Russia’s Serial Entrepreneurs Launch A New Crop of Hot Companies

U.S. skeptics said it couldn’t be done but Natalya Kaspersky built a company inside Russia that today has annual revenues of $500 million and is ranked as one of the top five anti-virus companies worldwide. Now she is on to her next venture, InfoWatch, which is targeting another area of data security. Kaspersky is just one of the Russian serial entrepreneurs who presented their companies to global venture capitalists during a recent tech tour of Moscow, Tatarstan and Siberia. Click here to see the video and read the story.

InfoWatch, a spin-out of Kaspersky Labs, is focused on data leakage protection, a technology that seeks to help corporates keep sensitive data in-house. Analysts estimate the DLP market to be worth $1 billion globablly. InfoWatch is “slowly but smoothly getting ready for international expansion,” says  Eric Domage, a security software analyst at technology consultancy IDC.

InfoWatch’s parent, Kaspersky Labs, is one of several Russian companies that have generated revenues of $100 million or more in the international market. Another is ABBYY Software House, which makes document recognition, data capture and linguistic software and then licenses it to customers such as Canon, Hewlett-Packard, Microsoft and Samsung Electronics. ABBYY founder David Yang also pitched during the 2009 Russia Tech Tour. Yang rose to fame in the U.S. after launching his second venture, Cybiko, a company which made one of the first handheld computing devices devoted to social networking. The company caught the attention of Internet visionaries Esther Dyson and Yossi Vardi ten years ago and raised millions of dollars from AOL before going bust. Yang was on the Tech Tour to promote his latest venture, Iiko, which makes automation software for the hospitality sector.

Evernote, a web service and software application that allows users to collect notes and information electronically and access it through a variety of devices, also presented during the 2009 Tech Tour. The company, which grew virally to 1.5 million users in a year – primarily in the U.S. – was co-founded by another Russian serial entrepreneur, Stephan Pachikov. Pachikov is one of the engineers behind ParaGraph, which made handwriting recognition software for the Apple Newton before being sold to Silicon Graphics in 1997.

To be sure, entering the Russian market still carries plenty of risk. With its rampant corruption, shifting legal environment and competition from deep-pocket locals, the country remains off-limits for some. “Russia has good people and good technology but you need to be prepared and do your homework before trying to do business here,” says Konstantin Fokin, president of the 2009 Russian Tech Tour, which was organized by the Geneva-based European Tech Tour Association.

Still, those willing to take the plunge are starting to see a pay-off. When the European Tech Tour association organized its first event in Russia in 2004 none of the 25 companies that pitched had funding. Since then one company, SJ Software, a VoIP software developer, has moved its headquarters to the U.S., growing revenues from around €500,000 at the time of the 2004 Tech Tour to €100 million, notes Sven Lingjaerde, head of the European Tech Tour. Three other companies are being valued at anywhere from $500 million to as much as $1 billion: Acronis, a maker of storage management and disaster recovery software; Yandex, Russia’s largest search portal; and SWSoft (now called Parallels) which makes virtualization and automation software for mass market cloud computing service providers.

The new generation of start-ups that pitched during the 2009 Tech Tour included two companies created by former members of the Parallels team: Acumatica and iCore Software. Another company which caught the eye of VCs on the tour was Softkey, an e-commerce platform which generated €38 million in revenues in 2008.

While Kaspersky and Yandex have proved that it is possible to build and develop a company inside Russia, most companies attracting outside investment follow the hybrid model, keeping development in Russia and basing management and marketing and sales outside of the country. (For Kaspersky’s contrarian view click on the video below)

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“There has always been skepticism related to Russia but when you look at the quality of companies identified on the first Tech Tour you have to wonder if all this skepticism is justified versus other countries here in Europe,” says Lingjaerde. “Sure there are issues with rule of law and management skills but a Russian company can have a turnover of  only €2.5 million and still be profitable while this is almost impossible with Western Europe and the U.S.,” says Lingjaerde. “There is also an opportunity for mergers and acquisitions and for developing a company in Russia addressing a big local market.”

Indeed, Yandex, the most popular search engine in Russia, has proved that there is a lucrative domestic market for Internet services , paving the way for other companies, like e-commerce start-up Ozon, which raised $18 million in venture capital in 2007 from Switzerland’s Index, U.S. network equipment giant Cisco Systems and German publisher Axel Springer.

