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Whither Entrepreneurship in Russia?

by Stephanie Marrus at 18/01/2012 10:28

Russia knows it needs to diversify. With oil and gas representing two thirds of exports and breakeven for the 2012 budget requiring an oil strike price of $110, Russia is extremely vulnerable to changes in commodity pricing. The threat of world recession has led some analysts to postulate a dramatic reduction of oil price from $109 in 2011 to $60 in 2012, Bloomberg reports.

This is not good news for a country already running a budget deficit.
The perils of one- sector dependency are well documented. So is the solution – create commerce in other sectors. Scalable businesses born through innovation and entrepreneurship are badly needed.

Yet entrepreneurship in Russia remains an elusive goal.
There are many reasons for a dearth of successful ventures in Russia. Intellect isn’t one of them; there are plenty of smart, educated technologists with PhDs. Instead the deficit derives from lack of entrepreneurial competency, government interference and missing a supportive ecosystem.

Few Russian startups meet the international standard for funding new ventures. Many ventures begin as academic technology projects. A technologist or PhD student has a technical problem in mind, develops a solution and creates a “company,” often more like a project. The fallacy is that there may be no customers for the solution and hence no business model. Without a viable business model, there are no funders.

This dynamic was apparent at a recent conference in Silicon Valley focused on Russian entrepreneurs.

Russia’s budget expenses and revenues for 2012-2014

© RIA Novosti. / Станислав Сырецких

The State Duma has adopted Russia’s budget in the third and final reading

Sixteen companies were chosen to travel from Russia to Silicon Valley to present in a business plan competition and hopefully to attract U.S. venture capitalists as funders. All but one of the 16 businesses suffered from the same weakness – there was no evidence that customers wanted to buy their offering. These were technologies and ideas in search of a market.

There was one clear winner who ended up with first prize. The entrepreneur had spoken to over 100 potential buyers and was able to validate his business model. He presented customer input that supported his approach. Unsurprisingly, he had an MBA from a top American business school.

There are other reasons Russian entrepreneurship has not taken off. For one, Russia’s history discourages entrepreneurship. Until the early 1990s, it was criminal to start a company. Even today some entrepreneurs fear for their lives.

Entrepreneurs wish the government would just leave them alone. The view is that when the government intervenes to help, things get worse. Burdensome regulations make it difficult to operate.

Corruption, lack of patent enforcement, rule of law issues and lack of transparency discourage investment.
English-language skills are lacking. Any venture that hopes to come to the U.S. or Europe for capital must be fluent in English. Skolkovo Foundation recently brought 12 of their 100 Information Technology companies to the Valley for a chance to pitch. Were they chosen on merit? No, they were the only ones who spoke English.

Add together the cultural factors that derive from a long anti-entrepreneurial history, government restrictions, lack of entrepreneurial training and a Russia-centric focus, you have a formula for failure.

Most young people aspire to a comfortable job with the government or at a bank, not to taking the unknown and controversial path of starting a new venture.

Foreign venture capital is loath to enter this scene. President Medvedev visited Silicon Valley in June 2010 and told his audience at Stanford University, an epicenter of the Valley: "Unfortunately for us, venture capitalism is not going so well so far… No one wants to run the risk… It's a problem of culture, as Steve Jobs told me today. We need to change the mentality."

For Russian entrepreneurs to compete in the international marketplace, they have to be educated on the expectations of professionals in the field and deliver to that level. They have to think globally, understand the customer, develop compelling business models and speak the language of global business. None of these factors for success relate to billion-dollar real estate plays. Success will only come if there is entrepreneurship education, effective government policy, a supportive cultural environment and an entrepreneurial ecosystem. There is a lot of work ahead.

Stephanie Marrus is a business consultant in Silicon Valley, California who teaches and mentors entrepreneurs globally and is an adjunct professor at St. Petersburg State University Graduate School of Management. The views expressed here are her own.

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