Ruminations on Russia

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.

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.

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.

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.)

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.

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?

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?

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.

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.