22 December 2003

Arun Sarin; Vodafone's CEO on 3G, Life and the Universe

Arun Sarin here giving a full interview to the FT on Vodafone's strategy. For those of you with a subscription here is the link. For those without, a quick cut and paste;

"But are we investing seriously? - the answer is yes. And the point is it's not just that we're investing in 3G networks which are an important piece but we're investing in 3G handsets, we're investing in 3G content, we're investing in 3G service delivery platforms because it takes much more than just some infrastructure and a handset out there . That's kind of 2G thinking. The 3G world is a little more complicated and requires a little more systems integration on our part to bring these new products and services to light."

The interviewer immediate follow up question was back to handsets, which as I have pointed out before is neither the question nor the answer to the future of wireless connectivity. How players control the service delivery platform ("SDP") is. Vodafone are a mile ahead of their competitors in this. I don't think that this is generally understood. Too many VC dollars are still being thrown at the handset end of the market and far too few in to the engine.

Which seems a little counter-intuitive. The telecom downturn has seriously hurt the incumbent telecom manufacturers from Ericsson to Lucent and Nortel and just about everyone else along the way. To make it worse their pain happened as the telco world and the IT world really started to converge. IBM will start to eat Lucent's lunch because Lucent cannot compete. To paraphase Claude Leglise from Intel Capital; whenever this firm of disruption occurs there is money to be made by start ups. And if the VC community was clever enough to spot it by VC's. However, I am not sure that this train has pulled in to the station yet. There are a few plays out there - some of which make more sense than others; Opencloud, Apertio, Appium amongst others fit that bill. Then there are a group that seem to, but to my mind miss the point - tw leading contenders amongst these are Aepona and BayPackets. Each of these companies covers a different part of the new network ecosystem. There are plenty others out there, these together with our bet, see below, are the market leaders.

Stovepipe solutions and high integration costs are no longer acceptable. Unless startups use technology to differentiate and protect themselves from resurgent TEM's they will lose business to better funded incumbents. This is not a game of incremental improvements.

Disclosure - we have a big bet in this market BET

18 December 2003

ACOL Technologies

Blatant link venturewire to an investment we closed Monday. I have mentioned the CTO, Alex Shishov, before. The best Russian technologist I have ever met. It was great working with Amadeus and Apax - a good team.
Open Innovation

I have been doing some research in to the role of internal R&D and innovation in large corporations. Slightly behind the times I came across Open Innovation by Henry Chesbrough via Amazon. The core of the idea is expressed in this interview that he gave to IdeaFlow Creativity & Innovation IdeaFlow - Corante:

This distinction between open and closed innovation is at the heart of the book. Closed Innovation is fundamentally about scarcity of useful knowledge. In order to do anything, you have to do everything. It is inwardly focused, and deeply vertically integrated. It takes little or no notice of external knowledge and resources. Open Innovation is fundamentally about operating in a world of abundant knowledge, where "not all the smart people work for you", so you better go find them, connect to them, and build upon what they can do. It seeks ways to build upon and leverage external knowledge, and focuses internal activities upon filling in the gaps, and integrating internal and external knowledge into useful systems.�

IdeaFlow has just joined my Powermarked list of must reads. Chesbrough's book is at this very moment being Amazoned to my parents in the UK (no Russia branch just yet) where it will be great I'm hiding reading.

15 December 2003

FT.com Home Europe: "Mr Blair said he had signed a joint letter to Romano Prodi, president of the European Commission, with the leaders of Germany, France, the Netherlands, Sweden and Austria, calling for 'budgetary discipline'." If ever there was a case of the pot calling the kettle black. I jsut about fell off my chair.
Games We Play

First is this article from the Economist Invaders from the land of broadband about the success of online gaming (as in games played online, for UK readers) in S. Korea. As if the South part needed spelling out.

The second is a headline $18mn investment by Highland and Polaris in to Turbine Entertainment here via VentureWire.

Third, I have been following SeeStorm for what seems like forever. Started out as an add on to IM and has morphed in to an avatars for mobile licenser. It seems to be taking off in Korea and Japan, having (very) limited success in Europe and absolutely none whatsoever in the US. I thought long and hard about investing in 2002 and was, rightly, rebuffed by my partners. I have been thinking long and hard about the same in 2003 - but to be honest don't have the guts. For those of you interested its worth researching potential revenues from low ARPU mass appeal apps on mobiles in Korea. They don't exactly make a company but they will make you smile as you build one.

The reason is that each region and, as the Economist article points out, countries within each region use mobiles / PDA's / smart phones / PC's and gaming devices differently. I used to think it was enough to be platform agnostic but its more subtle and harder than that. Furthermore, who ever thought that 3D virtual environments would ever make a comeback - which is what the Korean gaming world is all about.

There is definitely a gold mine to be made for the person who can work out what it takes to make this happen. What is absloutely certain is that what works in Japan, will only just work in Korea (S), will fail abysmally in Europe and won't even do that well in N. America. And that's just the means of delivery. The game, the nature of the game will have to be very specific.

To my mind this is a steer clear investment area unless your ability to connect with your eyes closed is very good.
Outsourcing Again

A classic piece of lowest common denominator journalism on Outsourcing hereOutsourcing via Rocky Mountain News

It probably would not be worth the effort to comment on it except that it makes the point that if you outsource then you cut off the engineering life blood that creates start ups. The fact that there is no lead in to the story or explanation of why it makes the claim does not point to the highest standards of either journalism or, more likely, editing.

11 December 2003

3G - Focus on Handsets

A fair enough article as far as it goes. Yahoo! News - Third-generation mobile phones fail to connect in Austria

However, Mobikom not only faces problems with its handsets but also with its IN. As indeed does everyone, including 3. They cannot provide all the sexy services which journalists and pundits like to write about becasue they cannot roll those services out quickly and effectively. They are locked in to providing stove-pipe solutions to each service and that's a whole bunch worse than crappy handsets. Next generation IN will become a major story over the next 12 months.
Social Networking

He could not be more right if he tried. Which is not to say that someone wont' make money out of it - I just cannot see it being a way to get to the people I want to get to. VentureBlog on Social Networking The only reason that I will give to change my mind is spam killing email and we therefore use a different medium to make contact. I'm not sure that I believe that as a statement.

10 December 2003

3G - But Not What the Business Plan Says

Vodafone plans data-only 3G services for Germany and Italy

Last night I was explaining to my wife why 3 (Hutchinson in the UK and Italy) was struggling. More importantly that Vodafone with its PMCIA card targeting buiness customers was getting it right. And there it was a journalist agreeing with me / and vice versa.
Boeing's Woes

Boeing's Failure / Airbus' Greater Bribery There was a fantastic article in The Economist sometime ago (sic - I can't find the link) about Airbus bribery and corruption. Not that the article used those words - the meaning was implicit.

Strange now that Boeing is suffering for the same reason. Strange that a French led company is not. Strange that there is no link between a Republican attack on Boeing and Yukos.

Russia does that to you - conspiracy theories abound.
Zero Sum Game

From today's FT. Does not require registration. It refers to Germanny and the Vodafone / Mannesman takeover. But it struck me as a phrase that would apply well to Russian business. I have referred to it before as a zero sum game. FT.com / Industries / Telecoms: "Foreign investors suspect the charges reflect a German cultural mindset of destructive social envy and a dislike of business success. "
More on Outsourcing

Red Herring interview with Gerard Fairtlough on the venture industry Venture Bouncebacks He makes some good points and some less so. There still needs to be a venture shake out. I think many people, and Gerard is one, have not thought hard enough about the outsourcing industry. Theoretically engineers can sit anywhere in the world, provided that the link between architecture, marketing (the link to the market) and management is strong.

Markets for early stage products is still predominantly in the west; that's where the marketing and management people will sit. I am not sure that it's really possible to build a product without closely linking marketing / architecture and engineers.
Outsourcing from Tim Oren

Tim Oren covers a piece from the NYT and a discussion on outsourcing here. Where I think that he may be wrong is his assertion that outsourcing may be good for nth degree programming, but less good for complete architectures.

The question should actually be; is out-sourcing is a good way to create products. The inherent question being whether marketing can interact with a time-separated programming center. We'll let you know.

Our most successful companies have foca both in the market and in Moscow - I'm not sure that it can all be done remotely.

08 December 2003

More on Management

This time from Private Equity Online. Reflecting its European nature the magazine tends to be later-stage oriented. Yet the lack of management due diligence is stage neutral. The writer is pitching for work, nonetheless, some of his early comments are apposite. The right team for the job
Political Factions In Russia

A typically pithy and on-the-spot set of remarks from the Economist's Russia correspondent.

I make little effort to keep track of which unheard-of party with no ideology and no obvious support base represents which splinter faction of what clan within the ruling elite's three big groupings. It's enough to remember what those
groupings are:

- the siloviki, people linked to the security services, whom I always imagine as thin men in ill-fitting suits who spontaneously cause lightbulbs to fuse as they walk past them;

- the business-linked "family" - in my mind's eye, portly types with flashy cufflinks fearfully glancing over their shoulder to see if one of their bodyguards is planting a landmine under the armoured Mercedes;

- and the "liberal reformers" - intense, sharp-eyed, desperate men overloaded with files who have long since discarded the moral dilemmas that their work involves and live their lives trying not to pick fights with either of the other two.

But at any rate, the fact that at least 50 Duma deputies switched parties after the last elections is a good sign of how little the election itself has to do with politics and everything to do with who can manipulate the balance of power to their own advantage.
President Putin Hails Election as "another step in strenthening democracy" I suppose that principally depends on your definition of democracy. As his is something close to - I'll do what I want, when I want, to whomsoever I care to - then I guess democracy was strengthened.

It would be nice though to point to a truly democratic country where democracy is working; Tony Blair carries on Thatcher's assault upon Britain's "unwritten constitution." Bush stole the election and then employed Ashcroft to steal democracy under the banner of Homeland Security. However, Churchill had a point: democracy is the worst form of government, except for all those others that have been tried here

06 December 2003

More on Khordokovsky (MBK); it would appear that the cat slipped out of the bag this week. We now all understand the meaning of minimal - its $10bn. Having previously said that this conflict was a battle between MBK and the Kremlin and not an assault on Yukos the lie was shown to be just that.

In a marvellous piece of cynicism the Kremlin has been repeating to anyone who wants to listen, and lets face we all do, that they have no intention of reversing privatizations. Of course they don't. They intend to divert the wealth created at Yukos in to their pockets. Privatizing it would mean that they could only steal cash flow. In short we have been asking the wrong question.
IBM GS � Another Step On the Road to Global Domination

IBM software and Global Services are going to be more closely aligned to better serve industry verticals (link to every newspaper and tech journal in the world.). Ever since IBMGS bought PwC Consulting it has (or was it always this way) been slowly ending its historical policy of being software / hardware agnostic. Sometime ago I believed that eventually this would eventually lead to IBMGS becoming just another services division of a large corporation. Well I was wrong. IBMGS is not just the 800lbs Gorilla it is the all encompassing Gorilla. Scott McNealy joked that of the $80bn that Bush requested to rebuild Iraq, 90% would go to IBMGS. Hate them if you must, but there is nothing else to do but work with them. They are after all the largest re-seller of Sun equipment.

What is more the convergence of telecom networks and IT will just add to their powerbase.

The only piece of news that cheered me from the announcement was the realization that for this strategy to succeed IBM Software is going to have to integrate a lot or 3rd party software to be able to build best-of-breed products. They cannot build it all in house though they do try. There will be space for ISV�s to build great products � as long as we understand that they will become a building block in someone else�s portfolio. My only concern is who do you sell to?
Om Malik on Sun's Problems. I think that he may have a point - they provide great equipment at a pretty good price point. Their problem is not that they can't get their PR right but that they have not got their sales comp in line with their revised strategy.

A sense also emanates from Sun that they would struggle to organize a piss up in a brewery.
An interesting report from Crescendo Ventures on investing in the Storage Industry Crescendo Ventures Report on Overspending it claims that there are a number of surprising results. Amongst them that the companies with the most cash weren't the most succesful. Firstly as a VC with a massively under-capitalised fund I am glad to hear it. The so-what that they draw is that it allowed companies to follow misguided strategies for too long. My take would be that it allowed the management to feel too comfortable and did not challenge them.

Treat em mean; keep em keen.

05 December 2003

SAP Ventures Comments on Sales Teams I liked this post - salesman are whores. Pay them and they are happy; don't and they aren't. The unspoken link is don't bring in a charging salesman in to an early stage team. They go after the easiest accounts because they want to get paid and aren't that keen on market development.

27 November 2003

Ed Sim on Capital Efficent Investing

Ed Sim from Beyond VC on Nov 19 writes about what I have been wittering on about since I started this blog namely Capital Efficient Business Models : You will have to scroll down to find it as I cannot work out how to go straight to the place.

His point is absolutely correct. Marketing costs may stay the same, but if you can create a product for a few million, smartly get the first product to market whilst running a low cost organisation then hopefully the initial and most painful burn will be limited. Once the product has real "traction" (presumably its a car wheel) then people can be hired to really sell the product. Given that these are always the most expensive part of a team hopefully they will be brought in commensurate with real sales opportunities rather than hopeful hype. At the end of this year all our companies will be cash flow positive. Some will require more cash to grow more rapidly. But if we cannot find it then they should be able to grow organically. Given that none of them were that expensive to acquire even a low growth scenario should see a reasonable return.
More from Ed Sim, this time on the US IT market. The Economy and IT Spending : "
It looks like the economy in Q3 grew even faster than we initially thought, 8.2% annual rate versus 7.2%. It was not too long ago that the Department of Commerce released numbers showing 7.2% annualized GDP growth for Q3. If you take a closer look, 'equipment and software' spending was at a 15.4% annualized rate. I obviously have concerns about the revised 8.2% GDP growth and certainly do not believe that is sustainable due to one-time factors like tax cuts and mortgage refinancings. While it is nice to see a 15.4% annualized growth rate in 'equipment and spending' for Q3, let's not assume that this is the beginning of a huge ramp-up in IT Spending. To bolster my thinking, I like to look at a number of data points. For one, Goldman Sachs recently issued its October IT Spending Survey. Its latest survey calls for an increase of 2% spending for 2003 versus a December 2002 survey which forecasted a decline of 1.1% for 2003 spending. So it is nice to see that the trend reversed in terms of IT spending, and that it looks like there is a small rebound happening. That being said, the October 2003 survey forecasts spending growth of only 1.3% for 2004, down from an August 2003 spending survey forecast of 2.3% growth for 2004. That is a negative trend and does not promise earth-shattering returns to IT Spending in the bubble years. As Goldman Sachs mentions, hopefully there is just a lag in terms of how the economy performs and where each company is in its budgeting process. If this is the case, we shoud keep an eye out for data from future surveys.

Another data point that I look at is how the fund's 30+ portfolio companies are performing. We have a number of companies in the Enterprise IT space selling security, storage, network management, wireless, and other related software. Some companies are performing extraordinarily well "

26 November 2003

The gaps between my thoughts on technology have become embarassing; plenty of comment on the Khordokovsky affair, little on Russian technology won't pay any bills. What it does do is reflect my concerns as to the future of the country. Those who spend more time than I do thinking about these matters tell me I am being over-sensitive. I still respond that greed is greater than fear, and there will come a time when fear takes over and we will all wonder why we did not pay attention.

Back to technology; seems as though there are companies out there getting funded, and getting bought. Suse was a great relief to those of us investing outside the mainstream US that good companies will still get bought, and at good multiples. I hear that the main investors made 3-5x. Given the $'s ploughed in to the company to turn out software and the time that they first invested, its not a bad result. BTW the last sentence is a subtle dig European / US software companies failure to make use of inexpensive programming assets.

On the funding side the investing world must be looking up if social software companies are getting funded. I can see the point of what they are trying to do but....Don't we do this informally anyway? Why would I pay for what I do already, unless it really helps me to do it better. None of the companies that I have looked at really convince me that they do.

If strange companies are getting funded it means that strange companies are getting bought. At a personal level I am intrigued by the direction that Shwartz is taking Sun. From what I hear from portfolio companies they could not organise a piss up in a brewery - or sales people after commissions are driving the direction of the company. To be more precise; it does not matter what the strategy guys put together to improve the TCO, customer experience etc. the sales guys are selling boxes loaded with software that requires the most boxes to be sold. I like the approach that Shwartz seems to be taking - it puts Sun ahead of the crowd in working out where the future of software is going. If he can get control of his sales teams the strategy might even work.

16 November 2003

An interesting take on the reemergence of vlast (power) in Russia

NOVAYA GAZETA
No. 85, Thursday
November 13, 2003
Don�t go Visiting the President in a Sweater -- then there won�t be a Dictatorship Interview with an Anonymous Source
Translated by Luba Schwartzman

The following is an interview with an officer of the Federal Security Service who is involved in the investigation of the YUKOS Affair. Granted on the condition of anonymity, it is cited word for word, with no corrections. Despite the officer�s careful wording, we can still find answers to very important questions.

* Who can say �shush� in the YUKOS Affair?
* What fate awaits Chubais?
* Does the �national question� play a role in the Khodorkovsky Affair?
* Is there such a thing as a �good� oligarch?

Q: How will the story starring Khodorkovsky end? What does the government want? To jail him? To take away his property? Or just to make an example of him to make others obedient?
A: Yes. Khodorkovsky was asking for it. He annoyed everyone; he was a real jerk.

Q: What did he do that was annoying?
A: Did you see how he was dressed when he came to meet with the President? The �I don�t give a damn� attitude� He stuck his nose in all over the place, going way too far. The worst part was when he said that he would rather be a political prisoner than a political refugee.

Q: So how will he be pressured? Until he breaks?
A: We don�t make decisions about that. We only carry out orders. But we will keep going as long as they let us.

Q: And how long will they let you?
A: Until they stop us. Once they say �shush,� we�ll quietly step away. But for now, we�ll have some fun. Our boys are pretty angry, you know. Angry at him and angry at the unfairness of life.

Q: Who are the bosses who can let or stop you?
A: The bosses are different for everyone. But everything is decided at the very top.

