The Russian startup ecosystem has been slowly building over the past ten years, with a noticeable increase in activity in the past 3-4 years. The government has been a key driver in many areas of activity, and as befits the tendencies of the Russian government, many of the schemes have been grand and ambitious. The most notable of these is the Skolkovo project, which aims to build an entirely new ‘Innovation City’ just outside of Moscow, complete with top tier university, accelerator labs, and all of the housing and infrastructure to sustain a sizeable community. The Skolkovo site also houses corporate innovation groups from Russian organisations like Sberbank and international groups like Boeing. The project was begun in 2006 and is finally starting to come together after experiencing stumbling development through the economic difficulties of the past decade.
Funding
The volatility of the Russian economy has made it difficult for the startup economy to get a strong foothold, as it has reduced investment and weakened the local market. Not only was Russia hit by a recession in 2008-2009 following the financial crisis, it was hit again in 2014 by the sudden fall in oil prices and the imposition of sanctions following Russia’s actions in Crimea and Ukraine. As well as scaring away foreign investors, the fluctuating ruble also caused many Russian investors to turn their attentions to less volatile markets. While startups are not directly affected by the sanctions, they are suffering the knock-on effects. Getting initial investment can be a tough challenge, with a relatively low level of VCs active in the market and only a small community of angel investors. Government grants and tax breaks can fill this gap, although receiving a government grant requires a lot of effort and paperwork.
Support programs
Part of the government approach has been to establish privately-run organisations to support startups. Skolkovo Foundation, at the heart of the Skolkovo project, is one of these. Other groups include фрии (pronounced ‘FREE’), who provide funding and educational support to startups. Also prominent are the Technoparks, set up by city governments, including the 12 business incubators established by Moscow city government containing 1300 projects across various industrial sectors. They offer space and structure for early stage startups and other small businesses. The incubation facility of Skolkovo is also run by Technopark. Going a stage further, Moscow also has a ‘Technopolis’ which provides flexible and specialised industrial spaces for mid-sized businesses. Graduates of Technoparks sometimes move their production to Technopolis as they scale.
Numerous other support programs are being established to help startups find their footing, and especially to try to help them through the ‘Valley of Death’ between concept development and market acceptance. These groups offer services such as working space, access to investors, industry partners and support services, events and networking, and training and mentorship. Some also help startups make the most of government grants by taking on management of the bureaucratic reporting demands, allowing the founders to focus their time on developing their companies.
Regions
While Moscow and the Skolkovo project are the most prominent hubs of activity, centres of innovation are spread across the country. The Soviet era saw the establishment of a number of ‘science cities’ (or ‘Naukograds’), spread across the country as hubs for scientific research. Many of these were ‘secret’ or ‘closed’ cities at the time, although most have since opened up, and they were spread across even the more remote areas of the country like Siberia and the Urals (a good science location for its rich mineral resources). Siberia is still strong in the sciences, with cities like Novosibirsk – once the Soviet equivalent to Skolkovo and now the third most populous city in Russia – and Tomsk – a student city with six universities. The city of Kazan in the Republic of Tartastan has built up as a more organic science city, thanks to its impressive collection of science institutions and universities. Kazan is growing into an important startup hub and hosts Russia’s main venture industry event – the Venture Fair.
The roots of a strong ecosystem are also taking place in St Petersburg, with a lot of support from universities like ITMO, who offer a range of programs to help their students build successful startups. In future, the Skolkovo project may also establish satellite centres elsewhere in the country – at the moment startups are required to move to Moscow/Skolkovo for the accelerator program. The have already opened a regional office in Vladivostok to support the development of startups in the Far East, where entrepreneurs tend to build solutions related to the sea (such as fisheries and marine robotics).
