A New Internet Startup Wave

Pavel Cherkashin
Head of representation Adobe Systems to Russia and the CIS
the Private business angel

Why is Russia with all its intellectual potential, so short on new technology startup companies? Russia has the largest software developer community in Europe and a huge offshore programming business and excellent technical universities, so why can’t the country produce more than just a few tens of technology start-ups annually?

There are several reasons: Firstly, it is still not considered to be cool. When you quit a well paid job to start your own business, people will whisper behind your back “What a loser! He couldn’t make it in corporate world”. Your bank will lower your personal credit limit once they see your name on the list of small business owners; your parents will ask you to think again before “getting into this risky adventure”; the tax inspector will put you under special observation; customers will bypass you, as they prefer larger suppliers and investors will ask for solid collaterals. If you fail in building your first business, you will probably never try again, and will advise all your friends not to try in the first place. In some other markets like California you will get encouraged to try - nobody would think you were weird. You would get support from the government (at least they wouldn’t impede you) and your family, and the business  community would respect your decision - even if you fail and return to being an employee in a large corporation, you have experience of running your own business, and are therefore worth two other guys without such experience.

Another problem for technology startups is the lack of exit options. Business is all about customers who buy your products. If your product is your company itself, that you have watched grow since you planted it as a seed,  you may wish to sell it to somebody who is less risk-addicted and will want to invest in a stable business: strategic or portfolio investors, other larger companies, venture funds or individual investors (through IPO). The global economy offers a wide range of options for serial entrepreneurs to exit their current business and start something new. Russian private investors have billions of dollars in blue chip stocks, but there are very few options for them to invest directly.

Then there is the fact that business infrastructure is not built to support young companies. Every time I get involved with a startup, we have to solve same issues over and over again. Nothing has changed since 1997, when I did it for the first time, some things have even gotten worse. In 1997 we could get bank account right away with a freshly baked legal entry and start the business the very next day. In 2007, we had to prove to the bank that company was not established for money laundering (why else would it get millions of venture investments “for nothing”?). Dealing with legal and tax structure, security, IP protection all by yourself, without anyone’s help, is enormously difficult. There is no mercy for the new kid on the block. If you have never done it before, the odds are you will mess it up.

The bad news is that none of these issues can be solved quickly - it will take years before we will see any significant progress. The good news for the industry is that many talented and bright professionals now have no choice but to try building startups for themselves - opportunities in big companies continue to shrink and salaries are frozen. At the same time, the markets are just waiting for new companies to come and play: new media, social networking, online advertising, e-commerce, corporate automation, online intelligence  offer billions of dollars in efficiency improvement for Russia, and big revenues for newcomers. Large companies are very slow to innovate, while startups could solve those issues quicker and cheaper. In 2009, I saw more Internet startups coming to the market in our country than during whole prosperous decade before. If we keep the trend for a year or two, Russia will soon have new intellectual entrepreneur elite to change our lives.