Q: The very-very top?
A: Of course.

Q: Are there political motivations for this?
A: Well, we certainly don�t have any. What have we got to do with it? We just carry out orders. They said �go� and we did. If they say �stop,� we will.� You know how it is in Russia -- it�s enough to say �act in accordance with the law.� Then anyone can get in trouble -- you, me� For many years we weren�t allowed to follow the law. Now, with regard to YUKOS, they said: �ok, go ahead!� We cheered. (laughs) We know that we have to act carefully and precisely. The political environment could change and then we could get in trouble. So those who carry out orders cannot overdo it. The main thing is to follow the law to the letter, to conform to all of the procedural regulations. Well, we�ll make him [Khodorkovsky -editor] sweat as long as we can, and then we�ll let him go. Certainly we understand that, sooner or later, someone who has as much money as he does will buy his way out. But it will be a pity if they let him off so easy. After all, we�re really trying, really working hard�

Q: But, tell me, what are you really after?
A: Well, we�ll push him as far as we can� Of course it would be really great to kick him out of the country. After all, our boys used to do it back in Soviet times. �Out of sight, out of heart� you know! (laughs) �No person means no problem.� Although Stalinist methods don�t cut it now� and the jerk [Khodorkovsky -editor] said he doesn�t want to leave. Our boys got pretty mad about that. Look at him being brave! He really is going too far!

Q: So how far will you go? Are you going to kick all of the oligarchs out?
A: We take our cue from Zhirik [Zhirinovsky -editor]. He says it will happen soon. He told all the oligarchs recently: �You�re all going to jail soon!� So that�s what the oligarchs have coming. All of them have dirty hands. All of these �shares-for-loans auctions� are a questionable affair. I�m talking about the law here! Why didn�t they return the money for the stocks? They could have, you know�

Q: But it was the government that made the decision about the auction. Are you ready to open up cases against Chernomyrdin and Chubais?
A: That�s a very sensitive issue you�re bringing up. Many of our boys can�t wait to get their hands on Chubais. But there�s an obstacle there. You can�t touch the government. That�s why we�re keeping low and waiting. But the boys have been quietly gathering information all these years. We�ve got plenty of evidence. The problem lies elsewhere: the interests of the state are involved, the interests of the government. One needs to be very, very careful. Look who�s at the top now -- if you really think about it, theose people shouldn�t be at the top. We have information -- plenty of information, even way back from Yeltsin�s time� but let�s not talk about that� It�s better for you not to know� You�ll be able to sleep better.

Q: How about Aksenenko?
A: Oh, nothing�s going to happen to him. They�ll just let him know: sit and keep quiet. If you don�t -- you�ll be sorry.

Q: Do you like how things are going in Russia?
A: I was a little uneasy before. But then I understood -- things like that always happen when the rules of the game change. And the rules of the game are changing now. It�s just that we�ve adapted to them and you haven�t yet.

Q: Which rules are changing?
A: Well, you see -- back under Yeltsin, certain things came to be accepted as dogmas. The notion that private property is sacred, for example. That�s rubbish. Do you really believe that all of these liberal values are here to stay? Don�t get used to these illusions! All of the rules can still be reviewed -- and the will be reviewed. In the past, everything was predictable: If someone made a move against an oligarch, he would give some money to the media, and the journalists would rally around him. He would give some money and buy his way out. If he didn�t get out of trouble tight away, it only meant that he didn�t give enough money. Now, none of the oligarchs can predict all of the consequences. Everything has come into motion. The rules of the game are changing. Now they are afraid of us, because they don�t know what to expect.

Q: And now they cannot bribe you?
A: You know, for us, the main priority right now is to be on Putin�s team. That means more than a one-time pay-off. If you manage to stay on the team, you�ll get back everything and more. If, on the other hand, you take money now, you can get kicked out. Before was chaos. No one valued their positions, since they knew they could end up on the street tomorrow. That�s why everyone grabbed whatever they could get -- to get at least something out of the job. But now we value our jobs. Look at what happen to the cops. All of the Ministry of Internal Affairs guys got quite a fright� We don�t want to become �werewolves.� So we do everything according to the law! We keep our noses clean! But the main thing is not to stray too far from the �party and government line.� (laughs) We�re the servants of the state, you know!

Q: How do you tell apart the �good� oligarchs and the �bad� oligarchs?
A: Oh, it�s very simple. Those who have a national orientation are safe. But these oligarchs aren�t �home based� in Russia.

Q: Where then?
A: In the US, in Israel� They are a major threat to our nation. There is a danger that Russia will be turned into a source of natural resources, a danger that we will be subjugated to a different country. That�s why the oligarchs have to be pushed down or pressed out. Of course, only those who are internationalist in ideology. It�s obvious that Gus [Gusinsky -editor] worked for Israel, just like Bereza [Berezovsky -editor] did. We should only keep those who are thinking about the nation and not about their own wallets. Khodorkovsky is clearly oriented toward the United States. He shouldn�t be in Russia. This is a real fifth column we�re talking about. This is a very dangerous political wing. If it becomes stronger, Russia will lose its independence from the West. And if we don�t get rid of him now, Khodorkovsky will become invincible.

Q: So, are there any �good� oligarchs, who might be allowed to stay?
A: Sure. Mordashov, for example. He�s a Russian.

Q: Is nationality what counts?
A: Of course. All Jews are traitors. They all lean towards the West. This was always the case. Back at the �High� [Higher School of the Committee for State Security -editor] they taught us that all intelligence workers rely on Zionist lines, because the Jews have diasporas everywhere. You know, for them nationality is more important than citizenship. Zionists were always hostile towards Russia. And they had many ideas about how to use international capital against us. All of our achievements in intelligence work were based on Jews and their networks. Take the Rosenthal Affair, for example. We always worked along Jewish channels. So now we cannot allow in this Zionist capital�

Q: What about democracy?
A: Oh, democracy is a bluff. The only thing that counts is power. Remember how everyone was afraid of us when the USSR was strong? And now that we�re weak, everyone is trying to get at us. During the mess that the Yeltsin regime was, we created way too many of those� Well, the same thing that happened with Trotsky, basically.

Q: So what�s coming? Nationalization?
A: No, nationalization isn�t on the agenda. The main thing right now is redistribution in favor of nationally-oriented businessmen. Why the heck should Khodorkovsky have seven billion dollars? Who the heck is he?

Q: Perhaps he is smarter than other people and a better businessman?
A: How much brainpower does it take to pump oil? Just build some towers, and you�re set. All of the technology is purchased in the West. You don�t need to be smart for that.

Q: Do we need to get rid of LUKOIL as well?
A: No. LUKOIL protects out strategic interests on the borders, in disputed areas like Kazakhstan and Azerbaijan. This is �our� company. It�s nationally-geared. Alekperov never tried to stick his nose into politics.

Q: So politics is what counts?
A: Yes. You see, Khodorkovsky is driven by ambition. Just look how much money he gave to oppositionist parties! He must be quashed with no questions asked, before he becomes another Berezovsky.

Q: And what�s so dangerous about giving money to these parties -- Yabloko, Union of Right Forces?
A: Oh -- right now it may not seem dangerous. But they are just lying low and waiting for their hour. These are the same Zionists we were talking about. Under no circumstances should they be allowed to grow stronger. And Khodorkovsky? Let him run about and complain now. No Strasbourg Court can help him. After all -- they got their chance to live well, but quietly. But, no! That wasn�t enough! They wanted to get involved in politics! Well -- now they will have neither politics nor money.

Q: Is this also an example set for other oligarchs?
A: Of course. You see, Abramovich is the smartest of them. We�ve already made a deal with him. Once his gubernatorial term is up, he will leave quietly, without a scandal. He�s already sold everything here and bought everything there.

Q: So, who should leave? Just the Jews or others as well?
A: Whoever proves their loyalty can stay. We aren�t trying to ruin relations with large business. Hitler hadn�t revoked major holdings that helped him.

Q: So where are you taking the country? Towards totalitarianism?
A: Yes. But this is going to be a capitalist totalitarianism rather than a socialist totalitarianism. This is the kind of government we had after Catherine II. Nicholas I came to power and replaced the ruling class. Officials replaced the nobility. Officials should get property for their service to the state, instead of property getting handed down by birthright. Then we will have order in the country.

05 November 2003

The Entrepreneurial Mind: The Experience Myth Great comment from a bus school prof i have never heard of before.

Innovation will fail when the investing process is run by bus school grads with the entrepreneurial instincts of a dead slug and a tick board to fill in.
Yukos or Those Who Have vs Those Who Would Like to Have What Those Who Have, Have

It's difficult to write intelligently about the Khordokhovsky affair - to do so requires an understanding of what is going on. No one really does. There have been some very intelligent attempts to assess the impact. Most of them private; if you can get to read what Bernie Sucher and Eric Kraus are writing its worth doing so as they differ markedly from the newspapers.

However, both of them come from the buy/sell side of the asset management/ brokerage game. Their antennae are directed accordingly. As John Dizard put it in the most avertly cynical Make Money from the Crisis article; its probably only Khordokhovsky so buy in to a growing economy. Unfortunately its that greed that Putin and his advisors are banking on to get him through before we all forget.

They should sit for an hour and listen to young (immensely) educated Russians working for international companies before letting greed get to them. They are very concerned and have some understanding what it is to be in an overtly authoritarian regime. They hate it and hate the people who are pushing this policy - the ex-KGB.

Lets not paint Khordokhovsky as any kind of saint; as one of the few who has taken him on and come away with something I feel reasonably well placed to comment. He does not want a pluralistic democracy in Russia anymore than Putin. But he does need the rule of law so that he can hold onto what he took with the Government's money for nothing. But if that is a crime; they are all going to jail - Putin included.

For a good Russian take on this read Yulia Latynina in the Moscow Times Conspiracy Theories Abound
Article on Russia's breakthrough in to the nano tech world

Long break from the blogging thing - good article from Valerie; not that she has ever been to Russia. Pavel Lazarev is an extraoridinary guy and worth following - if only out of interest.

18 October 2003

Part 2 of my interview with Tony Nash which appeared in Always On entitled Russia�s Investment Climate Begins to Warm Up

I wrote the majority of this en route from Phoenix to NY on the day that Hurricane Isabel was hitting the coast a little way to the south. Whilat we would all claim that we review and edit everything that we write it good to see that most of it makes sense in retrospect. The last comment; that Russia is a risky place to repatriate cash from is false; its not. Ask the oligarchy and the rest of Russia which has spent the last 10 years getting money out of Russia. Actually its harder getting the cash in.
Was away for a week getting some late summer sun in the southern Egyptian Red Sea. On the way back picked up a copy of this months Diver magazine, the leading UK dive mag. It published a 40 year historical retrospective. 20 years ago diving was for lunatics with a death wish. Today anyone on a holiday where the sea is warm and there is something to look at underwater can dive. The reason technological advances. But almost no breakthroughs. BCD's are better (the jackets that help keep depth even), infinitely better but an advance on a theme. Dive computers are algorythmic advances of dive tables that have been in existence since..... Regulators and second stages have really changed the availability of the sport.

Now it is too available - humans are de-populating the most accessible dive sites, causing changes in animal behaviour. That's why our next trip will be somewhere totally inaccessible.

29 September 2003

AlwaysOn Home: "Has Reality Caught Up with Russia�s Potential?
I speak to the press. Always a worrying thing to do.

20 September 2003

Travel 20/09/03

Why � what a waste of time effort and thought.

Big Companies 20/09/03

My silence has been due to travel. Some of which was spent in and around the Sun Convention in SF. My apologies to them for taking direct grief on this I am sure that they are no worse, and probably better than IBM, HP et al.

However, in a series of meetings which should be of some importance to Sun executives, especially as they were directly relevant to today�s announced job cuts, we met partially informed senior execs who had precisely 45 minutes for us before being moved on to the next meeting. All the follow up was left to a junior, but very keen, middle manager who relied on them remembering these meetings to push her agenda.

I was impressed by Jonathon Shwartz�s presentation at the same convention. But its difficult not to be cynical when you know that his contact with even 2 layers down in his organization is probably very limited. Who really �owns� Star Office? Or was it a big joke perpetrated by a very keen strategy exec who was promoted before his project came to fruition. This is not a condemnation of Star Office 7; I�ve yet to install it.

Sequoia / University of California 20/09/03

I read an appalling article Monday�s (8 Sept �03) FT (I�m offline and cannot link) on the Sequoia / University of California affair. The FT is a respected financial newspaper, but if it cannot write an intelligent, informed piece on disclosure then Sequoia is right not to disclose � and inherently I believe that Sequoia is wrong. Disclosure should never be wrong. Ask the NYSE Comp committee.

The Telecom Market � First Written 9/9/03

Thank goodness for quiet Aeroflot flights to, well, anywhere. A chance for thought that is only otherwise found at the dacha.

Do deals end up being interesting because they are inherently interesting; market, timing, potential, management etc., or because we, founts of all wisdom and knowledge decide that they are? Not really that important because a. it�s rhetorical and b. it�s mostly a self-fulfilling prophesy. The purpose of the question is a lead in to my thought for now.

There are a pile of deals sitting in the inbox (definition; not yet enough known to a. syndicate, b. understand, c. spend any money on) of which two in particular are of interest because of other investments. Both of them address the way that we will use mobiles, PDA�s and Smart Phones. One is Asia / Euro-centric, the other US-centric. That is; the former is a teenage / young adult consumer model, the latter principally business related. Neither management understand the others business model. How much of our interest has been piqued by related interests? More importantly how much has been missed in other deals because we just don�t possess enough knowledge. Let�s not even go down that path.

As some idle journalists have noted, a pile of cash has been wasted on telecom infrastructure investments. Now, it would appear that the carriers want something to show for that investment. However, whilst some of us were willing to pay $500+ for a handset in the early days of Russian mobile, and the ability to speak was the killer application. The world has moved on and the next app isn�t as easy as your voice but may actually be your voice and�(well if I knew you can be damn sure that I would not tell you.) It may be a bundle of apps, personalization � think ring tones with pictures, cheap voice (apparently known as VoIP.) What is clear, is that it is not clear. Voice is applicable to everyone. A 40+ year old businessman is not interested in a personalized ring tone, much, but he probably wants to stop carrying a ton of electronic hardware in his briefcase. A kid (when do you stop being a kid?) could not give a damn about synced schedules, to do lists and contacts; they are probably however interested in personalization, anonymization (apologies) and low cost high cool factor frequently accessed and changed apps.

All of which goes to say that the carriers need to spread their nets wider. Stop trying to build a wall around the garden and build an infrastructure that allows both the post-paid businessman and the pre-paid kid to co-exist on one network with multiple marketing opportunities.




09 September 2003

Mercury News | 09/07/2003 | Valley economy showing signs of erratic recovery

The article notes that the Valley is beginning to see light at the end of the tunnel - to experience a real downturn you have to experience the light at the end of the tunnel being turned off to save money. And its not much fun.

03 September 2003

First time I have actively discussed a portfolio company - not sure if that's a good or a bad thing. Tim Oren was pontificating A requiem for virtual reality on the death of VRML as a useful standard which caused me to fire back in defence of Parallel Graphics Mint's first investment.

Parallel Graphics was never in the VR business and as I noted in my email back to Tim, suggesting that VRML is not dead, some of which is here The 'V' in VR stands for 'vertical', the way that SGI, Parisi et all saw VRML was never going to be the future.

What the conversation does highlight is a focus on the visualization of the delivery and not on the creation of the content. Parallel Graphics has morphed from being a browser firm - Cortona is the last one left standing - to a means of capturing, inter alia, 3D CAD and delivering it with relevant design information attached (think virtual parts catalogues) to a PC. Should the standard bodies decide that the next browser use an entirely different base technology it should, in theory, make little difference to Parallel Graphics.

The easy comments refer to the consumer end of the technology - VRML / Cortona in this case. The more informed comments discuss where the input comes from and how it is processed.

30 August 2003

WHAT DOES EARLY IN A RUSSIAN CONTEXT MEAN?

I have been here before but the 30 minutes lying in a bath after exercise are full of clarity. Most of the technology investments that we see in Russia can be generalized as being strong technologically but weak commercially and in management. In many cases the technologically already has a commercial release, of sorts, and the Company is generating some limited revenue. Its worth differentiating between technology deals where there is some inherent technology, and software deals that are supposed to solve some issue that enterprises did not know that they had. As these are, for the most part, uninteresting we�ll ignore them from hereon.

So where does that place Russian tech deals in the early stage pantheon? I find it strange reading the wires of 2nd round investments in the $10mn+ range that are for; further product development and building sales and marketing teams. The latter part is fully-understood, there is little reason to make investments in Russian tech companies that have not already built virtually commercially available products.

But does early refer to the stage of technology, or more reasonably the stage of the company. Weighting in that pseudo-scientific way well known to venture capitalists everywhere; technology development, corporate development and management ability and experience. That would tend to mean that most Russian tech companies are very early stage � whatever their stage of technology or revenue development. The joy is that with revenues its possible to build management teams around technologies.

19 August 2003

BBC NEWS | Europe | Russia plans Mars nuclear station

Whilst the rest of the world is only slowly coming out of its technology shell its always good to know that Russian "Instituti" are still dreaming big. If however you are looking for a different view on spending on R&D and education try Here

A word of warning; Gaidar was acting Prime Minister in the Government in 1992. He and his team were affectionately known as "boys in pink trousers / shorts." A reference to their being slightly wet behind the ears politically. Easy to scoff from here, they were part of a transition that is looking OK from here - for now.

Quite what they are going to do with the power once its been built is not entirely clear - but then the value of alot of R&D was not either.

18 August 2003

Mecury News Says Entrepreneurs Don't Need Cash

Or have not learnt that the value which they could sell their company has come down so the entry valuation has come down.

This badly reported story does highlight an important issue. Tim Oren Ruminations on venture capital, trust networks, and information theory is a VC's view from the other side of the fence. Howevr, Tim is an entrepreneur turned VC, and the easy shots are against the finance / consulting types. Where there is a definite trend for prescription. I'm a finance type and would like to think that I might have a little humility; however, I'm sure that from time-to-time I have used prescription to mask ignorance.

