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Russia's tech startups aim to defy economic gloom

The annual Startup Village event near Moscow to showcase Russian innovators was the biggest yet

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In spite of the Russian economy's poor state and sanctions imposed by the European Union and the US over Ukraine and Crimea in 2014, the local tech startup scene is developing rapidly, cashing in on government policy to favour local suppliers and the lower costs caused by the weak national currency.

The fourth annual Startup Village event, an open-air festival for innovative entrepreneurs, was held in early June 2016 on the outskirts of Moscow, drawing in more than 20,000 people and hundreds of startups eager to present their projects and attract investors and grants, as well as competing for residency at the Skolkovo Innovation Centre that hosted the event.

Among those in attendance, 7,000 delegates represented startups and innovative systems, and 1,500 signed up as investors – a noticeable increase from the previous years.

Skolkovo Innovation Centre, a hub for tech startups, has been the event's venue since its inception three years ago. Focused on information technology, energy, biomedical/healthcare, nuclear and space/telecoms, it remains an innovation island in an economy still heavily dependent on exports of energy supplies, but striving to establish itself as a global player in technology.

Skolkovo is the country's largest hub for startups, attracted by various incentives, such as tax privileges, non-refundable grants of up to $10m, marketing support for international trade events and access to foreign investors.

We deal with startups that develop innovative technologies, said Igor Bogachev, executive director of the IT cluster at Skolkovo Innovation Centre. Our task is to provide help and support for companies that create something unique.

Economic uncertainty

When the Skolkovo Innovation Centre was founded in 2010, dubbed as Russia’s equivalent of Silicon Valley at the time, the overall economic outlook was much better and the government was eager to pump cash into innovation.

These days, the economic prospects are uncertain, and some of Russia's business ties with the outside world have been damaged over the past two years following Russia's annexation of the Crimea peninsular region and support for pro-Russian rebels in east Ukraine.

Still, Skolkovo remains an important project for the Russian government. Of course, we are still at the beginning of the road, but this beginning is impressive, said Russia's deputy prime minister, Arkady Dvorkovich, when addressing participants at the opening ceremony.

Many of you are already making money, and you're doing it with pleasure, which is twice as good, he continued.

Viktor Vekselberg, a prominent entrepreneur and president of the Skolkovo Foundation, added: Startup Village is no longer a village – we have taken it to the next level. Today, this is Russia's largest innovative project.

The government is sending a clear signal that Russian technologies need to be supported
Igor Bogachev, Skolkovo Innovation Centre

Apparently, new challenges create new opportunities. According to Bogachev, the unfavourable economic conditions are having a positive impact on local startups.

The government is sending a clear signal that Russian technologies need to be supported, he said. On the other hand, over the past three to four years, some institutions, including Skolkovo, have funded a sufficient number of projects, and now new solutions are ready to be applied.

Since the recent souring of relations between Russia and the West, the government has been pushing for import substitution – the use of local products instead of imported equivalents.

As of 1 January 2016, Russia banned state officials and agencies from use of foreign software unless no local equivalent exists. That's a niche that local startups could gradually occupy in the near future.

Russian startup trends

In the meantime, said Bogachev, Russian startup trends are generally in line with global ones. And a look at the list of Skolkovo residents and products offered at this year's Startup Village confirms that.

Many deal with machine learning, deep learning, neural networks and artificial intelligence in the broadest applications.

Another major area is cyber security and everything that is linked to data security, secure storage and transfer of data. The issue is acute for Russia, as in 2015 alone estimated damage from cyber attacks reached more than 200bn roubles ($3bn).

This is an area in which Russian programmers are strong and have substantial competencies, said Bogachev.

There are well-established Russian players in cyber security, including Kaspersky Lab, but startups such as Onsec are also eager to grab that territory.

Russian startups also actively work in the area of biometric security, such as face, voice or retina recognition.

Robotics is another field in which Russian innovators are developing systems, focused mostly on applications of artificial intelligence.

Russia is not the strongest country in providing robot technology solutions, but we are ahead in making the robot smart, said Bogachev. Based on recognition and language, artificial intelligence makes robots smart.

Fintech successes

Financial technology (fintech) is also a sector where Russian startups are working to establish themselves, and they already have some successes to report.

Recently, the Centre of Speech Technology, a Skolkovo resident, installed a system for biometric client recognition at major US bank Wells Fargo, which brought the lender an award in an innovation contest.

Russia's largest bank, state-controlled Sberbank, is also actively working with startups to pick the most cutting-edge systems and technology, which creates more opportunities in the sector that Russian companies are only beginning to cultivate.

Fintech is taking off in Russia, said Ilya Filippov, a co-founder of Artquant, a company that provides innovative fintech and investment tech systems. However, the majority of startups [in that field] are focused on various equivalents of bank transactions, such as payments, loans and scorings. Startups that work in the area of investment and asset management are still few.

Artquant, which currently focuses on US and India, is finishing the development of its products' Russian versions, hoping to seize the opportunities existing in the local market.

Big data focus

Lately, big data has also become one of the main areas for Russian tech startups' activities.

Everyone knows that the amount of data in the world doubles every year, so it needs to be stored, transferred and protected,” said Bogachev.

Big data is no longer an abstract concept – it has an impact on communication channels, it is vital to increase channel speed and capacity of backbone networks.”

Among Skolkovo-resident startups are those developing new-generation routers and systems for compressing data and distributed storage of large amounts of data.

One of the Startup Village participants, T-Tronic, develops big data applications for car service and repair, including pre-emptive maintenance. T-Tronic's platform is already used in Moscow, while the company is planning a Los Angeles launch.

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A large – and well attended – section of Startup Village in 2016 was devoted to virtual reality. Until recently, this area was mostly limited to games, but now much broader applications, including learning technology and engineering, have been added.

The need for businesses to cut costs creates another opportunity for Russian startups at a time of economic recession.

Companies are saving money, and startups often can do the same job for less money than a large company,” said Bogachev, adding that the weak ruble also helps to make Russian startups' products cheaper in international markets.

One company that is looking to capitalise on the import substitution” drive and, at the same time, seek global appeal for its products thanks to a partnership with a major international company, is Radix, a developer of systems for data storage.

During Startup Village, Radix signed a collaboration agreement with Panasonic. Panasonic is supplying hybrid storage systems, while Radix is contributing the software.

We were thinking there was a demand for a solution for storage of 'cold data' – that which is not used on a daily basis but still needs to be stored," said Radix head Alexander Kartashov. So we came up with a solution for managing data storage on Panasonic hardware.”

Fintech is taking off in Russia
Ilya Filippov, co-founder of Artquant

According to Kartashov, while hard disk drives can be used for storage of “hot data” – that which is used regularly – Panasonic's freeze-ray optical disc-based data archive systems can be a good solution for “cold data”.

He said the product, which is due to be available in the fourth quarter of 2016, is set to benefit from the “import substitution” programme and is already recommended by Russia's communications ministry.

However, the company doesn't intend to bring use of the system to the Russian market, and it will be offered globally, specifically in Asia and the US.

The total investment in in the project at this stage is in the vicinity of 50m roubles ($758,000).

While the government is strapped for cash and businesses are looking for ways to cut their costs, investment in startups are far from running dry.

Since the beginning of 2016, several corporaions launched venture funds, including AFK Sistema's Sistema Venture Capital, which has already raised 10bn roubles ($154m).

Kaspersky Lab said it will start investing in seed-stage startups globally later in 2016, releasing investments between $50,000 and $1m. Gazprom Media, the media division of the natural gas giant Gazprom, also announced a corporate fund.

“I think this is a golden time for Russian startups,” concluded Bogachev.

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