Although negative publicity seems to dominate Western coverage of Russia, the country offers many exciting growth stories. Evan Burfield, founder of 1776, a technology start-up incubator based in Washington, DC, shared impressions from his latest trip to Moscow with FSG. In Russia, he met with start-up entrepreneurs, angel investors, and government officials to discover that a community of exciting, ambitious, Western-style technology start-ups has appeared in the country during the past few years. Below, we highlight a few of Evan’s insights from his trip.
Russia has a vibrant start-up community and it looks very much like the one in the West
Surprisingly to many observers, Russia has a growing community of start-ups that would be very much at home in Silicon Valley. One reason for this is that many Russian high-tech start-ups were set up by Russians educated in the West or with experience working in top global consulting companies such as Booz Allen Hamilton, McKinsey, and others. Some Russian emigrants living in West have also returned to Russia to take advantage of the huge growth potential that the country offers.
As a result, you find in Russia the same trends in start-up development as in other countries – big data, education, consumer web, etc. Some Russian companies are cloning Western business models, but are striving to be global players and to expand into markets beyond Russia.
But the sources of start-up capital are different
Russian startups are supported by an angel community composed of prominent investors whose roots are often in building successful businesses during the 1990s tech sector boom, for example companies such as Russian search-engine Yandex. However, many investors also come from more traditional industries such oil and gas. They may not see stable investment opportunities in their current industries and look to instead invest in what they increasingly see as the next-generation wave of Russian startups.
Russian start-ups face unique challenges
In the U.S., capital and start-ups are readily available and the challenge lies in selecting the right ideas. In Russia, capital is abundant, but high-quality ideas and entrepreneurs are more difficult to find.
One of the reasons for this difference is the shortage of mentors in Russia. Most of the big Russian businesses are in more traditional industries, which means that the pool of successful tech entrepreneurs is small. Local mentors with experience are highly sought after, but are few and far between.
The Russian government both supports and obstructs local start-ups
The Russian government seeks to support start-ups, especially in the technology industry. The most well-known example of this is the high-tech innovation hub of Skolkovo.
On the other hand, start-ups in Russia struggle with administrative issues such as being able to post several years of losses without arising the suspicion of the tax authorities, and the generally very high level of taxation. This makes it critical for them to establish good relationships with the authorities to ensure sustainable growth.
Corruption is less of a problem than is commonly perceived. The burdensome regulatory environment is a much bigger challenge for Russian start-ups. This underlines the attractiveness of special projects such as Skolkovo, which offer reduced red tape and tax breaks.
Exciting opportunities exist for investors with a more balanced view of Russia
There is no doubt that there is a massive misunderstanding of Russia in the US investor community. There is a Western perception of the inherent element of criminality and corruption in all Russian business. But at the same time, this doesn’t mean that there are no sophisticated, Western-style aspects of the Russian economy. In fact, the two exist in parallel. For example, Russian government rhetoric against the US is also combined with strong interest in and support for collaboration in technology. There is huge demand for start-up engagement on the side of the Russian government as well as from the private business community. This creates significant opportunities for those investors who are willing to look beyond the headlines on Russia.
Evan Burfield is a cofounder of 1776, driven by his passionate belief in entrepreneurship as the engine for solving the major problems facing America and the world today—from education to energy efficiency.
Evan became an entrepreneur in 1996 when he founded netDecide, shortly after graduating from the Thomas Jefferson High School for Science and Technology. Before he turned 25, he built netDecide into the leading provider of enterprise wealth management solutions for top tier financial service firms. After netDecide, Evan served as the Director of Strategy and Technology for Oakwood Global Finance, where he led the London-based private equity firm’s analyses of new global markets, new business models in financial services, and data-driven investment strategies. In 2006, Evan returned to Washington, D.C. to found Synteractive, a consulting firm that builds innovative social apps for startups, corporations, and government agencies.
Evan holds Bachelor’s and Master’s degrees in Philosophy, Politics and Economics from the University of Oxford. While at Oxford, he won the Webb Medley prize for outstanding work on the effects of organizational incentives on knowledge sharing. Evan currently serves on the Board of the Rothermere American Institute at Oxford, dedicated to the study of American history and politics.