Another factor in this story is the investment stage; or how early is early? A little commercial traction never hurt before making an investment. Indeed one of the joys of investing in Russian tech is how developed the technology is by the time that it gets close to being investable. The VentureOne reports make it clear that if you intend to be an early stage investor you had better be sure that you can keep "paying-to-play." Put another way Angel investors have the lowest returns of all the stages because they can't or won't pay up. Crammed down is only polite for wiped out. There are some good reasons to be very early; even better to pay early prices for more developed companies.

Back to ignorance; it should help to be an investor if you have just come from the industry. Taken to a logical extreme corporate venture teams should be the best investors in their own industry. Access to IBM's, for example, many divisons should give an IBM investor a massive head start in technology and market due diligence. Yet history does not hold this seemingly self-evident fact to be true. Maybe its the other factors associated with being in a corporate venture group that stand in the way.

Never having worked with a Venture Partner the following statement is somewhat devoid of personal empirical evidence. However, it seems from here to be a good idea; combining entrepreneurship with the discipline of an institutional investor. We'll see.

Apologies if you made it to here; this is a terrible blog. I'll have to come back to this theme later.

11 August 2003

Airplanes can be good places to do thinking shorn as they are of telephones etc. Except that Illyushin 90�s on their way to Delhi do not qualify as good places to think. Not sure which Quasimodo freak they used to model these seats but he was not 180cm, weighing 90kg sitting in a row of three where every seat is occupied. Not to mention that this, being Aeroflot, there was one beer to alleviate the agony.

The excruciating passage through Sheremeytevo, Moscow�s much under-maligned airport, caused me to consider the nature of entrepreneurialism in Russia. The thought process that gets you from Soviet levels of service to entrepreneurialism are way too complex to describe.

Russia�s greatest business leaders have all had a hand up by using State assets from which to build empires � passim Khordokhovsky et al. The number of true entrepreneurs who have built meaningful businesses can be counted on the digits used to create this blog. On my return from St. Petersburg last week the guy in the next seat worked for GosStroi (State building company) and was actively perusing a Lexus brochure � bureaucrats get paid a maximum of $100 per month. He was in his early 30�s. Many of Russia�s youth actively consider joining the Governemnt bureaucracy because it�s a great way to make a fortune. Even the Government acknowledges that ist efforts are hindering not helping the development of a entrepreneurial business class. This is not an environment that is actively fostering entrepreneurs. And yet��

Last night I collected a video and CD for this trip to Delhi from an individual who played Olympic level hockey (field) for the Soviet Union, has a PhD from Moscow State University (�MGU�), helped create one of Russia�s most successful local fast food outlets, has identified some of the most promising technologies emanating from Russia�s universities and institutes, and is building a great commercial finance business. Just before that meeting (I was sitting in a traffic jam for over an hour) I met with another MGU PhD with a string of successful business behind him � and is now the CTO of one of the most enterprising. Oh and he won a prize in Pure Mathematics from MGU � this in a country where Mathematics skills are valued and don�t make you a geek.

They are not quite as prevalent as maybe they we would all like � but they are there. Slowly but surely the people who are building the service businesses that will support the diversification away from natural resources are beginning to surface. They are humbler than their mid / late 90 compatriots; and better businessman.

But every time I have an experience such as today in Sheremeytevo, where those theoretically providing a service lord their power over poor mutts such as I who have paid good cash for my right to be abused by them I doubt that things will ever change.

02 August 2003

Due Diligence: "We should be careful not to confuse diversification with agility. Ross points to this post as evidence that portfolio behavior is called for. I can't agree. If you're venturing into an unknown market - 'social software' in that case - you'd bloody well better be ready to react when the customers don't behave the way you predicted. That's the whole point of my posting about OODA loops. If the market actually exists, and you can learn from your customers faster than an incumbent can adapt, you will diagnose the market need and get a long way ahead on serving it before they respond. If your board is worth a damn, they should be in there thinking about the process with you, and be open to the shifts required. (If not, you got the wrong investors.)"

I learnt about OODA loops whilst I was carrying heavy weights up and down (mostly up) big hills for the Queen. By far and away the best management tool ever invented; and if you should ever find yourself in a situation where the guy has a gun and wants to kill you - even better.
Back late from St. Petersburg, the home of our great President and the ad that states - "we can and must control the people." Told by my taxi driver that this was an attempt to restore order because the state cannot i was happy to return to the comfort of a tech environment;

Except that I was not particularly. Air conditioning has not reached St. Petersburg yet and it was definitely over 30 degrees. But they are doing some very coolthings technologically. Saw 3 companies in less than 9hours including 1 for just over 5. They have a cooling technology that today is as good as (I'm British, if this was an American blog I would be more forceful) as anything in the West, or East today. But are not trusted because they are Russian.

Two big thoughts for the weekend - Options. Caught up on some reading on the way to SpB regarding Stock Options and their value to Shareholders. They keep employees but not executives - and boards give options to employees as an afterthought and to executives to retain them. Also no quantifiable additionla value from companies that are option heavy. I sort of agree; except when paying with cash is the worst option.

Second thought; whither Anything over IP. Voice, video, data, anything. If a technology's life runs; hype, failed, adopted, commodity - VOIP is at adopted. Now the apps have to catch up.

31 July 2003

The Impact of Equity Ownership on Returns -Knowledge @ Wharton: "Larcker, Guay and their colleague John E. Core did a broad survey of academic research and could not find compelling evidence that employee ownership, through options or shares, boosts shareholder returns. �Whether it translates to the bottom line is totally unclear,� Larcker said."

You have to sort of agree; especially in companies that are not performing that well. How often the refrain from managers; reset my options to incentivise me to work - nothing is more likely to turn me in to a miserable approximation to every managers worst type of VC.

Not that Options are a bad thing; how else do you pay people in companies that are short of cash?

28 July 2003

Mercury News | 07/27/2003 | Dan Gillmor on the Bad news of the Recent Uptick: "I have no faith whatever in big technology companies' ability to bring sustainable growth back to the valley. Even when the economy picks up again, many of them will simply continue to export skilled technical and back-shop jobs to places like India and China. We have no choice but to participate in a global economy, but are we really ready for what we're setting into motion?"

Though this is probably a good thing - innovation is not created by things standing still but by upheaval. The last few years have seen an upheaval of sorts; now the innovation has to come.

25 July 2003

I have been here before many times but some late night reading of blogs from the Always On Conference meant that sleep was interrupted by random thoughts on how to invest in Russian technology. My sleeplessness can be attributed to Tim Oren's Thoughts on Venture Capital Investing etc..... so he should at least be attributed.

So back to basics;

There is some exceedingly interesting Russian technology out there in a more or less comercial or commercialisable form.
Where computational power matters (telecom's for instance) Russia's huge mathematical skills make a real difference.
Because Russia, and its predecessor, had to work with sub-standard equipment (you name it, it was sub-standard) scientists, programmers and the like had to find ways to make inferior products work, as well as, or better than the most modern equipment in the west. Most commonly this was achieved through a multi-disciplinary approach that is broadly lacking in the West. These generalisations are so easily challenged but they are broadly right.
The cost of building a product to Beta and beyond is a fator of 4-10x cheaper than a similar product in western Europe or US. This makes no comment about quality.
Russia's continuing isolation from the hotbeds of technology limit its ability to build products and applications that solve today's problems.
Russian management teams have not yet had exposure to the long term exposure to western management and customer interfacing that provides a pool of highly qualified management teams - even at the CTO level. Somewhere I read that 25% of Valley start-ups have Indian and Chinese CEO's.
There is almost no qualified capital looking at Russian technology.

So where is the value to be found? Somewhere in Tim's blogging he mentioned he questioned the stage of investing differentiation between venture funds that was caused by the bubble in the late 90's. Hopefully for the right reasons he decided it was a good thing, hopefully for the right reasons I agree with him. Inherently I believe in early stage investing, something about being a frustrated entrepreneur; but is that the right model for investing in Russian technology. Assuming the assumptions above are correct; the massive weakness of Russian technology is management and its applicability to global markets. Surely then it makes sense to invest at the point that these two problems are solved? Or is it not overly arrogant to believe that through appropriate mentoring of the right people applications and additional management can be added to overcome these shortcomings.

Assuming that we invest in companies that have the ability to see where their weaknesses lie - understanding what they don't understand - then early stage investing makes sense........I think.

Anyway back to the day job.

The news from the Yukos affair seems to get worse and worse - there are no angels in this game and it is extremely hard to determine which version of the spin is closer to the truth. Whatever the end game turns out to be three major facts are rammed home by these events;

We thought things were getting better, actually they look better on the surface but in reality little has changed.
The judiciary and police are a business, pressure tool and has almost nothing to do with enforcing the law.
Whilst their are skeletons in the closet, someone will seek to extract "rent" so that you can live a quiet life.

The last point is the most worrying - everyone, and I mean everyone, has been judicious with the truth in paying corporate and personal taxes at some point. Many small / medium size businesses are trying to come clean but it is a slow process and the bureacrats are not in favour of it as it has a nasty habit of reducing their monthly take home.

For an alternative take on what is going on read Eric Kraus via
Sovlink's Home Page

For a well written piece that makes it clear that the whole affair is unclear read Gideon Richter's piece in the Economist.

16 July 2003

The text below has been quoted, and edited by me, from an article written by Valerie Thompson in Computer World. I have not found it in English as I understand it was published in the Swiss version. Such gems should not be left unearthed�.

I have made some comments in blue along the way which got lost and are now bracketed.

From Russia with love and bytes
By Valerie Thompson


Russian high-tech, obscured for the longest time by news flow about the Mafiya and its use of selected seedy Swiss bankers, cowboy capitalism, and oil oligarchs, (however the mind-bendingly stupid Chekisti seem to be being doing a good job of tying to change that impression) has substantially evolved in recent years.

Today people talk about the success stories and role models, such as Google co-founder Sergey Brin. They mention Israel (oh what a joy a journalist who understands more than the lunatics trying to promote Russian technology at MinSvyaz and Trade Minsitry) -- it is a little known fact that the basis of the tiny country�s ability to create a huge, new high tech economy, is the influx of highly education Russian Jews - many of whom worked in the former Soviet Republic�s military industrial complex.

And they will talk about a rich supply of talented engineers and scientist with math skills, physics know-how, creativity. They will also mention Russian tenacity and pride. A new dynamic is emerging.

A number of smart, young Swiss-based high tech firms have tapped into one of Russia�s richest resources. They have found success transferring Russian developments to the West to solve tricky software programming issues, introducing new innovative products for a global market.

ACOL Technologies, based in Geneva, acquired an R&D team in Moscow, forming a new company with Russian entrepreneur, Alexander Shishov. (Probably one of the best CTO�s operating in Russia today � actually delete probably.) It already has customers in the US and in Russia and at the time of writing was in discussion with investors to back its bid to make ultra-high brightness light emitting diodes.

Two other firms, A4Vision and Virtoons AG, are tapping Russia�s advanced digital signal processing and software programming skills to develop innovative, new products for niche markets, while Novavox based its entire R&D effort in St Petersburg. It has had success selling its computer telephony products for PBX manufacturers and wireless operators.

The Swiss aren�t the only ones who have discovered this shortcut to advanced technology and innovation. Intel�s Centrino software is developed in Russia. It employs 200 engineers in Nizhny Novgorod in development and 150 contractors in Sarov in central Russia, as well as close to 100 developers in Moscow.

Intel Capital�s Marie Trexler told BusinessWeek that her business unit hopes to profit from the country�s rich supply of technical talent and engineers. Specifically, the Russians� advanced knowledge of materials science and ability to design powerful algorithms. Man-made crystals could lead to new semiconductor materials, she said, adding that the algorithm know-how could lead to faster processors and software. Wireless and radio are also Russian strengths.

The Russians are coming!
High-end animation software companies, such as Pixar, Dreamworks, DNA, could soon be facing competition from a much cheaper and elegant solution from Russia developers.

One year old Virtoons AG is a Zurich based animation studio, founded by Russian-born Alexander Semenov. His idea is to create an animation studio that can produce animation sequences on a PC based on interpreting movements of someone wearing a magnetic sensor suit in real time. If his software team is successful, they will remove the need to hire hundreds of people to �draw� and render animated clips, plus, since the software operates in real time, it could cut development times dramatically. Oh and by the way, he wants to do it in 3D, as well.

The studio is working on a solution based on animation software which it acquired from a Moscow-based high tech incubator called Latypov.

Semenov says his software has to run on standard processors. Being Russian, the developers just did not have access to the capital to acquire high performance computers. But he figures it�s a smart approach because the niche for supercomputer based animation solutions is already occupied by the big US players. �Pixar and Dreamworks have a solution that runs on terabit process and needs gigabytes of storage,� explains Semenov.

Virtoons success started early. It has already won a prestigious contract from SF DRS for a new children�s cartoon series, the first since Pingu ten years ago.

Semenov is currently presenting sample scripts and the concept to television channels around the world.

Normally a studio will deliver a single sample script, a few minutes of demo film and a description of the characters, explains Semenov, but Virtoons has delivered all 13 sample scripts for the series. Semenov felt he had to �over-deliver� in order to overcome any doubts that the startup would be unable to follow through on its promises. �To convince the TV channels over-delivering was the only way,� says Semenov.

The company received financial aid from the Swiss Organization for Facilitating Investments (SOFI), an initiative of the Swiss State Secretariat for Economic Affairs in cooperation with KPMG.

SOFI helped the entrepreneur during the application process and show him how access a SECO fund with some success. Virtoons was able to raise capital in the form of loans that have to be paid back in five years time. In Moscow, 17 jobs have been created and 18 more are planned for this year.

Bright LEDs, Russian ingenuity
When disc drive manufacturer Quantum merged with Maxtor two years, one of the company�s top European managers, Jean Charles Herpeux convinced a couple of colleagues to try their hands at forming their own company.

Herpeux says he wanted to exploit his experience building up sophisticated sales and marketing organization for his own profit. They went to Russia looking for some bright ideas and there found Alexander Shishov who was running a company called Corvette Lights. Shishov had been having difficulties breaking into the European and US markets with some innovative high brightness LEDs and subsystems based on his firm�s R&D breakthrough. So he was happy to do a deal with the Frenchman.

Herpeux is a big fan of the Russian techno-elite. �If you want to talk about reliable technology, just remember that it was the Russian Soyuz that rescued the NASA space station crew,� says Herpeux. (The MIR also long outlived its planned expiration date when it finally burned out in 2001 after 15 years in service.)

He is one of a number of outsiders that are increasingly recognizing the strength of Russia�s system of education in the fields of mathematics and basic sciences, as well as the solid work experience with complex projects and diverse technologies.

The cultural traditions with Western Europe and America, says Herpeux. It is something that cannot be said of the software development outsourcing leader, India.

The Russians have come up with a way to make any color of LEDs shine more brightly. The technique increases the brightness without increasing the power consumption due to a smart packaging technique, precision optics and better thermal management. Typical applications are traffic lights, automobile brake lights, commercial displays, and giant screen computer displays.

First customers for ACOL Technologies, which now employs 22 people, are US based firms that make traffic lights.

Herpeux says he has not run into any problems working with the Russians. �It�s just like managing an operation in any remote place in the world. There is less difference in the culture between the Swiss and the Russian than the Swiss and the Americans or the Japanese,� says Herpeux.

The Swiss, the French and the Russian education systems are normative, he says. Whereas the Anglo Saxon method of educating people, which rewards good presentation and self expression, rather than demonstration of an ability to complete assignments based on certain standards. What makes Russia�s outstanding is that it rewards creativity at the same time, which results in engineers and software developers that can solve problems.

From Russia to the shores of Lac Leman to Silicon Valley
A4Vision has transferred technology from Russian labs to Geneva and now to Silicon Valley. Its facial recognition system relies on inexpensive digital cameras, an infra-red grid projector, and a standard PC running A4Vision�s software.

It is recognized by industry experts as being one of the most �advanced�.

Backed by an Italian venture capital company and Switzerland�s Logitech, A4Vision, has its R&D activities in Moscow but that probably won�t be touted too much in the future as the firm has an American headquarters and is aiming for the US-homeland security market.

The Russians have the inter-disciplinary (this is the key every time � either the Zhiguli approach to technology � they had to work with less so they worked out ways of making less work better) know-how to understand the optics, electronics, math and physics required to make such software work, says Kelly Richdale, a co-founder of A4Vision.

The smart Russian behind the innovative solution is Artiom Yukhin, a former researcher at the Bauman Moscow State Technical University; there he headed the 3D machine vision research team.

His expertise in mathematical modeling, along with his research team�s dedication made it possible for A4Vision to change direction shortly after being founded to become a supplier of �homeland security� solutions after the September 11th attacks on the US.

Richdale says she was able to ramp up quickly, growing from 10 employees to 60 within 18 months. The Moscow engineers are �hard-working�, able to make innovations, but also willing to do the hard work required to commercialize a technology.

St Petersburg R&D
Novavox AG was founded in 1994 and employs 75 people. It is currently restructuring and relying on the adaptability of its Russian R&D team to grow into the future. Employ numbers are down from a peak of 160 during the telecommunications boom where it achieved what few Swiss-based telecommunications applications makers have achieved: it was able convinced big brand name equipment makers, such as Tenovis and Alcatel to incorporate its software into their products. The US Army is one of its customers.

Andre Zgraggen, the company founder now lives in Russia. His lab recently received ISO quality certification. Settling the development in Russia, has given the company an advantage far beyond being able to find good programmers, it has �opened the doors to the Eastern European market�, which has been growing.

Advantages of being in Russia are not only technical; market-wise the products can be made available in six other languages due to the language skills of his St Petersburg crew. The company is branching out into offshore software development.

The Swiss Russian tech exchange
A number of government funded initiatives could very well lead to further partnerships between Russian and Swiss scientists, engineers, and entrepreneurs.