It is little wonder then that this time the Russia Tech Tour, which had the support and participation of  the U.S. Russia Center for Entrepreneurship, attracted a variety of interested western investors: Herman Hauser from Amadeus Capital Partners, Alexandra Johnson from DFJ Aurora, Joerg Sievert from SAP Ventures, Adam Fisher from Bessemer Venture Partners and Nenad Marovac from DN Capital.

The Tech Tour made stops in Kazan, the capital of oil-rich Tatarstan ,as well as Tomsk, a university town in Siberia. “The government of Tatarstan is making a big effort to help entrepreneurs and that is why Kazan was selected for a visit,” says Lingjaerde. “The combination of high education and government support make Kazan and Tomsk high potential destinations.”

Tour participants received the royal treatment in Tatarstan. A government entourage met the Tech Tour’s private plane. Police cars with blaring sirens escorted buses of VCs and the red carpet was rolled out at the Kazan city hall, where young men in powdered wigs, silk stockings and brocade suits lined the sweeping staircase, bowing in welcome. The visit was capped off with an elaborate evening song and dance production. “The tremendously warm welcome in Kazan was like a huge sign stating  ‘we are open for business’, “says SAP Ventures’ Sievert. “The energy of the entrepreneurs we met was second to none and this carries an incredibly strong promise for the emergence of high tech companies from Russia.”

The governmental welcome is part of a larger effort by the Russian government to diversify the economy away from its dependence on natural resources. Aynur Aydeldinov, the director of Tatarstan’s Investment & Ventures Fund, was a member of the Russian Tech Tour’s advisory board as was Igor Agamirzyan, chairman of the Russian Venture Company, a $600 million fund of funds set up three years ago by the Russian government.

The Russian Venture Company provides 49% of capital to venture firms that meet its criteria and can raise the remaining 51% of their funds from private sources. Some seven funds have been set up under this umbrella so far, with participation from Gazprom, insurance companies and banks. It also has decided to set up a new seed fund to help close the gap between funds raised from friends and family and the first venture round.

The Russian fund of funds program emulates one called Yozma that worked well in Israel. Yigal Erlich, the former leader of Israel’s Yozma program servers on the board of the Russian Venture Company and also participated on the 2009 Russian Tech Tour.

But it is not just government efforts to support venture capital but the presence of a small but growing group of world-class companies that is attracting investors. Corporate venture arms which have jumped on the opportunities include Intel Capital, which invested in three of the companies on the 2004 Tech Tour and Cisco, a relative newcomer to the market.

In addition to its investment in Ozon, Cisco has invested $30 million in Almaz Capital Partners, a $100 million venture fund founded in July 2008 targeting companies in Russia and the C.I.S. The fund has so far announced two investments: one in Parallels and the other in Apollo, a company that pitched on the 2009 Tech Tour with technology that allows digital communications and social networking sites to effectively extend their services to mobile devices.

One of Almaz Capital Partners’ managing partners is Sasha Galitsky, who was president of the 2004 Tech Tour and a member of the advisory board for the most recent Tech Tour. Prior to his investment career, Galitsky founded and led as CEO five sucessful companies in the software, communications, semiconductor, Internet and security sectors, including ELVIS+, Elvis Telekom and TrustWorks Systems. Galitsky said Almaz will announce two new investments before the end of the year. “A crisis is always a good time to invest,” he says.

Still, while Russia now has a few high-profile serial entrepreneurs and some success stories the numbers pale besides other high tech hotspots with a high level of education and smart engineers, such as China and India, notes Tom Nastas, a veteran venture capitalist who served on the 2009 tech tour selection commitee. And it is not just because of the legal and business environment. “Corruption is big in India and China as it is in Russia,” says Nastas, founder of Moscow-based Innovative Ventures. “The difference is that Russia does not have China’s strong manufacturing base or India’s entrepreneurial user-friendly, customer-friendly software industry so it is taking a longer period of time.”

To emprove the entrepreneurial context, Russia needs to provide the legal and governance framework in which foreign investors will feel more comfortable to invest, says the European Tech Tour’s Lingjaerde.  It is also important that local Russian entrepreneurs get more support and recognition, particularly when they become more successful. “This is an area where Russia could decide to provide a better context than in most European countries where successful entrepreneurs are leaving their country for a combination of tax and media harassment,” Lingjaerde says.

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