Sectors
The main focal areas for the Russian startup market are in the hard sciences and IT. The Skolkovo project targets five specific strands of technology: Energy, IT, Nuclear, Biomedical and Space (Nuclear referring more generally to the study of things on an atomic and sub-atomic level rather than specifically energy or weaponry). The focus on specific areas is reflective of the government’s efforts to establish clear sectors of excellence in which it can diversify the economy away for its current over-dependence on oil, gas and other natural commodities. That said, oil and gas research within the Energy field also shows Russia trying to innovate within its key industries to raise their profitability once again.
Along with these sectors, there is also a trend (similar to that seen in South Korea) for Russian startups to replicate successful Western business models for the Russian market. The Russian Facebook equivalent, VK (VKontakte) is one of the country’s main startup success stories and has become the largest European social network.
Markets
The general level of technology aptitude and use in Russia is varied. While the larger metropolitan areas have good access to internet and mobile technology, there is a vast spread across the country in terms of quality of life and access to technology. Even large cities like St Petersburg have a lot of updating to do, with a metro system that still uses metal tokens and an icicle problem solved by sending men onto the roofs with crowbars and shovels. Russia is a vast country with a complex history and an exceptionally challenging climate, so it is unsurprising that certain parts of the country are substantially more technologically advanced than others.
Given the variability of the Russian market, key players in the Russian startup ecosystem recognises the importance of the global market in breeding ‘unicorn’ status companies. Despite the vast size of the country, the economic slump and sparseness of the population mean that the Russian market is not large enough for a startup to achieve that level of valuation. Many of the acceleration projects aimed at startups have support for globalisation as one of their core activities and multicultural events and foreign trips are part of this activity. The Skolkovo project is also intended as a multicultural enterprise and Skoltech University was founded in partnership with MIT.
Culture
Culturally, Russia has a number of challenges to overcome, most notably in openness. The regimes of the past have left their impact and people are reluctant to share either their successes or their failures, which can make it difficult to establish a strong supportive, collaborative network of innovators. There is also a traditional negativity towards successful businesspeople, seen perhaps as getting above their station in a country which has generally tended towards collectivism.
Diversity
This history has also meant that diversity is not a key consideration within the ecosystem, as Soviet times ensured women were well represented in science education and Russians almost unanimously told me that they do not discriminate by gender or ethnicity. Of course, this does not mean that there is equal representation of women among startup founders, in fact they seem to make up only around 10 percent of most accelerator intakes (this is an estimate as most programs don’t track this metric). It will be hard to address this diversity issue as long as Russians don’t actively recognise that it exists.
Challenges and Opportunities
Alongside these cultural aspects, there are clear strengths and weaknesses in the typical skillsets of startup founders in the Federation. Russians have long been known for their scientific prowess, but they are now realising that great inventions do not necessarily make marketable innovations. While there is a strong scientific community and the historic and environmental difficulties of living in Russia have made the people into consummate problem solvers, the scientists are often too attached to traditional methods and the problem solvers struggle to identify the right problems to solve. Russians have the advantage of being well-developed in several of the cornerstones for innovation, but now they need to build up their market understanding in order to turn great ideas into successful businesses. If they can jump these hurdles, then it is likely that we will see an increasing number of Russian startups making waves with their scientific solutions in the global markets in coming years.
Update: It was only after reading a tweet from my good friend Roger Strukoff of Tau Institute that it occurred to me that I wrote an entire overview of the Russian ecosystem without once mentioning Putin. This post is only a brief snapshot of my research, but it’s interesting that he didn’t come to my mind as I tried to sum up my learnings about the ecosystem. Of course he came up in conversation, but not as often as you would think, and really there were only two prevailing points of view: one set was adamant that the ecosystem could never thrive under the current political leadership, while others didn’t seem bothered and just got on with things (a very Russian thing to do). As for myself, I am in the middle of reading various texts on Putin to get a proper handle on the man and his government before I form my own opinion.
Note: This is a brief overview of the startup ecosystem in the Russian Federation, with insights gathered from three weeks spent in Vladivostok, Moscow and St Petersburg, including around 20 interviews with startups, accelerators, government groups, universities, investors and others and attendance to conferences and meetups. More in depth findings will be detailed in the full report.