is another startup working with Skolkovo. The company has developed a crowd-sourcing platform to bring data scientists together to create algorithms for specific data-mining challenges with corporate clients. Working with Skolkovo has helped Algomost to expand internationally, demonstrating its offerings at trade shows in Asia.

“For companies like us in Russia that want to be global, Skolkovo is the best place to come to accelerate our development,” says Algomost CEO Michael Leviev.

“The maximum amount of possibilities are in Skolkovo, but if you’re willing to work hard and come to Skolkovo, then the opportunity to expand internationally is there for sure. Thanks to Skolkovo, you have the infrastructure – all we need is to bring the talent.”

Some Russian tech startups have had success in the UK, too. Rockflow Dynamics, which makes highly specialised software for reservoir simulation, numbers British Gas among its customers.

Political difficulties

But the Skolkovo project is not without its challenges. There have been allegations of corruption – with claims of embezzlement followed by investigations by Russian authorities. Although prime minister Medvedev is public in his support, an initiative with billions of roubles attached to it will inevitably have its detractors in Russian politics.

Even among some of the young people Skolkovo will rely on, there is private cynicism about the programme, and wider concerns founded in the government’s rigid control of state media and the internet.

Western journalists attending the recent Startup Village event at Skolkovo were eager to ask about problems caused by the political situation in Ukraine, but Skolkovo executives and startups were dismissive, seeing Ukraine as more of a storm in a teacup.

Nonetheless, Skolkovo was due to host a meeting of the G8 group of leading economies this year, an event that never took place as the G7 proceeded without Russia in protest at its annexation of Crimea. Reports also suggest a significant fall in foreign investment in Russia because of international concerns over Ukraine.

There is little doubt that Western investors, while attracted to the money they could make from innovative Russian technologies, will be wary of committing too much if they perceive instability in the politics behind Skolkovo.

So on the one hand, you have the politicians and oligarchs who see a successful Russian startup scene as a way to make money and extend influence. But on the other, you have the internet generation who would like to see this as a way to change Russia. “It is a new mindset that we hope will define the future of our country,” says Anna Urmantseva, host of a popular Russian science and technology TV show.

For all the political clashes, it is perhaps the culture clash that Skolkovo’s young entrepreneurs embody that will determine its long-term achievements. But if it is true that money talks the loudest, then Russia’s third-richest man, Skolkovo chief Viktor Vekselberg, deserves the last word for now.

“There is a saying in Russia that the first pancake you bake will be a failure,” he says. “But all the pancakes we bake [at Skolkovo] will be successful.”


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This was first published in June 2014

 

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