27 April 2007
Mission: Open the Russian Regions for Investors
Mission: Open the Russian Regions for Investors
General Director, MARCHMONT Capital Partners
Venture investment in any country is a combination of financial, manufacturing, and planning skills. A venture company begins its work by establishing a fund, collecting investorsТ capital into the fund, promoting the fund and financing an investee company. Over two or three years, the investee is monitored and consulted to help raise its market price in order to make a successful exit in the end, often by offering an initial pubic offering (IPO) for the company. Then, the development cycle starts anew with new funds and new companies.
However, at the same time the Russian venture capital industry undoubtedly has its own specific character.
First, the history of venture capital in Russia is incredibly brief. The European Bank for Reconstruction and Development established the first venture companies in Russia in 1991. Several appeared soon after and, in 1997, the Russian Association of Venture Investment was founded. In 2000, under an RF Government Resolution, the Venture Innovative Fund started its work to inject capital into Russian industry and high technology companies, particularly those in the Russian regions. Several venture fairs have been held since 2000 as well.
Russian venture capital has always had the participation of international companies. Specific examples include Mint Capital, Quadriga Capital Russia, and now our own company, Marchmont, which has offices in Boston and Nizhniy Novgorod. These venture capital companies usually invest in expanding investee companies via the so-called "European investment philosophy." There are also domestic venture capital companies in Russia such as the Federal Venture Investment Fund, the Russian Technological Fund, the Bortnik Fund and others. These are more likely to finance emerging companies as well as expanding companies. Overall, investment in emerging Russian companies is growing.
Despite the quick growth of the market, there are still a number of serious problems impeding the further development of the venture capital industry in Russia. The most important of them are: 1) a lack of infrastructure development common in small and medium-sized investee companies; 2) a lack of local capital to fund venture initiatives; 3) a lack of liquidity in venture investments due to the insufficient development of the Russian stock market; 4) an undeveloped legal base which makes registering venture companies in Russia a long and complicated process; 5) a lack of information about the past successes of venture capital investments and about the potential growth of many economic sectors in Russia.
This lack of information often results in "first-step fear" for investors and keeps them from making potentially profitable investments in Russia and its regions.
Removing these impediments should be a priority in Russia. Russian leaders have continuously stated that the country should diversify its economy, particularly into areas dealing with scientific research and high technology. Venture investment is essential for the growth of these industries, where investments are often high and where investors often face un-guaranteed prospects and considerable risk. It seems that some progress is being made in this regard, or at least a plan is being developed. The Ministry of Industry, Science, and Technology, following orders from the Government of the Russian Federation, has developed a "Concept of Venture Industry Development" to alleviate most of the above mentioned problems and encourage companies to invest in Russia. Whether the plan will be successful is yet to be seen.
Despite the difficulties and impediments faced by the market, one can say the market is, all the same, booming. Kirill Dmitriev, the President of the Russian Association of Venture Investment, estimates that within the next three years Ц just fifteen years after the market began Ц investments in venture capital in Russia will total 2 - 3 billion USD.
While there are many companies in Russia operating under different philosophies, Marchmont the Russian market requires that venture companies operate under a complete cycle of investment. This cycle should focus on reinvesting any short-term profits to bolster company value and market position. This will subsequently grow shareholder value, meaning that when the company is sold or offered for IPO later on, the eventual payback to the investor will be maximized. This means that communication between all participants in the process is of the utmost importance, so that all realize that everything is being done to maximize the value of the company. Keeping this communication open and flowing can be difficult as participants are often numerous and diverse. They often include the state, venture funds, investment banks, corporate investors, and so called "business-angels," or investors who help privately finance a project from their own pockets.
In Russia, it is also beneficial to stagger investments into multiple stages. Initial investments from the venture capital source should be followed up with second and sometimes third financial rounds in what are known as "follow-on investments." These allow growing companies to continue to grow, but also give reassurance to the investor by providing a frame work for the investee company to make regular reports of their prospects for future growth and to demonstrate their ability enter a next stage of business development. This communication also allows investors to assist investees by providing regular consulting and coaching services and by sharing their experience. All of this helps to aim the project at its eventual goal Ц a successful exit of investors from an investee company that has maximized its value.
Marchmont has also taken the initiative to provide more complete information about the Russian venture capital markets. This year, our publishing division began issuing a series of regional journals devoted to the leading economic regions of Russia Ц the Volga region, the South, the Urals and Siberia. An issue on Nizhny Novgrod has already published. Ekaterinburg and Novosibirsk are now being prepared for publishing. These are intended to be used as guides for foreign investors; they contain information on what business in these specific regions are suitable for investment.
Today, most well-known investment opportunities exist only in Moscow and to a smaller degree in Saint Petersburg. However, many other cities are developing quickly and offer great growth and profit potential in several economic areas. We believe it is time to start considering and, indeed, even promoting these opportunities.
MARCHMONT is an American owned business advisory firm with a bi-lingual team of specialists based in the City of Nizhniy Novgorod. With more than 14 years' professional experience in corporate finance and private equity fund management, we have accumulated a wealth of experience working to develop and expand a wide variety of private enterprises located throughout Russia's provincial regions.