For example, the SNF has funded dozens of joint research projects on a wide range of topics, many are basic research in physics related and biotech topics, but some have direct application in advanced materials and future electronics and quantum computing applications.

In addition, delegates from Russia�s scientific community have been invited to meet and tour centers across the country, including the Paul Scherrer Institut, CSEM, and the two ETHs in Zurich and Lausanne.

TEXT BOX: Once a giant electronics sector
The Russian educational system, with its emphasis on mathematics and physical sciences, the foundation for the strategic achievements of the former Soviet Union in space, nuclear, and oceanographic exploration technologies, is responsible for the large number of qualified software developers, says RusSoft, (unfortunately they could not recognize an Israeli development model if it leapt out of their kasha in the morning) a trade organization based in Moscow.

Russia had sixty-five science cities centered on advanced research institutes across the country. But today the electronics industry in Russia is one-third the size it was at its Soviet peak. Some experts believe it will take a few more years for that giant to change directions to a market oriented sector (in the meantime the Russian Academy of Sciences is dong $1.6bn in outsourced research contracts.) In Soviet times, R&D was driven by government action plans, rather than the need to solve a customer�s need or a market�s problem.

�Due to its heft and infrastructure, however, it has managed to retain a sizable indigenous base,� says Malcolm Penn, an industry analyst at Future Horizons in Sevenoaks, England.

�Investment in electronics was out of step with the Wild West, fast-buck/low-risk investment style in Russia of the early nineties,� comments Penn. Russian and other former Soviet states suffered from a lack of foreign direct investment, except for the automotive and wired-telecommunications industries, both heavily subsidized by governments.

One of the countries largest electronics exporters is Svetlana that still manufactures vacuum tubes. It has found a global niche. There is a growing demand among audiophiles, for example, for hi-fi equipment where digital technology does not deliver the same quality of sound.

During the Cold War, the former Soviet Union did not have access to the fastest microprocessors or supercomputers but they still put the first rockets into space. They achieved what they did by writing powerful algorithms using their tremendous digital signal processing skills, according to Kelly Richdale, who majored in Russian studies at Cambridge before moving there and eventually co-founding A4Vision in Geneva.

There are quite a few success stories of Russian high tech entrepreneurship already, such as Abbyy Group�s with its offices near Red Square in Moscow and Epsylon Technologies, but this is just the beginning. The research for this article revealed dozens of innovative and creative examples of Russian high-tech entrepreneurialism.

Esther Dyson agrees. In a recent report she writes that Russia's programmers have begun to recognize their capabilities and �being smart and creative� they are now figuring out how to organize their marketplace better, putting in place not just software firms but training centers, education loans and the like.

Success Stories
Abbyy Software, founded by David Yang, who has at least two other tech startups under his belt, makes optical character recognition software. It can be found in more than half of the scanners manufactured worldwide today. Turnover is E12 million a year and the firm employs 250 people in Russia.

Its OCR software is used by Lexmark, Compaq and Samsung. It was recently praised by PCWorld as the best OCR engine in a recent analysis of printer performance.

Five year old Archivista, based in Zurich, licensed Abbyy�s OCR software for use it in its flagship archiving software. The tiny startup firm sells its software in Germany, Austria, Netherlands, and Switzerland.

Abbyy has picked up �relatively quickly� the basics of entrepreneurialism, says Urs Pfister, founder and CEO Archivista who has worked with a number of Russian software vendors. That is his diplomatic way of saying that the once bargain basement priced software licenses from Abbyy are now much more expensive than they were a number of years ago when the Swiss upstart made its deal with the Russians. They have increased �dramatically� and reached a much fairer (for the Russian) price level.

Yang also invented Cybiko, a wireless peer to peer handheld device that is meant to launch in the US this year. It claims to have already sold 250,000 units at $129 each. A European launch compatible with mobile phone and WiFi networks is expected at a later date.

Since more than 60 percent of its employees are working in R&D in Moscow, we can expect more innovations soon. (And thus if you are still with me is the real story of Russian technology.)



25 June 2003



Tony Nash on Always On talking about export of jobs. Somewhere down the comments it morphed in to a discussion on Russian outsourcing. I reread my comments and am pretty proud of them - its not often that you make short comments and feel in retrospect that you hit the nail on the head;

I have joined this discussion a little late - the joys of traveling through low-bandwith / high charge countries, otherwise known as Europe and only now catching up on my reading. The comments on Russia as an offshore programming / products center somewhere to the top of this page are pretty much spot on. Russia enjoys an enormous wealth of programming talent; its more expensive than India or China on a per hour basis but a number of companies have concluded that on a per line basis it competes well. Where it competes badly is in management, both strategic and line, and productization and sales of ideas. Almost none of the companies that I am involved with in Russia maintain Russian senior management or product managers. Its not a cultural failing but one born of isolation. Whilst the USSR collapsed over a decade ago it is only in the last few years (the start date is after the 1998 crisis) that people have started to take Russia and Russians seriously. It will take a decade for the cross-culutral osmosis to occur that will result in Russia regularly churning out world class products - be they IT or tech general.

A string of Russian tech companies will start to make headway in the next few years - however most people won't know them to have originated in Russia as they will have an almost entirely western front end.

Lex: Mobile handsets
Published: June 24 2003 20:31 | Last Updated: June 24 2003 20:31


Vodafone may crow that some customers now ask for the "David Beckham phone" - inspired by an advert for its Vodafone live! service featuring the England football captain. But most still ask for a Nokia. The branding of handsets in Europe remains a more powerful draw for users than the networks they are signing up to.

The continent's big operators are doing their best to make sure that changes. Orange, which already stamps its brand on handsets, on Tuesday signed a deal with Motorola which will produce a unique set of handsets. Orange also talked of putting more intelligence on to its network rather than into handsets. The network operators are increasingly aware that they need to differentiate themselves as data becomes a bigger chunk of revenues. Handset branding is one element. Another is having more say in design, so users find it easier to use new services, and therefore spend more money with the operator.

Vodafone live! is a good example. The Sharp handset, which is heavily Vodafone-branded, has easily outsold the equivalent Nokia. Its configuration for Vodafone services has also driven higher usage than from other handsets. Networks have long attempted to wrest more control over handsets. Market leader Nokia has so far resisted and continued to go from strength to strength. That will not change overnight. But as operators become more aggressive in working with individual manufacturers and stamping their identity on handsets, the risks for Nokia increase"



Oh boy, even the FT Lex Column is starting to talk about intelligence in the network and quits wittering about mobile networks always being about handsets. Maybe the world really is changing. Whatever, the truth is that the future of all communication networks will be driven by intelligence. Intelligence used to be hard, soon everything will be software running on standard NEBs boxes. The traditional TEM's will lose this battle to the IT giants - who in turn will buy their components from....

28 May 2003

Better or just different; Russian technology when it is better really is better - but that does not make it better in every sphere, or even in the spheres where it is deemed to be better. Solutions to physical technology problems that are interesting here tend to have approached long existing problems in an entirely different way from the West. Locally this is known as the Zhiguli-school of technology development. A little harsh maybe but pretty much close to the truth. (A Zhiguli is a Russian car based on a Fiat 125 that has an even worse reliability record than the original. Russian's have an initimate knwoledge of their cars in order to keep them running. Thus they have a habit of coming up with solutions born of habit that we in the West have forgotten as our lives get more comfortable.)

Russian technolgy solutions, orthe ones that work anyway, tend to approach issues in a more holistic way than their competitors in the West. They tend to understand what is required to make a complete solution and work on the many facets that could improve the end solution - rather than focusing on the one area where the most substantial gains could be found.

26 May 2003

I have been pushing the thought that cheap resources is a competitive advantage for Russia that I started to miss the point. Its been written below from time-to-time as I worry that Russian technology companies will not make it out in to the big wide world. Cheap is good, but more important is a technology that really addresses significant problem and a management team that will make it happen.


The arguments in this article succiently encapsulates the problem for the super-large IT companies; they are too large to innovate but have yet to work out (fully) how to make the most money from their brands. The Economist IT Review (week May 10-16) explains it out more eruditely than I can. This has to be an opportunity to small innovative companies with products - let HP, IBM et al sell the services and products from innovative companies through partnership, OEM and acquisition.

Their other option was to get smaller, more focused and more innovative however, that does not exactly fit the fee earners aspirations.

13 May 2003

12 May 2003

Most Tech Sectors are Joining the Service Evolution :: AO

I have been meaning to write for a while on the product / component model versus a service driven model. The blog above made me think some more about this so maybe it�s a good thing that I had not attacked the issue previously. In common with most early stage VC�s much time in evaluating a businesses prospects are spent looking at its �to market strategy� or how will it sell this great product.

My thinking evolved as we reviewed a follow-on investment in a NGIN product / component company and tried to attract other investors. To a man (strange thing about VC investing) they all wanted the Company to invest in building out its service business. The Company stood firm � said no and is bootstrapping itself to profitability. The Company�s view � correct in my view � is that in large telecom solutions the system integrators / service providers will be the big companies: IBM GS, Ericsson, Nokia etc. They are not alone in addressing services as the panacea to the capex drought. It is in the services business where the market is truly crowded � if you are in any doubt ask LogicaCMG or CGEY. Providing the components that build the systems that these service providers are going to install makes a lot more sense than competing in the service business.

I should have hit the Blog This button on an earlier announcement of funding for AePona, another in the OSA / Parlay space. It has a huge service infrastructure � 100�s of people supporting, installing and building apps for a substandard product. Its service guys are going to become disillusioned that they are competing with better technical products that are available across multiple platforms, and they will be tied to competing in tenders where there product fits � AePona neither becomes a best-of-breed integrator, nor a best-of-breed product provider. It�s pretty damn good at marketing though.

Then as I pondered whether this was a telco specific problem, a company in an entirely different space says that it will be a preferred provider because its competitors sell both sub-systems and full solutions.

In conclusion � technology companies can compete by providing better technologies. Service providers will compete by packaging those solutions and making them (very) relevant to the end user. I will stay clear of service strategies; it is too frightening to compete with IBM and HP�s service delivery arms. That leaves the investing question � is there enough left to make good returns on product / component businesses. The logical answer is yes if the entry price is right.

25 April 2003

In Search of Russia�s Great White Hope

An interesting week; whether it is spring in the air or just the natural course of things but since I last put fingers to the keyboard the world seems to be picking up (whilst at the same time the opportunities for raising funds seem to be further and further away.) It always a good week when the number of investment opportunities in the inbox that get you excited is greater than 2 � and 3 is 50% more than 2.

Also added to the pile this week is the latest contender for Great White Hope in Russia�s tech world. Russia�s tech world, whilst undoubtedly intriguing, is lacking the one or two home runs that will bring the cash to the market that will allow the market to further develop. A virtuous circle; or which came first�.

One of the principal reasons for this is the lack of management expertise in Russia. Indeed it could be said that even those tech entrepreneurs who acknowledged that what they don�t know would be a good start. Thus we are all looking for the poster child that can be shown off to the investing public. There have not been many pretenders to the crown and most have proven to be flawed. Flaws can be forgiven if it returns are stellar. In these more straightened days a manager who builds a good tech company that offers real value will do.

The latest poster child will have to remain nameless for the time being � I want to invest in his company. As many England football managers have found being built up by the press, in this case the cognoscenti, is a forerunner of being torn apart by them (or sleeping with Ulrika Johnson.)

19 April 2003

FT.com Home Global - Yushenkov Murdered

I spend my life telling people its safe to invest in Russia, and then this. Odds on that its linked to FSB are deeply involved and even more likely that neither the killers or, more importantly the people who ordered the killing will ever be brought to justice.

18 April 2003

So much for not having too many days between blogs - one month later:

The snow has finally melted and the outside temperature has finally risen above zero for a week on the trot. Maybe that is the driving reason behind what feels like a wave of investment tourism � at least for Russia. The ubiquitous Esther Dyson is in town meeting morning, noon and night. The daughter-in-law of one of the founding fathers of US VC investing is looking to see if her Russian roots and Californian location can drag something out of Russian tech that has evaded the rest of us so far. Meanwhile, the founder of Flintstone Technology (a real tech transfer incubator) is back in Moscow working out how not to invest in tech but take advantage of the booming retail sector. Those in the know believe that it is down to boredom with a very dull rest of the world.

My conviction that excellent and cheap Russian technical assets (scientists and programmers) really do make a difference to returns is starting to be borne out. I am looking at a deal that requires $8mn to get to break even � that�s a lot of expensive European management � if the R&D centre was moved out of Russia you could add a another $4mn (minimum) to the bill. The minimum post-money (fully-diluted) is going to be $12mn, more realistically $20mn (options are expensive in return dilution.) Assume that a VC expects a minimum of 5x cash-on-cash � that�s a minimum exit valuation of $100mn. The VC world remains fixated by finding the next $1bn company, the reality however is that investors returns come from a range of reasonably successful companies and not too many failures � there aren�t that many VC-backed companies being sold for in excess of $100mn today.

Still the question remains are there enough Russian tech companies to build a portfolio of $100mn companies?

12 March 2003

Don�t want to have too many days between blogs � it backs up the ideas. Today�s is the big one; is it possible to build a business investing in Russian tech? It is after all what I do for a living and gets me out of bed with more or less a spring in my step every day.

The facts (or as many as you can get in the Irish bar at Moscow Airport waiting for a delayed flight); there are today no successful examples of Russian built technologies that have become $1bn companies. There are a number of (mostly) ex-Russian-entrepreneurs who have built great companies � Sergei Brin (Google,) the guys at Parametric Technologies, Paragraph (Stepan Pachikov,) despite the fact that Transcriber drives me insane daily. Then a number of more or less successful companies of which the latest is Optiva, founded by Pavel Lazarev. Should the fact that it took him 10 years to get to Series D be really frightening?

The facts continued; the number of Russian tech companies that cause the hairs on the back of your neck to really stand up is, well, one every blue moon. Not a great hit rate. Maybe the tech is great, but investable tech cannot exist in isolation from its market. It would be fair to say that it�s pretty difficult to build a tech business if you don�t really comprehend the market you are addressing.

One of my favourite bizarre investment opportunities is a holographic storage company in Akademgorodok in Novosibirsk � go east from Moscow and keep going. Two strange Professors doing some of the coolest research but with little if any contact to Moscow, let alone to the rest of the world. How are we going to get them to build products? Other, that is, from paying them a living wage and taking the IP and running to the Valley.

So maybe we could do 3 deals a year � can we make long term money on that? It is clear that there is some very cool technology however, getting it to be accepted is unbelievably difficult � to describe the tech world as parochial would be as correct as describing the UK as a class ridden society.

With only a few investors actively targeting Russian tech the opportunities for spreading the word are few and far between.

Are we doing the wrong thing?

04 March 2003

I suspect that it is the way with the rest of the world but it does not make it any more right; demand for reasonably priced voice and, particularly, data communications is growing rapidly. However, the market is being held back by the incumbents who are more interested in providing communications to high end corporate customers than tracking down the dispersed SME market, but still insist on making it difficult for others to enter the market. Note that in Moscow / Russia incumbent has a slightly different connotation to the rest of the world - incumbents may be CLEC's but if they have the right level of political support they very definitley display the same qualities of boneheaded denial of market opportunities that their bretheren in the rest of the world have.

Its not as though the basic infrastructure does not exist. In Moscow, which is not like the rest of Russia, the city level backbone exists; its the copper over the last mile (500m?) that is lacking. Thus a potentially lucrative market for broadband wireless serving SME's, consumer outlets and high end retail (believe me there is enough of it.) An example; the Sistema Telecom controlled MGTS (Moscow City Telecom Network - THE ILEC) recently raised carriage prices 9x for Golden Telecom, Moscow's leading business CLEC - economic rape - especially as MGTS would never be able to offer even the paltry service levels of Golden Telecom.

There is no shortage of mom & pops playing local games; not big enough to draw the attention of the big boys, but also not big enough to generate inetrest from the financial community. Strikes me that one of the easiest investment cases to make in Moscow today is aggregating all these mom & pop's to create a really viable ISP / WISP.

Whilst Russia may have one of the most theoretically liberal telecom markets in Europe, the reality is that the incumbents are determined to repeat the mistakes of the west, only without the debt.

03 March 2003

First blog on Ruminations on Russian Tech. Not that it is limited to Russian tech, more the thoughts that strike me as we wade our way through the myriad of investment opportunities available. We, Mint Capital, are investing in tech and media opportunities either in Russia or made available and fundable because the quality of Russian programming provides vastly superior price / performance or finally, but unfortunately, less frequently due to brilliant Russian inventions that are available to the rest of the world.

Just to prove that this is really more of tech thoughts with a Russian flavour first thought relates to the closure of Red Herring. Can't remember when I first signed up, and I am not sure how relevant that is, however the last 2 editions sit only partially read in my briefcase along with a pile of other partially interesting material. That is relevant. It was expressed well by Glenn Fleischmann on his 802.11b Yahoo Group - I shamelessly quote "The author now provides an example of why listening to the company you're interviewing too closely causes you to drink the blue zombie soup and repeat their tropes.". Some of the thoughts were insightful, the editorial frequently was. The principal pieces were too often, especially recently the usual repeats of the main line views being espoused.

As an example; surely there could have been few magazines closer to the VC community than RH. Why then mindlessly repeat the quarter-by-quarter performance type analysis of the VC industry repeated in the mainstream press? Surely it was incumbent on RH to point out the crap investments that have been made by all of us and then go on to point out that in mainstream VC investing, early stage can take and usually take 5+ years to come to fruition. Portfolios valuations will generally look lousy during the first couple of years and then, assuming you did not invest in 1999, pick up.

The same basic lack of analysis plagued the recent piece on Cometa; suggesting that Boingo builds out infrastruture as opposed to aggregrating what is there. Its rubbish and we were expected to pay for it. The same is true for far too much that poses as tech journalism - it just reports without insight, or far too frequently, knowledge. Celebrity bloggers may be nice but they generally don't say anything.

The last shot at journalists is fired at Dan Gillmour; petty cheap shots may be amusing but as you are an employee not an at risk owner serve to make you look small not clever.

