PHLburg Technologies, Inc.

Where Has the Good IT Gone?

April 12, 2005

By Sveta Skibinsky
The St. Petersburg Times
     
Imagine it — an investment fund in Russia that is ready and willing to invest $1.5 million into the country’s high-tech companies, but it simply cannot find a suitable recipient! Is this a prince charming of funds or a super-selective sugardaddy?
Most investment funds operating in Russia say that they are looking to invest in innovative IT companies with potential to grow into a global business. The expectations are pretty high, but since there are over 40 such funds working in Russia at the moment, something in the domestic IT sector must be catching their eye.

In a country where experts cite a lack of capital as the major obstacle to development in the fields of science and technology, a newly formed U.S.-based fund recently highlighted the other side of the investment problem. The fund said it simply lacked information about potential projects.

“The fund plans to invest $1.5 million into two or three hi-tech companies at an early development stage and ‘grow’ them for further resale or to attract other large investors,” said the press statement of an American venture fund, founded in March by PHLburg Technologies, Mirantis and Landbridge Capital. The companies behind the fund operate in the fields of venture financing, international business organization and technology commercialization respectively. They say their fund’s key difference from some 40 others operating in Russia comes in its balance of responsibilities. The American backers will take
care of all the marketing and promotional activities, while a Russian team
will oversee product research and development. The only obstacle the fund declared was a lack of potential projects. “Obtaining information about technology projects that need financing and would correspond to our criteria has proved difficult. The difficulties stem from the lack of infrastructure development in the sector of innovation technology in Russia,” according to the fund’s press statement.

Seek and You Shall Fund

A lack of infrastructure and investment culture in the country has long been blamed for the comparatively low investment levels in the Russian IT sector. “Yes, there are no databases like the [British] Library House, where companies can post their ideas and financial needs for investors, but it doesn’t mean the firms are not there,” said Albina Nikkonen, director of the Russian Venture Capital Association (RVCA). Nikkonen said the lack of such databanks resulted from the considerable financial costs associated with their maintainance, and more importantly, from a lack of intellectual property rights protection in Russia, which makes companies fear publicity. Nikkonen added that the search for
companies involved in innovative technologies takes time and effort everywhere, and investors cannot expect to be served potential companies on a platter. “Company search is a problem everywhere, not only in Russia, which nevertheless has plenty of ‘brides’ in the shape of companies with good potential,” she said. Although Nikkonen had not heard of the new fund, she welcomed its appearance on the market. “But, if the fund representatives sit in Moscow, while a worthwhile company is stuck in some forsaken little place, there is no way to reach them without actively participating in the venture network,” she said.

Picky Prince Charming

By no means a little barrier to investment could be the fund’s selection policy. After all, there are plenty of technology enterprises in the country. So, what kind would suit the new venture fund? In an e-mail following the fund’s press statement, the president of PHLburg Technologies, Neil Godick, said that the fund was looking for companies that must first and foremost be working with breakthrough technology that could be brought out onto the world stage and turned into a global business. “We acknowledge that there are many start-up companies in Russia, especially in the north-west,” Godick said in a telephone interview. He said that the fund’s partners in the north-west and Moscow had visited some start-up enterprises, but the fund was more interested in companies whose technology could be taken as a basis for a global company. Not too much to ask? Apparently not, say other venture fund managers working on the domestic market, although they also support Nikkonen’s position: all good things come to those who wait and plan. “Russia has high-potential technology projects and people that are ready to turn the technology into a marketable product,” Dmitry Lisenkov, manager of Russian Technology Fund, said in an e-mail. The company, backed by Finnish and British investors, has been involved in several projects on the local market and is in the process of preparing one company for an IPO. “The right selection process and successful project supervision can help a company become a successful project operating not only in Russia but internationally within a reasonable amount of time,” Lisenkov said. The formation of a fund that is ready to invest in Russian venture companies at the start-up and ‘seed’ stages was especially welcome, Lisenkov said, given the “serious lack of venture capital in the country.”

Solution: A Stroll in the Park

What the new investment fund hopes is that the information gap will be closed once Russia develops a series of techno-parks so popular in the U.S. and India, and which have recently won the backing of state officials. “It seems Western investors finally believe in the government’s intentions of reforming the science and technology development. And it is specifically venture capital that should at this stage become the economic tool that will ensure innovation growth,” the fund’s press statement said. Earlier this year the Kremlin announced its intention to provide taxbreaks for companies operating in technology parks or ‘zones,’ while Information Technology and Communications Minister Leonid Reiman
signed an agreement with the city government in March to create one such zone on the campus of St. Petersburg’s Bonch-Bruyevich telecommunications institute.According to the ministry’s figures, investments in the future park will range from $75 million to $100 million in order to foster the development of so-called mini ‘silicon valleys’ in Russia.

Raring to.. Wait?

However, unless the American Venture Fund finds a company that meets its criteria and is at a breakthrough stage within its field, the $1.5 million that it announced as “ready to be invested” may go nowhere fast. When asked about the urgency in the fund’s statement, PHLburg Technologies’ Godick kept the reply quite cool, calm, and collected. “The capital is not burning a hole in our pocket. We will be patient to find the best chance,” Godick said.
Hopeful Cinderella ‘brides’ may have to wait their turn a while longer.

Techno-Parks

Apart from the creation of a special technology zone on the campus of St. Petersburg’s Bonch-Bruyevich telecommunications institute, at least three other techno-parks are expected in the city, experts say. One will be based at the Institute of Optics and Mechanics (ITMO); another will be created by software association Russoft on a two-hectare plot near the Pionerskaya subway station; a third is a project planned by Noble Prize winning scientist Jores Alfyorov. The techno-park concept envisages the construction of a modern research and office facility that will have the infrastructure and telecommunication networks necessary for the operations of innovative IT development
companies. It would also facilitate the identification of burgeoning companies with high potential by investors.


This article was originally published in The St. Petersburg Times, http://www.sptimes.ru/