22 December 2003

Arun Sarin; Vodafone's CEO on 3G, Life and the Universe

Arun Sarin here giving a full interview to the FT on Vodafone's strategy. For those of you with a subscription here is the link. For those without, a quick cut and paste;

"But are we investing seriously? - the answer is yes. And the point is it's not just that we're investing in 3G networks which are an important piece but we're investing in 3G handsets, we're investing in 3G content, we're investing in 3G service delivery platforms because it takes much more than just some infrastructure and a handset out there . That's kind of 2G thinking. The 3G world is a little more complicated and requires a little more systems integration on our part to bring these new products and services to light."

The interviewer immediate follow up question was back to handsets, which as I have pointed out before is neither the question nor the answer to the future of wireless connectivity. How players control the service delivery platform ("SDP") is. Vodafone are a mile ahead of their competitors in this. I don't think that this is generally understood. Too many VC dollars are still being thrown at the handset end of the market and far too few in to the engine.

Which seems a little counter-intuitive. The telecom downturn has seriously hurt the incumbent telecom manufacturers from Ericsson to Lucent and Nortel and just about everyone else along the way. To make it worse their pain happened as the telco world and the IT world really started to converge. IBM will start to eat Lucent's lunch because Lucent cannot compete. To paraphase Claude Leglise from Intel Capital; whenever this firm of disruption occurs there is money to be made by start ups. And if the VC community was clever enough to spot it by VC's. However, I am not sure that this train has pulled in to the station yet. There are a few plays out there - some of which make more sense than others; Opencloud, Apertio, Appium amongst others fit that bill. Then there are a group that seem to, but to my mind miss the point - tw leading contenders amongst these are Aepona and BayPackets. Each of these companies covers a different part of the new network ecosystem. There are plenty others out there, these together with our bet, see below, are the market leaders.

Stovepipe solutions and high integration costs are no longer acceptable. Unless startups use technology to differentiate and protect themselves from resurgent TEM's they will lose business to better funded incumbents. This is not a game of incremental improvements.

Disclosure - we have a big bet in this market BET

18 December 2003

ACOL Technologies

Blatant link venturewire to an investment we closed Monday. I have mentioned the CTO, Alex Shishov, before. The best Russian technologist I have ever met. It was great working with Amadeus and Apax - a good team.

Open Innovation

I have been doing some research in to the role of internal R&D and innovation in large corporations. Slightly behind the times I came across Open Innovation by Henry Chesbrough via Amazon. The core of the idea is expressed in this interview that he gave to IdeaFlow Creativity & Innovation IdeaFlow - Corante:

This distinction between open and closed innovation is at the heart of the book. Closed Innovation is fundamentally about scarcity of useful knowledge. In order to do anything, you have to do everything. It is inwardly focused, and deeply vertically integrated. It takes little or no notice of external knowledge and resources. Open Innovation is fundamentally about operating in a world of abundant knowledge, where "not all the smart people work for you", so you better go find them, connect to them, and build upon what they can do. It seeks ways to build upon and leverage external knowledge, and focuses internal activities upon filling in the gaps, and integrating internal and external knowledge into useful systems.�

IdeaFlow has just joined my Powermarked list of must reads. Chesbrough's book is at this very moment being Amazoned to my parents in the UK (no Russia branch just yet) where it will be great I'm hiding reading.

15 December 2003

FT.com Home Europe: "Mr Blair said he had signed a joint letter to Romano Prodi, president of the European Commission, with the leaders of Germany, France, the Netherlands, Sweden and Austria, calling for 'budgetary discipline'." If ever there was a case of the pot calling the kettle black. I jsut about fell off my chair.

Games We Play

First is this article from the Economist Invaders from the land of broadband about the success of online gaming (as in games played online, for UK readers) in S. Korea. As if the South part needed spelling out.

The second is a headline $18mn investment by Highland and Polaris in to Turbine Entertainment here via VentureWire.

Third, I have been following SeeStorm for what seems like forever. Started out as an add on to IM and has morphed in to an avatars for mobile licenser. It seems to be taking off in Korea and Japan, having (very) limited success in Europe and absolutely none whatsoever in the US. I thought long and hard about investing in 2002 and was, rightly, rebuffed by my partners. I have been thinking long and hard about the same in 2003 - but to be honest don't have the guts. For those of you interested its worth researching potential revenues from low ARPU mass appeal apps on mobiles in Korea. They don't exactly make a company but they will make you smile as you build one.

The reason is that each region and, as the Economist article points out, countries within each region use mobiles / PDA's / smart phones / PC's and gaming devices differently. I used to think it was enough to be platform agnostic but its more subtle and harder than that. Furthermore, who ever thought that 3D virtual environments would ever make a comeback - which is what the Korean gaming world is all about.

There is definitely a gold mine to be made for the person who can work out what it takes to make this happen. What is absloutely certain is that what works in Japan, will only just work in Korea (S), will fail abysmally in Europe and won't even do that well in N. America. And that's just the means of delivery. The game, the nature of the game will have to be very specific.

To my mind this is a steer clear investment area unless your ability to connect with your eyes closed is very good.

Outsourcing Again

A classic piece of lowest common denominator journalism on Outsourcing hereOutsourcing via Rocky Mountain News

It probably would not be worth the effort to comment on it except that it makes the point that if you outsource then you cut off the engineering life blood that creates start ups. The fact that there is no lead in to the story or explanation of why it makes the claim does not point to the highest standards of either journalism or, more likely, editing.

11 December 2003

3G - Focus on Handsets

A fair enough article as far as it goes. Yahoo! News - Third-generation mobile phones fail to connect in Austria

However, Mobikom not only faces problems with its handsets but also with its IN. As indeed does everyone, including 3. They cannot provide all the sexy services which journalists and pundits like to write about becasue they cannot roll those services out quickly and effectively. They are locked in to providing stove-pipe solutions to each service and that's a whole bunch worse than crappy handsets. Next generation IN will become a major story over the next 12 months.

Social Networking

He could not be more right if he tried. Which is not to say that someone wont' make money out of it - I just cannot see it being a way to get to the people I want to get to. VentureBlog on Social Networking The only reason that I will give to change my mind is spam killing email and we therefore use a different medium to make contact. I'm not sure that I believe that as a statement.

10 December 2003

3G - But Not What the Business Plan Says

Vodafone plans data-only 3G services for Germany and Italy

Last night I was explaining to my wife why 3 (Hutchinson in the UK and Italy) was struggling. More importantly that Vodafone with its PMCIA card targeting buiness customers was getting it right. And there it was a journalist agreeing with me / and vice versa.

Boeing's Woes

Boeing's Failure / Airbus' Greater Bribery There was a fantastic article in The Economist sometime ago (sic - I can't find the link) about Airbus bribery and corruption. Not that the article used those words - the meaning was implicit.

Strange now that Boeing is suffering for the same reason. Strange that a French led company is not. Strange that there is no link between a Republican attack on Boeing and Yukos.

Russia does that to you - conspiracy theories abound.

Zero Sum Game

From today's FT. Does not require registration. It refers to Germanny and the Vodafone / Mannesman takeover. But it struck me as a phrase that would apply well to Russian business. I have referred to it before as a zero sum game. FT.com / Industries / Telecoms: "Foreign investors suspect the charges reflect a German cultural mindset of destructive social envy and a dislike of business success. "

More on Outsourcing

Red Herring interview with Gerard Fairtlough on the venture industry Venture Bouncebacks He makes some good points and some less so. There still needs to be a venture shake out. I think many people, and Gerard is one, have not thought hard enough about the outsourcing industry. Theoretically engineers can sit anywhere in the world, provided that the link between architecture, marketing (the link to the market) and management is strong.

Markets for early stage products is still predominantly in the west; that's where the marketing and management people will sit. I am not sure that it's really possible to build a product without closely linking marketing / architecture and engineers.

Outsourcing from Tim Oren

Tim Oren covers a piece from the NYT and a discussion on outsourcing here. Where I think that he may be wrong is his assertion that outsourcing may be good for nth degree programming, but less good for complete architectures.

The question should actually be; is out-sourcing is a good way to create products. The inherent question being whether marketing can interact with a time-separated programming center. We'll let you know.

Our most successful companies have foca both in the market and in Moscow - I'm not sure that it can all be done remotely.

08 December 2003

More on Management

This time from Private Equity Online. Reflecting its European nature the magazine tends to be later-stage oriented. Yet the lack of management due diligence is stage neutral. The writer is pitching for work, nonetheless, some of his early comments are apposite. The right team for the job

Political Factions In Russia

A typically pithy and on-the-spot set of remarks from the Economist's Russia correspondent.

I make little effort to keep track of which unheard-of party with no ideology and no obvious support base represents which splinter faction of what clan within the ruling elite's three big groupings. It's enough to remember what those
groupings are:

- the siloviki, people linked to the security services, whom I always imagine as thin men in ill-fitting suits who spontaneously cause lightbulbs to fuse as they walk past them;

- the business-linked "family" - in my mind's eye, portly types with flashy cufflinks fearfully glancing over their shoulder to see if one of their bodyguards is planting a landmine under the armoured Mercedes;

- and the "liberal reformers" - intense, sharp-eyed, desperate men overloaded with files who have long since discarded the moral dilemmas that their work involves and live their lives trying not to pick fights with either of the other two.

But at any rate, the fact that at least 50 Duma deputies switched parties after the last elections is a good sign of how little the election itself has to do with politics and everything to do with who can manipulate the balance of power to their own advantage.

President Putin Hails Election as "another step in strenthening democracy" I suppose that principally depends on your definition of democracy. As his is something close to - I'll do what I want, when I want, to whomsoever I care to - then I guess democracy was strengthened.

It would be nice though to point to a truly democratic country where democracy is working; Tony Blair carries on Thatcher's assault upon Britain's "unwritten constitution." Bush stole the election and then employed Ashcroft to steal democracy under the banner of Homeland Security. However, Churchill had a point: democracy is the worst form of government, except for all those others that have been tried here

06 December 2003

More on Khordokovsky (MBK); it would appear that the cat slipped out of the bag this week. We now all understand the meaning of minimal - its $10bn. Having previously said that this conflict was a battle between MBK and the Kremlin and not an assault on Yukos the lie was shown to be just that.

In a marvellous piece of cynicism the Kremlin has been repeating to anyone who wants to listen, and lets face we all do, that they have no intention of reversing privatizations. Of course they don't. They intend to divert the wealth created at Yukos in to their pockets. Privatizing it would mean that they could only steal cash flow. In short we have been asking the wrong question.

IBM GS � Another Step On the Road to Global Domination

IBM software and Global Services are going to be more closely aligned to better serve industry verticals (link to every newspaper and tech journal in the world.). Ever since IBMGS bought PwC Consulting it has (or was it always this way) been slowly ending its historical policy of being software / hardware agnostic. Sometime ago I believed that eventually this would eventually lead to IBMGS becoming just another services division of a large corporation. Well I was wrong. IBMGS is not just the 800lbs Gorilla it is the all encompassing Gorilla. Scott McNealy joked that of the $80bn that Bush requested to rebuild Iraq, 90% would go to IBMGS. Hate them if you must, but there is nothing else to do but work with them. They are after all the largest re-seller of Sun equipment.

What is more the convergence of telecom networks and IT will just add to their powerbase.

The only piece of news that cheered me from the announcement was the realization that for this strategy to succeed IBM Software is going to have to integrate a lot or 3rd party software to be able to build best-of-breed products. They cannot build it all in house though they do try. There will be space for ISV�s to build great products � as long as we understand that they will become a building block in someone else�s portfolio. My only concern is who do you sell to?

Om Malik on Sun's Problems. I think that he may have a point - they provide great equipment at a pretty good price point. Their problem is not that they can't get their PR right but that they have not got their sales comp in line with their revised strategy.

A sense also emanates from Sun that they would struggle to organize a piss up in a brewery.

An interesting report from Crescendo Ventures on investing in the Storage Industry Crescendo Ventures Report on Overspending it claims that there are a number of surprising results. Amongst them that the companies with the most cash weren't the most succesful. Firstly as a VC with a massively under-capitalised fund I am glad to hear it. The so-what that they draw is that it allowed companies to follow misguided strategies for too long. My take would be that it allowed the management to feel too comfortable and did not challenge them.

Treat em mean; keep em keen.

05 December 2003

SAP Ventures Comments on Sales Teams I liked this post - salesman are whores. Pay them and they are happy; don't and they aren't. The unspoken link is don't bring in a charging salesman in to an early stage team. They go after the easiest accounts because they want to get paid and aren't that keen on market development.

27 November 2003

Ed Sim on Capital Efficent Investing

Ed Sim from Beyond VC on Nov 19 writes about what I have been wittering on about since I started this blog namely Capital Efficient Business Models : You will have to scroll down to find it as I cannot work out how to go straight to the place.

His point is absolutely correct. Marketing costs may stay the same, but if you can create a product for a few million, smartly get the first product to market whilst running a low cost organisation then hopefully the initial and most painful burn will be limited. Once the product has real "traction" (presumably its a car wheel) then people can be hired to really sell the product. Given that these are always the most expensive part of a team hopefully they will be brought in commensurate with real sales opportunities rather than hopeful hype. At the end of this year all our companies will be cash flow positive. Some will require more cash to grow more rapidly. But if we cannot find it then they should be able to grow organically. Given that none of them were that expensive to acquire even a low growth scenario should see a reasonable return.

More from Ed Sim, this time on the US IT market. The Economy and IT Spending : "
It looks like the economy in Q3 grew even faster than we initially thought, 8.2% annual rate versus 7.2%. It was not too long ago that the Department of Commerce released numbers showing 7.2% annualized GDP growth for Q3. If you take a closer look, 'equipment and software' spending was at a 15.4% annualized rate. I obviously have concerns about the revised 8.2% GDP growth and certainly do not believe that is sustainable due to one-time factors like tax cuts and mortgage refinancings. While it is nice to see a 15.4% annualized growth rate in 'equipment and spending' for Q3, let's not assume that this is the beginning of a huge ramp-up in IT Spending. To bolster my thinking, I like to look at a number of data points. For one, Goldman Sachs recently issued its October IT Spending Survey. Its latest survey calls for an increase of 2% spending for 2003 versus a December 2002 survey which forecasted a decline of 1.1% for 2003 spending. So it is nice to see that the trend reversed in terms of IT spending, and that it looks like there is a small rebound happening. That being said, the October 2003 survey forecasts spending growth of only 1.3% for 2004, down from an August 2003 spending survey forecast of 2.3% growth for 2004. That is a negative trend and does not promise earth-shattering returns to IT Spending in the bubble years. As Goldman Sachs mentions, hopefully there is just a lag in terms of how the economy performs and where each company is in its budgeting process. If this is the case, we shoud keep an eye out for data from future surveys.

Another data point that I look at is how the fund's 30+ portfolio companies are performing. We have a number of companies in the Enterprise IT space selling security, storage, network management, wireless, and other related software. Some companies are performing extraordinarily well "

26 November 2003

The gaps between my thoughts on technology have become embarassing; plenty of comment on the Khordokovsky affair, little on Russian technology won't pay any bills. What it does do is reflect my concerns as to the future of the country. Those who spend more time than I do thinking about these matters tell me I am being over-sensitive. I still respond that greed is greater than fear, and there will come a time when fear takes over and we will all wonder why we did not pay attention.

Back to technology; seems as though there are companies out there getting funded, and getting bought. Suse was a great relief to those of us investing outside the mainstream US that good companies will still get bought, and at good multiples. I hear that the main investors made 3-5x. Given the $'s ploughed in to the company to turn out software and the time that they first invested, its not a bad result. BTW the last sentence is a subtle dig European / US software companies failure to make use of inexpensive programming assets.

On the funding side the investing world must be looking up if social software companies are getting funded. I can see the point of what they are trying to do but....Don't we do this informally anyway? Why would I pay for what I do already, unless it really helps me to do it better. None of the companies that I have looked at really convince me that they do.

If strange companies are getting funded it means that strange companies are getting bought. At a personal level I am intrigued by the direction that Shwartz is taking Sun. From what I hear from portfolio companies they could not organise a piss up in a brewery - or sales people after commissions are driving the direction of the company. To be more precise; it does not matter what the strategy guys put together to improve the TCO, customer experience etc. the sales guys are selling boxes loaded with software that requires the most boxes to be sold. I like the approach that Shwartz seems to be taking - it puts Sun ahead of the crowd in working out where the future of software is going. If he can get control of his sales teams the strategy might even work.

16 November 2003

An interesting take on the reemergence of vlast (power) in Russia

NOVAYA GAZETA
No. 85, Thursday
November 13, 2003
Don�t go Visiting the President in a Sweater -- then there won�t be a Dictatorship Interview with an Anonymous Source
Translated by Luba Schwartzman

The following is an interview with an officer of the Federal Security Service who is involved in the investigation of the YUKOS Affair. Granted on the condition of anonymity, it is cited word for word, with no corrections. Despite the officer�s careful wording, we can still find answers to very important questions.

* Who can say �shush� in the YUKOS Affair?
* What fate awaits Chubais?
* Does the �national question� play a role in the Khodorkovsky Affair?
* Is there such a thing as a �good� oligarch?

Q: How will the story starring Khodorkovsky end? What does the government want? To jail him? To take away his property? Or just to make an example of him to make others obedient?
A: Yes. Khodorkovsky was asking for it. He annoyed everyone; he was a real jerk.

Q: What did he do that was annoying?
A: Did you see how he was dressed when he came to meet with the President? The �I don�t give a damn� attitude� He stuck his nose in all over the place, going way too far. The worst part was when he said that he would rather be a political prisoner than a political refugee.

Q: So how will he be pressured? Until he breaks?
A: We don�t make decisions about that. We only carry out orders. But we will keep going as long as they let us.

Q: And how long will they let you?
A: Until they stop us. Once they say �shush,� we�ll quietly step away. But for now, we�ll have some fun. Our boys are pretty angry, you know. Angry at him and angry at the unfairness of life.

Q: Who are the bosses who can let or stop you?
A: The bosses are different for everyone. But everything is decided at the very top.

Q: The very-very top?
A: Of course.

Q: Are there political motivations for this?
A: Well, we certainly don�t have any. What have we got to do with it? We just carry out orders. They said �go� and we did. If they say �stop,� we will.� You know how it is in Russia -- it�s enough to say �act in accordance with the law.� Then anyone can get in trouble -- you, me� For many years we weren�t allowed to follow the law. Now, with regard to YUKOS, they said: �ok, go ahead!� We cheered. (laughs) We know that we have to act carefully and precisely. The political environment could change and then we could get in trouble. So those who carry out orders cannot overdo it. The main thing is to follow the law to the letter, to conform to all of the procedural regulations. Well, we�ll make him [Khodorkovsky -editor] sweat as long as we can, and then we�ll let him go. Certainly we understand that, sooner or later, someone who has as much money as he does will buy his way out. But it will be a pity if they let him off so easy. After all, we�re really trying, really working hard�

Q: But, tell me, what are you really after?
A: Well, we�ll push him as far as we can� Of course it would be really great to kick him out of the country. After all, our boys used to do it back in Soviet times. �Out of sight, out of heart� you know! (laughs) �No person means no problem.� Although Stalinist methods don�t cut it now� and the jerk [Khodorkovsky -editor] said he doesn�t want to leave. Our boys got pretty mad about that. Look at him being brave! He really is going too far!

Q: So how far will you go? Are you going to kick all of the oligarchs out?
A: We take our cue from Zhirik [Zhirinovsky -editor]. He says it will happen soon. He told all the oligarchs recently: �You�re all going to jail soon!� So that�s what the oligarchs have coming. All of them have dirty hands. All of these �shares-for-loans auctions� are a questionable affair. I�m talking about the law here! Why didn�t they return the money for the stocks? They could have, you know�

Q: But it was the government that made the decision about the auction. Are you ready to open up cases against Chernomyrdin and Chubais?
A: That�s a very sensitive issue you�re bringing up. Many of our boys can�t wait to get their hands on Chubais. But there�s an obstacle there. You can�t touch the government. That�s why we�re keeping low and waiting. But the boys have been quietly gathering information all these years. We�ve got plenty of evidence. The problem lies elsewhere: the interests of the state are involved, the interests of the government. One needs to be very, very careful. Look who�s at the top now -- if you really think about it, theose people shouldn�t be at the top. We have information -- plenty of information, even way back from Yeltsin�s time� but let�s not talk about that� It�s better for you not to know� You�ll be able to sleep better.

Q: How about Aksenenko?
A: Oh, nothing�s going to happen to him. They�ll just let him know: sit and keep quiet. If you don�t -- you�ll be sorry.

Q: Do you like how things are going in Russia?
A: I was a little uneasy before. But then I understood -- things like that always happen when the rules of the game change. And the rules of the game are changing now. It�s just that we�ve adapted to them and you haven�t yet.

Q: Which rules are changing?
A: Well, you see -- back under Yeltsin, certain things came to be accepted as dogmas. The notion that private property is sacred, for example. That�s rubbish. Do you really believe that all of these liberal values are here to stay? Don�t get used to these illusions! All of the rules can still be reviewed -- and the will be reviewed. In the past, everything was predictable: If someone made a move against an oligarch, he would give some money to the media, and the journalists would rally around him. He would give some money and buy his way out. If he didn�t get out of trouble tight away, it only meant that he didn�t give enough money. Now, none of the oligarchs can predict all of the consequences. Everything has come into motion. The rules of the game are changing. Now they are afraid of us, because they don�t know what to expect.

Q: And now they cannot bribe you?
A: You know, for us, the main priority right now is to be on Putin�s team. That means more than a one-time pay-off. If you manage to stay on the team, you�ll get back everything and more. If, on the other hand, you take money now, you can get kicked out. Before was chaos. No one valued their positions, since they knew they could end up on the street tomorrow. That�s why everyone grabbed whatever they could get -- to get at least something out of the job. But now we value our jobs. Look at what happen to the cops. All of the Ministry of Internal Affairs guys got quite a fright� We don�t want to become �werewolves.� So we do everything according to the law! We keep our noses clean! But the main thing is not to stray too far from the �party and government line.� (laughs) We�re the servants of the state, you know!

Q: How do you tell apart the �good� oligarchs and the �bad� oligarchs?
A: Oh, it�s very simple. Those who have a national orientation are safe. But these oligarchs aren�t �home based� in Russia.

Q: Where then?
A: In the US, in Israel� They are a major threat to our nation. There is a danger that Russia will be turned into a source of natural resources, a danger that we will be subjugated to a different country. That�s why the oligarchs have to be pushed down or pressed out. Of course, only those who are internationalist in ideology. It�s obvious that Gus [Gusinsky -editor] worked for Israel, just like Bereza [Berezovsky -editor] did. We should only keep those who are thinking about the nation and not about their own wallets. Khodorkovsky is clearly oriented toward the United States. He shouldn�t be in Russia. This is a real fifth column we�re talking about. This is a very dangerous political wing. If it becomes stronger, Russia will lose its independence from the West. And if we don�t get rid of him now, Khodorkovsky will become invincible.

Q: So, are there any �good� oligarchs, who might be allowed to stay?
A: Sure. Mordashov, for example. He�s a Russian.

Q: Is nationality what counts?
A: Of course. All Jews are traitors. They all lean towards the West. This was always the case. Back at the �High� [Higher School of the Committee for State Security -editor] they taught us that all intelligence workers rely on Zionist lines, because the Jews have diasporas everywhere. You know, for them nationality is more important than citizenship. Zionists were always hostile towards Russia. And they had many ideas about how to use international capital against us. All of our achievements in intelligence work were based on Jews and their networks. Take the Rosenthal Affair, for example. We always worked along Jewish channels. So now we cannot allow in this Zionist capital�

Q: What about democracy?
A: Oh, democracy is a bluff. The only thing that counts is power. Remember how everyone was afraid of us when the USSR was strong? And now that we�re weak, everyone is trying to get at us. During the mess that the Yeltsin regime was, we created way too many of those� Well, the same thing that happened with Trotsky, basically.

Q: So what�s coming? Nationalization?
A: No, nationalization isn�t on the agenda. The main thing right now is redistribution in favor of nationally-oriented businessmen. Why the heck should Khodorkovsky have seven billion dollars? Who the heck is he?

Q: Perhaps he is smarter than other people and a better businessman?
A: How much brainpower does it take to pump oil? Just build some towers, and you�re set. All of the technology is purchased in the West. You don�t need to be smart for that.

Q: Do we need to get rid of LUKOIL as well?
A: No. LUKOIL protects out strategic interests on the borders, in disputed areas like Kazakhstan and Azerbaijan. This is �our� company. It�s nationally-geared. Alekperov never tried to stick his nose into politics.

Q: So politics is what counts?
A: Yes. You see, Khodorkovsky is driven by ambition. Just look how much money he gave to oppositionist parties! He must be quashed with no questions asked, before he becomes another Berezovsky.

Q: And what�s so dangerous about giving money to these parties -- Yabloko, Union of Right Forces?
A: Oh -- right now it may not seem dangerous. But they are just lying low and waiting for their hour. These are the same Zionists we were talking about. Under no circumstances should they be allowed to grow stronger. And Khodorkovsky? Let him run about and complain now. No Strasbourg Court can help him. After all -- they got their chance to live well, but quietly. But, no! That wasn�t enough! They wanted to get involved in politics! Well -- now they will have neither politics nor money.

Q: Is this also an example set for other oligarchs?
A: Of course. You see, Abramovich is the smartest of them. We�ve already made a deal with him. Once his gubernatorial term is up, he will leave quietly, without a scandal. He�s already sold everything here and bought everything there.

Q: So, who should leave? Just the Jews or others as well?
A: Whoever proves their loyalty can stay. We aren�t trying to ruin relations with large business. Hitler hadn�t revoked major holdings that helped him.

Q: So where are you taking the country? Towards totalitarianism?
A: Yes. But this is going to be a capitalist totalitarianism rather than a socialist totalitarianism. This is the kind of government we had after Catherine II. Nicholas I came to power and replaced the ruling class. Officials replaced the nobility. Officials should get property for their service to the state, instead of property getting handed down by birthright. Then we will have order in the country.

05 November 2003

The Entrepreneurial Mind: The Experience Myth Great comment from a bus school prof i have never heard of before.

Innovation will fail when the investing process is run by bus school grads with the entrepreneurial instincts of a dead slug and a tick board to fill in.

Yukos or Those Who Have vs Those Who Would Like to Have What Those Who Have, Have

It's difficult to write intelligently about the Khordokhovsky affair - to do so requires an understanding of what is going on. No one really does. There have been some very intelligent attempts to assess the impact. Most of them private; if you can get to read what Bernie Sucher and Eric Kraus are writing its worth doing so as they differ markedly from the newspapers.

However, both of them come from the buy/sell side of the asset management/ brokerage game. Their antennae are directed accordingly. As John Dizard put it in the most avertly cynical Make Money from the Crisis article; its probably only Khordokhovsky so buy in to a growing economy. Unfortunately its that greed that Putin and his advisors are banking on to get him through before we all forget.

They should sit for an hour and listen to young (immensely) educated Russians working for international companies before letting greed get to them. They are very concerned and have some understanding what it is to be in an overtly authoritarian regime. They hate it and hate the people who are pushing this policy - the ex-KGB.

Lets not paint Khordokhovsky as any kind of saint; as one of the few who has taken him on and come away with something I feel reasonably well placed to comment. He does not want a pluralistic democracy in Russia anymore than Putin. But he does need the rule of law so that he can hold onto what he took with the Government's money for nothing. But if that is a crime; they are all going to jail - Putin included.

For a good Russian take on this read Yulia Latynina in the Moscow Times Conspiracy Theories Abound

Article on Russia's breakthrough in to the nano tech world

Long break from the blogging thing - good article from Valerie; not that she has ever been to Russia. Pavel Lazarev is an extraoridinary guy and worth following - if only out of interest.

18 October 2003

Part 2 of my interview with Tony Nash which appeared in Always On entitled Russia�s Investment Climate Begins to Warm Up

I wrote the majority of this en route from Phoenix to NY on the day that Hurricane Isabel was hitting the coast a little way to the south. Whilat we would all claim that we review and edit everything that we write it good to see that most of it makes sense in retrospect. The last comment; that Russia is a risky place to repatriate cash from is false; its not. Ask the oligarchy and the rest of Russia which has spent the last 10 years getting money out of Russia. Actually its harder getting the cash in.

Was away for a week getting some late summer sun in the southern Egyptian Red Sea. On the way back picked up a copy of this months Diver magazine, the leading UK dive mag. It published a 40 year historical retrospective. 20 years ago diving was for lunatics with a death wish. Today anyone on a holiday where the sea is warm and there is something to look at underwater can dive. The reason technological advances. But almost no breakthroughs. BCD's are better (the jackets that help keep depth even), infinitely better but an advance on a theme. Dive computers are algorythmic advances of dive tables that have been in existence since..... Regulators and second stages have really changed the availability of the sport.

Now it is too available - humans are de-populating the most accessible dive sites, causing changes in animal behaviour. That's why our next trip will be somewhere totally inaccessible.

29 September 2003

AlwaysOn Home: "Has Reality Caught Up with Russia�s Potential?
I speak to the press. Always a worrying thing to do.

20 September 2003

Travel 20/09/03

Why � what a waste of time effort and thought.

Big Companies 20/09/03

My silence has been due to travel. Some of which was spent in and around the Sun Convention in SF. My apologies to them for taking direct grief on this I am sure that they are no worse, and probably better than IBM, HP et al.

However, in a series of meetings which should be of some importance to Sun executives, especially as they were directly relevant to today�s announced job cuts, we met partially informed senior execs who had precisely 45 minutes for us before being moved on to the next meeting. All the follow up was left to a junior, but very keen, middle manager who relied on them remembering these meetings to push her agenda.

I was impressed by Jonathon Shwartz�s presentation at the same convention. But its difficult not to be cynical when you know that his contact with even 2 layers down in his organization is probably very limited. Who really �owns� Star Office? Or was it a big joke perpetrated by a very keen strategy exec who was promoted before his project came to fruition. This is not a condemnation of Star Office 7; I�ve yet to install it.

Sequoia / University of California 20/09/03

I read an appalling article Monday�s (8 Sept �03) FT (I�m offline and cannot link) on the Sequoia / University of California affair. The FT is a respected financial newspaper, but if it cannot write an intelligent, informed piece on disclosure then Sequoia is right not to disclose � and inherently I believe that Sequoia is wrong. Disclosure should never be wrong. Ask the NYSE Comp committee.

The Telecom Market � First Written 9/9/03

Thank goodness for quiet Aeroflot flights to, well, anywhere. A chance for thought that is only otherwise found at the dacha.

Do deals end up being interesting because they are inherently interesting; market, timing, potential, management etc., or because we, founts of all wisdom and knowledge decide that they are? Not really that important because a. it�s rhetorical and b. it�s mostly a self-fulfilling prophesy. The purpose of the question is a lead in to my thought for now.

There are a pile of deals sitting in the inbox (definition; not yet enough known to a. syndicate, b. understand, c. spend any money on) of which two in particular are of interest because of other investments. Both of them address the way that we will use mobiles, PDA�s and Smart Phones. One is Asia / Euro-centric, the other US-centric. That is; the former is a teenage / young adult consumer model, the latter principally business related. Neither management understand the others business model. How much of our interest has been piqued by related interests? More importantly how much has been missed in other deals because we just don�t possess enough knowledge. Let�s not even go down that path.

As some idle journalists have noted, a pile of cash has been wasted on telecom infrastructure investments. Now, it would appear that the carriers want something to show for that investment. However, whilst some of us were willing to pay $500+ for a handset in the early days of Russian mobile, and the ability to speak was the killer application. The world has moved on and the next app isn�t as easy as your voice but may actually be your voice and�(well if I knew you can be damn sure that I would not tell you.) It may be a bundle of apps, personalization � think ring tones with pictures, cheap voice (apparently known as VoIP.) What is clear, is that it is not clear. Voice is applicable to everyone. A 40+ year old businessman is not interested in a personalized ring tone, much, but he probably wants to stop carrying a ton of electronic hardware in his briefcase. A kid (when do you stop being a kid?) could not give a damn about synced schedules, to do lists and contacts; they are probably however interested in personalization, anonymization (apologies) and low cost high cool factor frequently accessed and changed apps.

All of which goes to say that the carriers need to spread their nets wider. Stop trying to build a wall around the garden and build an infrastructure that allows both the post-paid businessman and the pre-paid kid to co-exist on one network with multiple marketing opportunities.




09 September 2003

Mercury News | 09/07/2003 | Valley economy showing signs of erratic recovery

The article notes that the Valley is beginning to see light at the end of the tunnel - to experience a real downturn you have to experience the light at the end of the tunnel being turned off to save money. And its not much fun.

03 September 2003

First time I have actively discussed a portfolio company - not sure if that's a good or a bad thing. Tim Oren was pontificating A requiem for virtual reality on the death of VRML as a useful standard which caused me to fire back in defence of Parallel Graphics Mint's first investment.

Parallel Graphics was never in the VR business and as I noted in my email back to Tim, suggesting that VRML is not dead, some of which is here The 'V' in VR stands for 'vertical', the way that SGI, Parisi et all saw VRML was never going to be the future.

What the conversation does highlight is a focus on the visualization of the delivery and not on the creation of the content. Parallel Graphics has morphed from being a browser firm - Cortona is the last one left standing - to a means of capturing, inter alia, 3D CAD and delivering it with relevant design information attached (think virtual parts catalogues) to a PC. Should the standard bodies decide that the next browser use an entirely different base technology it should, in theory, make little difference to Parallel Graphics.

The easy comments refer to the consumer end of the technology - VRML / Cortona in this case. The more informed comments discuss where the input comes from and how it is processed.

30 August 2003

WHAT DOES EARLY IN A RUSSIAN CONTEXT MEAN?

I have been here before but the 30 minutes lying in a bath after exercise are full of clarity. Most of the technology investments that we see in Russia can be generalized as being strong technologically but weak commercially and in management. In many cases the technologically already has a commercial release, of sorts, and the Company is generating some limited revenue. Its worth differentiating between technology deals where there is some inherent technology, and software deals that are supposed to solve some issue that enterprises did not know that they had. As these are, for the most part, uninteresting we�ll ignore them from hereon.

So where does that place Russian tech deals in the early stage pantheon? I find it strange reading the wires of 2nd round investments in the $10mn+ range that are for; further product development and building sales and marketing teams. The latter part is fully-understood, there is little reason to make investments in Russian tech companies that have not already built virtually commercially available products.

But does early refer to the stage of technology, or more reasonably the stage of the company. Weighting in that pseudo-scientific way well known to venture capitalists everywhere; technology development, corporate development and management ability and experience. That would tend to mean that most Russian tech companies are very early stage � whatever their stage of technology or revenue development. The joy is that with revenues its possible to build management teams around technologies.

19 August 2003

BBC NEWS | Europe | Russia plans Mars nuclear station

Whilst the rest of the world is only slowly coming out of its technology shell its always good to know that Russian "Instituti" are still dreaming big. If however you are looking for a different view on spending on R&D and education try Here

A word of warning; Gaidar was acting Prime Minister in the Government in 1992. He and his team were affectionately known as "boys in pink trousers / shorts." A reference to their being slightly wet behind the ears politically. Easy to scoff from here, they were part of a transition that is looking OK from here - for now.

Quite what they are going to do with the power once its been built is not entirely clear - but then the value of alot of R&D was not either.

18 August 2003

Mecury News Says Entrepreneurs Don't Need Cash

Or have not learnt that the value which they could sell their company has come down so the entry valuation has come down.

This badly reported story does highlight an important issue. Tim Oren Ruminations on venture capital, trust networks, and information theory is a VC's view from the other side of the fence. Howevr, Tim is an entrepreneur turned VC, and the easy shots are against the finance / consulting types. Where there is a definite trend for prescription. I'm a finance type and would like to think that I might have a little humility; however, I'm sure that from time-to-time I have used prescription to mask ignorance.

Another factor in this story is the investment stage; or how early is early? A little commercial traction never hurt before making an investment. Indeed one of the joys of investing in Russian tech is how developed the technology is by the time that it gets close to being investable. The VentureOne reports make it clear that if you intend to be an early stage investor you had better be sure that you can keep "paying-to-play." Put another way Angel investors have the lowest returns of all the stages because they can't or won't pay up. Crammed down is only polite for wiped out. There are some good reasons to be very early; even better to pay early prices for more developed companies.

Back to ignorance; it should help to be an investor if you have just come from the industry. Taken to a logical extreme corporate venture teams should be the best investors in their own industry. Access to IBM's, for example, many divisons should give an IBM investor a massive head start in technology and market due diligence. Yet history does not hold this seemingly self-evident fact to be true. Maybe its the other factors associated with being in a corporate venture group that stand in the way.

Never having worked with a Venture Partner the following statement is somewhat devoid of personal empirical evidence. However, it seems from here to be a good idea; combining entrepreneurship with the discipline of an institutional investor. We'll see.

Apologies if you made it to here; this is a terrible blog. I'll have to come back to this theme later.

11 August 2003

Airplanes can be good places to do thinking shorn as they are of telephones etc. Except that Illyushin 90�s on their way to Delhi do not qualify as good places to think. Not sure which Quasimodo freak they used to model these seats but he was not 180cm, weighing 90kg sitting in a row of three where every seat is occupied. Not to mention that this, being Aeroflot, there was one beer to alleviate the agony.

The excruciating passage through Sheremeytevo, Moscow�s much under-maligned airport, caused me to consider the nature of entrepreneurialism in Russia. The thought process that gets you from Soviet levels of service to entrepreneurialism are way too complex to describe.

Russia�s greatest business leaders have all had a hand up by using State assets from which to build empires � passim Khordokhovsky et al. The number of true entrepreneurs who have built meaningful businesses can be counted on the digits used to create this blog. On my return from St. Petersburg last week the guy in the next seat worked for GosStroi (State building company) and was actively perusing a Lexus brochure � bureaucrats get paid a maximum of $100 per month. He was in his early 30�s. Many of Russia�s youth actively consider joining the Governemnt bureaucracy because it�s a great way to make a fortune. Even the Government acknowledges that ist efforts are hindering not helping the development of a entrepreneurial business class. This is not an environment that is actively fostering entrepreneurs. And yet��

Last night I collected a video and CD for this trip to Delhi from an individual who played Olympic level hockey (field) for the Soviet Union, has a PhD from Moscow State University (�MGU�), helped create one of Russia�s most successful local fast food outlets, has identified some of the most promising technologies emanating from Russia�s universities and institutes, and is building a great commercial finance business. Just before that meeting (I was sitting in a traffic jam for over an hour) I met with another MGU PhD with a string of successful business behind him � and is now the CTO of one of the most enterprising. Oh and he won a prize in Pure Mathematics from MGU � this in a country where Mathematics skills are valued and don�t make you a geek.

They are not quite as prevalent as maybe they we would all like � but they are there. Slowly but surely the people who are building the service businesses that will support the diversification away from natural resources are beginning to surface. They are humbler than their mid / late 90 compatriots; and better businessman.

But every time I have an experience such as today in Sheremeytevo, where those theoretically providing a service lord their power over poor mutts such as I who have paid good cash for my right to be abused by them I doubt that things will ever change.

02 August 2003

Due Diligence: "We should be careful not to confuse diversification with agility. Ross points to this post as evidence that portfolio behavior is called for. I can't agree. If you're venturing into an unknown market - 'social software' in that case - you'd bloody well better be ready to react when the customers don't behave the way you predicted. That's the whole point of my posting about OODA loops. If the market actually exists, and you can learn from your customers faster than an incumbent can adapt, you will diagnose the market need and get a long way ahead on serving it before they respond. If your board is worth a damn, they should be in there thinking about the process with you, and be open to the shifts required. (If not, you got the wrong investors.)"

I learnt about OODA loops whilst I was carrying heavy weights up and down (mostly up) big hills for the Queen. By far and away the best management tool ever invented; and if you should ever find yourself in a situation where the guy has a gun and wants to kill you - even better.

Back late from St. Petersburg, the home of our great President and the ad that states - "we can and must control the people." Told by my taxi driver that this was an attempt to restore order because the state cannot i was happy to return to the comfort of a tech environment;

Except that I was not particularly. Air conditioning has not reached St. Petersburg yet and it was definitely over 30 degrees. But they are doing some very coolthings technologically. Saw 3 companies in less than 9hours including 1 for just over 5. They have a cooling technology that today is as good as (I'm British, if this was an American blog I would be more forceful) as anything in the West, or East today. But are not trusted because they are Russian.

Two big thoughts for the weekend - Options. Caught up on some reading on the way to SpB regarding Stock Options and their value to Shareholders. They keep employees but not executives - and boards give options to employees as an afterthought and to executives to retain them. Also no quantifiable additionla value from companies that are option heavy. I sort of agree; except when paying with cash is the worst option.

Second thought; whither Anything over IP. Voice, video, data, anything. If a technology's life runs; hype, failed, adopted, commodity - VOIP is at adopted. Now the apps have to catch up.

31 July 2003

The Impact of Equity Ownership on Returns -Knowledge @ Wharton: "Larcker, Guay and their colleague John E. Core did a broad survey of academic research and could not find compelling evidence that employee ownership, through options or shares, boosts shareholder returns. �Whether it translates to the bottom line is totally unclear,� Larcker said."

You have to sort of agree; especially in companies that are not performing that well. How often the refrain from managers; reset my options to incentivise me to work - nothing is more likely to turn me in to a miserable approximation to every managers worst type of VC.

Not that Options are a bad thing; how else do you pay people in companies that are short of cash?

28 July 2003

Mercury News | 07/27/2003 | Dan Gillmor on the Bad news of the Recent Uptick: "I have no faith whatever in big technology companies' ability to bring sustainable growth back to the valley. Even when the economy picks up again, many of them will simply continue to export skilled technical and back-shop jobs to places like India and China. We have no choice but to participate in a global economy, but are we really ready for what we're setting into motion?"

Though this is probably a good thing - innovation is not created by things standing still but by upheaval. The last few years have seen an upheaval of sorts; now the innovation has to come.

25 July 2003

I have been here before many times but some late night reading of blogs from the Always On Conference meant that sleep was interrupted by random thoughts on how to invest in Russian technology. My sleeplessness can be attributed to Tim Oren's Thoughts on Venture Capital Investing etc..... so he should at least be attributed.

So back to basics;

There is some exceedingly interesting Russian technology out there in a more or less comercial or commercialisable form.
Where computational power matters (telecom's for instance) Russia's huge mathematical skills make a real difference.
Because Russia, and its predecessor, had to work with sub-standard equipment (you name it, it was sub-standard) scientists, programmers and the like had to find ways to make inferior products work, as well as, or better than the most modern equipment in the west. Most commonly this was achieved through a multi-disciplinary approach that is broadly lacking in the West. These generalisations are so easily challenged but they are broadly right.
The cost of building a product to Beta and beyond is a fator of 4-10x cheaper than a similar product in western Europe or US. This makes no comment about quality.
Russia's continuing isolation from the hotbeds of technology limit its ability to build products and applications that solve today's problems.
Russian management teams have not yet had exposure to the long term exposure to western management and customer interfacing that provides a pool of highly qualified management teams - even at the CTO level. Somewhere I read that 25% of Valley start-ups have Indian and Chinese CEO's.
There is almost no qualified capital looking at Russian technology.

So where is the value to be found? Somewhere in Tim's blogging he mentioned he questioned the stage of investing differentiation between venture funds that was caused by the bubble in the late 90's. Hopefully for the right reasons he decided it was a good thing, hopefully for the right reasons I agree with him. Inherently I believe in early stage investing, something about being a frustrated entrepreneur; but is that the right model for investing in Russian technology. Assuming the assumptions above are correct; the massive weakness of Russian technology is management and its applicability to global markets. Surely then it makes sense to invest at the point that these two problems are solved? Or is it not overly arrogant to believe that through appropriate mentoring of the right people applications and additional management can be added to overcome these shortcomings.

Assuming that we invest in companies that have the ability to see where their weaknesses lie - understanding what they don't understand - then early stage investing makes sense........I think.

Anyway back to the day job.

The news from the Yukos affair seems to get worse and worse - there are no angels in this game and it is extremely hard to determine which version of the spin is closer to the truth. Whatever the end game turns out to be three major facts are rammed home by these events;

We thought things were getting better, actually they look better on the surface but in reality little has changed.
The judiciary and police are a business, pressure tool and has almost nothing to do with enforcing the law.
Whilst their are skeletons in the closet, someone will seek to extract "rent" so that you can live a quiet life.

The last point is the most worrying - everyone, and I mean everyone, has been judicious with the truth in paying corporate and personal taxes at some point. Many small / medium size businesses are trying to come clean but it is a slow process and the bureacrats are not in favour of it as it has a nasty habit of reducing their monthly take home.

For an alternative take on what is going on read Eric Kraus via
Sovlink's Home Page

For a well written piece that makes it clear that the whole affair is unclear read Gideon Richter's piece in the Economist.

16 July 2003

The text below has been quoted, and edited by me, from an article written by Valerie Thompson in Computer World. I have not found it in English as I understand it was published in the Swiss version. Such gems should not be left unearthed�.

I have made some comments in blue along the way which got lost and are now bracketed.

From Russia with love and bytes
By Valerie Thompson


Russian high-tech, obscured for the longest time by news flow about the Mafiya and its use of selected seedy Swiss bankers, cowboy capitalism, and oil oligarchs, (however the mind-bendingly stupid Chekisti seem to be being doing a good job of tying to change that impression) has substantially evolved in recent years.

Today people talk about the success stories and role models, such as Google co-founder Sergey Brin. They mention Israel (oh what a joy a journalist who understands more than the lunatics trying to promote Russian technology at MinSvyaz and Trade Minsitry) -- it is a little known fact that the basis of the tiny country�s ability to create a huge, new high tech economy, is the influx of highly education Russian Jews - many of whom worked in the former Soviet Republic�s military industrial complex.

And they will talk about a rich supply of talented engineers and scientist with math skills, physics know-how, creativity. They will also mention Russian tenacity and pride. A new dynamic is emerging.

A number of smart, young Swiss-based high tech firms have tapped into one of Russia�s richest resources. They have found success transferring Russian developments to the West to solve tricky software programming issues, introducing new innovative products for a global market.

ACOL Technologies, based in Geneva, acquired an R&D team in Moscow, forming a new company with Russian entrepreneur, Alexander Shishov. (Probably one of the best CTO�s operating in Russia today � actually delete probably.) It already has customers in the US and in Russia and at the time of writing was in discussion with investors to back its bid to make ultra-high brightness light emitting diodes.

Two other firms, A4Vision and Virtoons AG, are tapping Russia�s advanced digital signal processing and software programming skills to develop innovative, new products for niche markets, while Novavox based its entire R&D effort in St Petersburg. It has had success selling its computer telephony products for PBX manufacturers and wireless operators.

The Swiss aren�t the only ones who have discovered this shortcut to advanced technology and innovation. Intel�s Centrino software is developed in Russia. It employs 200 engineers in Nizhny Novgorod in development and 150 contractors in Sarov in central Russia, as well as close to 100 developers in Moscow.

Intel Capital�s Marie Trexler told BusinessWeek that her business unit hopes to profit from the country�s rich supply of technical talent and engineers. Specifically, the Russians� advanced knowledge of materials science and ability to design powerful algorithms. Man-made crystals could lead to new semiconductor materials, she said, adding that the algorithm know-how could lead to faster processors and software. Wireless and radio are also Russian strengths.

The Russians are coming!
High-end animation software companies, such as Pixar, Dreamworks, DNA, could soon be facing competition from a much cheaper and elegant solution from Russia developers.

One year old Virtoons AG is a Zurich based animation studio, founded by Russian-born Alexander Semenov. His idea is to create an animation studio that can produce animation sequences on a PC based on interpreting movements of someone wearing a magnetic sensor suit in real time. If his software team is successful, they will remove the need to hire hundreds of people to �draw� and render animated clips, plus, since the software operates in real time, it could cut development times dramatically. Oh and by the way, he wants to do it in 3D, as well.

The studio is working on a solution based on animation software which it acquired from a Moscow-based high tech incubator called Latypov.

Semenov says his software has to run on standard processors. Being Russian, the developers just did not have access to the capital to acquire high performance computers. But he figures it�s a smart approach because the niche for supercomputer based animation solutions is already occupied by the big US players. �Pixar and Dreamworks have a solution that runs on terabit process and needs gigabytes of storage,� explains Semenov.

Virtoons success started early. It has already won a prestigious contract from SF DRS for a new children�s cartoon series, the first since Pingu ten years ago.

Semenov is currently presenting sample scripts and the concept to television channels around the world.

Normally a studio will deliver a single sample script, a few minutes of demo film and a description of the characters, explains Semenov, but Virtoons has delivered all 13 sample scripts for the series. Semenov felt he had to �over-deliver� in order to overcome any doubts that the startup would be unable to follow through on its promises. �To convince the TV channels over-delivering was the only way,� says Semenov.

The company received financial aid from the Swiss Organization for Facilitating Investments (SOFI), an initiative of the Swiss State Secretariat for Economic Affairs in cooperation with KPMG.

SOFI helped the entrepreneur during the application process and show him how access a SECO fund with some success. Virtoons was able to raise capital in the form of loans that have to be paid back in five years time. In Moscow, 17 jobs have been created and 18 more are planned for this year.

Bright LEDs, Russian ingenuity
When disc drive manufacturer Quantum merged with Maxtor two years, one of the company�s top European managers, Jean Charles Herpeux convinced a couple of colleagues to try their hands at forming their own company.

Herpeux says he wanted to exploit his experience building up sophisticated sales and marketing organization for his own profit. They went to Russia looking for some bright ideas and there found Alexander Shishov who was running a company called Corvette Lights. Shishov had been having difficulties breaking into the European and US markets with some innovative high brightness LEDs and subsystems based on his firm�s R&D breakthrough. So he was happy to do a deal with the Frenchman.

Herpeux is a big fan of the Russian techno-elite. �If you want to talk about reliable technology, just remember that it was the Russian Soyuz that rescued the NASA space station crew,� says Herpeux. (The MIR also long outlived its planned expiration date when it finally burned out in 2001 after 15 years in service.)

He is one of a number of outsiders that are increasingly recognizing the strength of Russia�s system of education in the fields of mathematics and basic sciences, as well as the solid work experience with complex projects and diverse technologies.

The cultural traditions with Western Europe and America, says Herpeux. It is something that cannot be said of the software development outsourcing leader, India.

The Russians have come up with a way to make any color of LEDs shine more brightly. The technique increases the brightness without increasing the power consumption due to a smart packaging technique, precision optics and better thermal management. Typical applications are traffic lights, automobile brake lights, commercial displays, and giant screen computer displays.

First customers for ACOL Technologies, which now employs 22 people, are US based firms that make traffic lights.

Herpeux says he has not run into any problems working with the Russians. �It�s just like managing an operation in any remote place in the world. There is less difference in the culture between the Swiss and the Russian than the Swiss and the Americans or the Japanese,� says Herpeux.

The Swiss, the French and the Russian education systems are normative, he says. Whereas the Anglo Saxon method of educating people, which rewards good presentation and self expression, rather than demonstration of an ability to complete assignments based on certain standards. What makes Russia�s outstanding is that it rewards creativity at the same time, which results in engineers and software developers that can solve problems.

From Russia to the shores of Lac Leman to Silicon Valley
A4Vision has transferred technology from Russian labs to Geneva and now to Silicon Valley. Its facial recognition system relies on inexpensive digital cameras, an infra-red grid projector, and a standard PC running A4Vision�s software.

It is recognized by industry experts as being one of the most �advanced�.

Backed by an Italian venture capital company and Switzerland�s Logitech, A4Vision, has its R&D activities in Moscow but that probably won�t be touted too much in the future as the firm has an American headquarters and is aiming for the US-homeland security market.

The Russians have the inter-disciplinary (this is the key every time � either the Zhiguli approach to technology � they had to work with less so they worked out ways of making less work better) know-how to understand the optics, electronics, math and physics required to make such software work, says Kelly Richdale, a co-founder of A4Vision.

The smart Russian behind the innovative solution is Artiom Yukhin, a former researcher at the Bauman Moscow State Technical University; there he headed the 3D machine vision research team.

His expertise in mathematical modeling, along with his research team�s dedication made it possible for A4Vision to change direction shortly after being founded to become a supplier of �homeland security� solutions after the September 11th attacks on the US.

Richdale says she was able to ramp up quickly, growing from 10 employees to 60 within 18 months. The Moscow engineers are �hard-working�, able to make innovations, but also willing to do the hard work required to commercialize a technology.

St Petersburg R&D
Novavox AG was founded in 1994 and employs 75 people. It is currently restructuring and relying on the adaptability of its Russian R&D team to grow into the future. Employ numbers are down from a peak of 160 during the telecommunications boom where it achieved what few Swiss-based telecommunications applications makers have achieved: it was able convinced big brand name equipment makers, such as Tenovis and Alcatel to incorporate its software into their products. The US Army is one of its customers.

Andre Zgraggen, the company founder now lives in Russia. His lab recently received ISO quality certification. Settling the development in Russia, has given the company an advantage far beyond being able to find good programmers, it has �opened the doors to the Eastern European market�, which has been growing.

Advantages of being in Russia are not only technical; market-wise the products can be made available in six other languages due to the language skills of his St Petersburg crew. The company is branching out into offshore software development.

The Swiss Russian tech exchange
A number of government funded initiatives could very well lead to further partnerships between Russian and Swiss scientists, engineers, and entrepreneurs.

For example, the SNF has funded dozens of joint research projects on a wide range of topics, many are basic research in physics related and biotech topics, but some have direct application in advanced materials and future electronics and quantum computing applications.

In addition, delegates from Russia�s scientific community have been invited to meet and tour centers across the country, including the Paul Scherrer Institut, CSEM, and the two ETHs in Zurich and Lausanne.

TEXT BOX: Once a giant electronics sector
The Russian educational system, with its emphasis on mathematics and physical sciences, the foundation for the strategic achievements of the former Soviet Union in space, nuclear, and oceanographic exploration technologies, is responsible for the large number of qualified software developers, says RusSoft, (unfortunately they could not recognize an Israeli development model if it leapt out of their kasha in the morning) a trade organization based in Moscow.

Russia had sixty-five science cities centered on advanced research institutes across the country. But today the electronics industry in Russia is one-third the size it was at its Soviet peak. Some experts believe it will take a few more years for that giant to change directions to a market oriented sector (in the meantime the Russian Academy of Sciences is dong $1.6bn in outsourced research contracts.) In Soviet times, R&D was driven by government action plans, rather than the need to solve a customer�s need or a market�s problem.

�Due to its heft and infrastructure, however, it has managed to retain a sizable indigenous base,� says Malcolm Penn, an industry analyst at Future Horizons in Sevenoaks, England.

�Investment in electronics was out of step with the Wild West, fast-buck/low-risk investment style in Russia of the early nineties,� comments Penn. Russian and other former Soviet states suffered from a lack of foreign direct investment, except for the automotive and wired-telecommunications industries, both heavily subsidized by governments.

One of the countries largest electronics exporters is Svetlana that still manufactures vacuum tubes. It has found a global niche. There is a growing demand among audiophiles, for example, for hi-fi equipment where digital technology does not deliver the same quality of sound.

During the Cold War, the former Soviet Union did not have access to the fastest microprocessors or supercomputers but they still put the first rockets into space. They achieved what they did by writing powerful algorithms using their tremendous digital signal processing skills, according to Kelly Richdale, who majored in Russian studies at Cambridge before moving there and eventually co-founding A4Vision in Geneva.

There are quite a few success stories of Russian high tech entrepreneurship already, such as Abbyy Group�s with its offices near Red Square in Moscow and Epsylon Technologies, but this is just the beginning. The research for this article revealed dozens of innovative and creative examples of Russian high-tech entrepreneurialism.

Esther Dyson agrees. In a recent report she writes that Russia's programmers have begun to recognize their capabilities and �being smart and creative� they are now figuring out how to organize their marketplace better, putting in place not just software firms but training centers, education loans and the like.

Success Stories
Abbyy Software, founded by David Yang, who has at least two other tech startups under his belt, makes optical character recognition software. It can be found in more than half of the scanners manufactured worldwide today. Turnover is E12 million a year and the firm employs 250 people in Russia.

Its OCR software is used by Lexmark, Compaq and Samsung. It was recently praised by PCWorld as the best OCR engine in a recent analysis of printer performance.

Five year old Archivista, based in Zurich, licensed Abbyy�s OCR software for use it in its flagship archiving software. The tiny startup firm sells its software in Germany, Austria, Netherlands, and Switzerland.

Abbyy has picked up �relatively quickly� the basics of entrepreneurialism, says Urs Pfister, founder and CEO Archivista who has worked with a number of Russian software vendors. That is his diplomatic way of saying that the once bargain basement priced software licenses from Abbyy are now much more expensive than they were a number of years ago when the Swiss upstart made its deal with the Russians. They have increased �dramatically� and reached a much fairer (for the Russian) price level.

Yang also invented Cybiko, a wireless peer to peer handheld device that is meant to launch in the US this year. It claims to have already sold 250,000 units at $129 each. A European launch compatible with mobile phone and WiFi networks is expected at a later date.

Since more than 60 percent of its employees are working in R&D in Moscow, we can expect more innovations soon. (And thus if you are still with me is the real story of Russian technology.)



25 June 2003



Tony Nash on Always On talking about export of jobs. Somewhere down the comments it morphed in to a discussion on Russian outsourcing. I reread my comments and am pretty proud of them - its not often that you make short comments and feel in retrospect that you hit the nail on the head;

I have joined this discussion a little late - the joys of traveling through low-bandwith / high charge countries, otherwise known as Europe and only now catching up on my reading. The comments on Russia as an offshore programming / products center somewhere to the top of this page are pretty much spot on. Russia enjoys an enormous wealth of programming talent; its more expensive than India or China on a per hour basis but a number of companies have concluded that on a per line basis it competes well. Where it competes badly is in management, both strategic and line, and productization and sales of ideas. Almost none of the companies that I am involved with in Russia maintain Russian senior management or product managers. Its not a cultural failing but one born of isolation. Whilst the USSR collapsed over a decade ago it is only in the last few years (the start date is after the 1998 crisis) that people have started to take Russia and Russians seriously. It will take a decade for the cross-culutral osmosis to occur that will result in Russia regularly churning out world class products - be they IT or tech general.

A string of Russian tech companies will start to make headway in the next few years - however most people won't know them to have originated in Russia as they will have an almost entirely western front end.

Lex: Mobile handsets
Published: June 24 2003 20:31 | Last Updated: June 24 2003 20:31


Vodafone may crow that some customers now ask for the "David Beckham phone" - inspired by an advert for its Vodafone live! service featuring the England football captain. But most still ask for a Nokia. The branding of handsets in Europe remains a more powerful draw for users than the networks they are signing up to.

The continent's big operators are doing their best to make sure that changes. Orange, which already stamps its brand on handsets, on Tuesday signed a deal with Motorola which will produce a unique set of handsets. Orange also talked of putting more intelligence on to its network rather than into handsets. The network operators are increasingly aware that they need to differentiate themselves as data becomes a bigger chunk of revenues. Handset branding is one element. Another is having more say in design, so users find it easier to use new services, and therefore spend more money with the operator.

Vodafone live! is a good example. The Sharp handset, which is heavily Vodafone-branded, has easily outsold the equivalent Nokia. Its configuration for Vodafone services has also driven higher usage than from other handsets. Networks have long attempted to wrest more control over handsets. Market leader Nokia has so far resisted and continued to go from strength to strength. That will not change overnight. But as operators become more aggressive in working with individual manufacturers and stamping their identity on handsets, the risks for Nokia increase"



Oh boy, even the FT Lex Column is starting to talk about intelligence in the network and quits wittering about mobile networks always being about handsets. Maybe the world really is changing. Whatever, the truth is that the future of all communication networks will be driven by intelligence. Intelligence used to be hard, soon everything will be software running on standard NEBs boxes. The traditional TEM's will lose this battle to the IT giants - who in turn will buy their components from....

28 May 2003

Better or just different; Russian technology when it is better really is better - but that does not make it better in every sphere, or even in the spheres where it is deemed to be better. Solutions to physical technology problems that are interesting here tend to have approached long existing problems in an entirely different way from the West. Locally this is known as the Zhiguli-school of technology development. A little harsh maybe but pretty much close to the truth. (A Zhiguli is a Russian car based on a Fiat 125 that has an even worse reliability record than the original. Russian's have an initimate knwoledge of their cars in order to keep them running. Thus they have a habit of coming up with solutions born of habit that we in the West have forgotten as our lives get more comfortable.)

Russian technolgy solutions, orthe ones that work anyway, tend to approach issues in a more holistic way than their competitors in the West. They tend to understand what is required to make a complete solution and work on the many facets that could improve the end solution - rather than focusing on the one area where the most substantial gains could be found.

26 May 2003

I have been pushing the thought that cheap resources is a competitive advantage for Russia that I started to miss the point. Its been written below from time-to-time as I worry that Russian technology companies will not make it out in to the big wide world. Cheap is good, but more important is a technology that really addresses significant problem and a management team that will make it happen.



The arguments in this article succiently encapsulates the problem for the super-large IT companies; they are too large to innovate but have yet to work out (fully) how to make the most money from their brands. The Economist IT Review (week May 10-16) explains it out more eruditely than I can. This has to be an opportunity to small innovative companies with products - let HP, IBM et al sell the services and products from innovative companies through partnership, OEM and acquisition.

Their other option was to get smaller, more focused and more innovative however, that does not exactly fit the fee earners aspirations.

13 May 2003

12 May 2003

Most Tech Sectors are Joining the Service Evolution :: AO

I have been meaning to write for a while on the product / component model versus a service driven model. The blog above made me think some more about this so maybe it�s a good thing that I had not attacked the issue previously. In common with most early stage VC�s much time in evaluating a businesses prospects are spent looking at its �to market strategy� or how will it sell this great product.

My thinking evolved as we reviewed a follow-on investment in a NGIN product / component company and tried to attract other investors. To a man (strange thing about VC investing) they all wanted the Company to invest in building out its service business. The Company stood firm � said no and is bootstrapping itself to profitability. The Company�s view � correct in my view � is that in large telecom solutions the system integrators / service providers will be the big companies: IBM GS, Ericsson, Nokia etc. They are not alone in addressing services as the panacea to the capex drought. It is in the services business where the market is truly crowded � if you are in any doubt ask LogicaCMG or CGEY. Providing the components that build the systems that these service providers are going to install makes a lot more sense than competing in the service business.

I should have hit the Blog This button on an earlier announcement of funding for AePona, another in the OSA / Parlay space. It has a huge service infrastructure � 100�s of people supporting, installing and building apps for a substandard product. Its service guys are going to become disillusioned that they are competing with better technical products that are available across multiple platforms, and they will be tied to competing in tenders where there product fits � AePona neither becomes a best-of-breed integrator, nor a best-of-breed product provider. It�s pretty damn good at marketing though.

Then as I pondered whether this was a telco specific problem, a company in an entirely different space says that it will be a preferred provider because its competitors sell both sub-systems and full solutions.

In conclusion � technology companies can compete by providing better technologies. Service providers will compete by packaging those solutions and making them (very) relevant to the end user. I will stay clear of service strategies; it is too frightening to compete with IBM and HP�s service delivery arms. That leaves the investing question � is there enough left to make good returns on product / component businesses. The logical answer is yes if the entry price is right.

25 April 2003

In Search of Russia�s Great White Hope

An interesting week; whether it is spring in the air or just the natural course of things but since I last put fingers to the keyboard the world seems to be picking up (whilst at the same time the opportunities for raising funds seem to be further and further away.) It always a good week when the number of investment opportunities in the inbox that get you excited is greater than 2 � and 3 is 50% more than 2.

Also added to the pile this week is the latest contender for Great White Hope in Russia�s tech world. Russia�s tech world, whilst undoubtedly intriguing, is lacking the one or two home runs that will bring the cash to the market that will allow the market to further develop. A virtuous circle; or which came first�.

One of the principal reasons for this is the lack of management expertise in Russia. Indeed it could be said that even those tech entrepreneurs who acknowledged that what they don�t know would be a good start. Thus we are all looking for the poster child that can be shown off to the investing public. There have not been many pretenders to the crown and most have proven to be flawed. Flaws can be forgiven if it returns are stellar. In these more straightened days a manager who builds a good tech company that offers real value will do.

The latest poster child will have to remain nameless for the time being � I want to invest in his company. As many England football managers have found being built up by the press, in this case the cognoscenti, is a forerunner of being torn apart by them (or sleeping with Ulrika Johnson.)

19 April 2003

FT.com Home Global - Yushenkov Murdered

I spend my life telling people its safe to invest in Russia, and then this. Odds on that its linked to FSB are deeply involved and even more likely that neither the killers or, more importantly the people who ordered the killing will ever be brought to justice.

18 April 2003

So much for not having too many days between blogs - one month later:

The snow has finally melted and the outside temperature has finally risen above zero for a week on the trot. Maybe that is the driving reason behind what feels like a wave of investment tourism � at least for Russia. The ubiquitous Esther Dyson is in town meeting morning, noon and night. The daughter-in-law of one of the founding fathers of US VC investing is looking to see if her Russian roots and Californian location can drag something out of Russian tech that has evaded the rest of us so far. Meanwhile, the founder of Flintstone Technology (a real tech transfer incubator) is back in Moscow working out how not to invest in tech but take advantage of the booming retail sector. Those in the know believe that it is down to boredom with a very dull rest of the world.

My conviction that excellent and cheap Russian technical assets (scientists and programmers) really do make a difference to returns is starting to be borne out. I am looking at a deal that requires $8mn to get to break even � that�s a lot of expensive European management � if the R&D centre was moved out of Russia you could add a another $4mn (minimum) to the bill. The minimum post-money (fully-diluted) is going to be $12mn, more realistically $20mn (options are expensive in return dilution.) Assume that a VC expects a minimum of 5x cash-on-cash � that�s a minimum exit valuation of $100mn. The VC world remains fixated by finding the next $1bn company, the reality however is that investors returns come from a range of reasonably successful companies and not too many failures � there aren�t that many VC-backed companies being sold for in excess of $100mn today.

Still the question remains are there enough Russian tech companies to build a portfolio of $100mn companies?

12 March 2003

Don�t want to have too many days between blogs � it backs up the ideas. Today�s is the big one; is it possible to build a business investing in Russian tech? It is after all what I do for a living and gets me out of bed with more or less a spring in my step every day.

The facts (or as many as you can get in the Irish bar at Moscow Airport waiting for a delayed flight); there are today no successful examples of Russian built technologies that have become $1bn companies. There are a number of (mostly) ex-Russian-entrepreneurs who have built great companies � Sergei Brin (Google,) the guys at Parametric Technologies, Paragraph (Stepan Pachikov,) despite the fact that Transcriber drives me insane daily. Then a number of more or less successful companies of which the latest is Optiva, founded by Pavel Lazarev. Should the fact that it took him 10 years to get to Series D be really frightening?

The facts continued; the number of Russian tech companies that cause the hairs on the back of your neck to really stand up is, well, one every blue moon. Not a great hit rate. Maybe the tech is great, but investable tech cannot exist in isolation from its market. It would be fair to say that it�s pretty difficult to build a tech business if you don�t really comprehend the market you are addressing.

One of my favourite bizarre investment opportunities is a holographic storage company in Akademgorodok in Novosibirsk � go east from Moscow and keep going. Two strange Professors doing some of the coolest research but with little if any contact to Moscow, let alone to the rest of the world. How are we going to get them to build products? Other, that is, from paying them a living wage and taking the IP and running to the Valley.

So maybe we could do 3 deals a year � can we make long term money on that? It is clear that there is some very cool technology however, getting it to be accepted is unbelievably difficult � to describe the tech world as parochial would be as correct as describing the UK as a class ridden society.

With only a few investors actively targeting Russian tech the opportunities for spreading the word are few and far between.

Are we doing the wrong thing?

04 March 2003

I suspect that it is the way with the rest of the world but it does not make it any more right; demand for reasonably priced voice and, particularly, data communications is growing rapidly. However, the market is being held back by the incumbents who are more interested in providing communications to high end corporate customers than tracking down the dispersed SME market, but still insist on making it difficult for others to enter the market. Note that in Moscow / Russia incumbent has a slightly different connotation to the rest of the world - incumbents may be CLEC's but if they have the right level of political support they very definitley display the same qualities of boneheaded denial of market opportunities that their bretheren in the rest of the world have.

Its not as though the basic infrastructure does not exist. In Moscow, which is not like the rest of Russia, the city level backbone exists; its the copper over the last mile (500m?) that is lacking. Thus a potentially lucrative market for broadband wireless serving SME's, consumer outlets and high end retail (believe me there is enough of it.) An example; the Sistema Telecom controlled MGTS (Moscow City Telecom Network - THE ILEC) recently raised carriage prices 9x for Golden Telecom, Moscow's leading business CLEC - economic rape - especially as MGTS would never be able to offer even the paltry service levels of Golden Telecom.

There is no shortage of mom & pops playing local games; not big enough to draw the attention of the big boys, but also not big enough to generate inetrest from the financial community. Strikes me that one of the easiest investment cases to make in Moscow today is aggregating all these mom & pop's to create a really viable ISP / WISP.

Whilst Russia may have one of the most theoretically liberal telecom markets in Europe, the reality is that the incumbents are determined to repeat the mistakes of the west, only without the debt.

03 March 2003

First blog on Ruminations on Russian Tech. Not that it is limited to Russian tech, more the thoughts that strike me as we wade our way through the myriad of investment opportunities available. We, Mint Capital, are investing in tech and media opportunities either in Russia or made available and fundable because the quality of Russian programming provides vastly superior price / performance or finally, but unfortunately, less frequently due to brilliant Russian inventions that are available to the rest of the world.

Just to prove that this is really more of tech thoughts with a Russian flavour first thought relates to the closure of Red Herring. Can't remember when I first signed up, and I am not sure how relevant that is, however the last 2 editions sit only partially read in my briefcase along with a pile of other partially interesting material. That is relevant. It was expressed well by Glenn Fleischmann on his 802.11b Yahoo Group - I shamelessly quote "The author now provides an example of why listening to the company you're interviewing too closely causes you to drink the blue zombie soup and repeat their tropes.". Some of the thoughts were insightful, the editorial frequently was. The principal pieces were too often, especially recently the usual repeats of the main line views being espoused.

As an example; surely there could have been few magazines closer to the VC community than RH. Why then mindlessly repeat the quarter-by-quarter performance type analysis of the VC industry repeated in the mainstream press? Surely it was incumbent on RH to point out the crap investments that have been made by all of us and then go on to point out that in mainstream VC investing, early stage can take and usually take 5+ years to come to fruition. Portfolios valuations will generally look lousy during the first couple of years and then, assuming you did not invest in 1999, pick up.

The same basic lack of analysis plagued the recent piece on Cometa; suggesting that Boingo builds out infrastruture as opposed to aggregrating what is there. Its rubbish and we were expected to pay for it. The same is true for far too much that poses as tech journalism - it just reports without insight, or far too frequently, knowledge. Celebrity bloggers may be nice but they generally don't say anything.

The last shot at journalists is fired at Dan Gillmour; petty cheap shots may be amusing but as you are an employee not an at risk owner serve to make you look small not clever.