Boom! Is Russia’s Business Angel Market Ready to Explode?

Russia's innovation potential is attracting the attention of European Investors but will it lead to more investment?

Dogged by corruption and instability, Russia was once regarded as a difficult place to do business, but there are signs that  times and attitudes may be about to change for the business angel market within the boundaries of this former Communist superpower.

A quick browse through the Moscow Times yesterday revealed an article about the need for Russia to improve its image amongst foreign investors. The country needs to show the world that it has a lot of pent up potential when it comes to innovation and that it is no longer a difficult place for investment in innovation.

Despite the oft-reported wealth of its oil billionaires, Russia’s VC and business angel sector is underdeveloped in comparison to major economies in Western Europe the United States and Asia. So in a bid to boost innovation in the country President Dmitry Medvedev is rolling out his modernization and innovation agenda which has seen a number of foreign VCs invited to innovation forums and conventions recently.

This may be a sound strategy to boost the number of angel investors within its boundaries, but will it really attract more foreign investment?

The secretary of the European Private Equity and Venture Capital Association (EVCA), Georges Noël, certainly hopes so.  During a conference on Tuesday, he called for Russia to convince European and American companies to directly invest in Russia.

The problem is – as most angel investors are aware – investing in early stage companies is a risky business as it is – even in advanced economies. Russia’s President may have his work cut out trying to change deeply ingrained attitudes among foreign investors on the risks of doing business in his country.

Igor Agamirzyan head of the Russian Venture Company recently spoke of a business angel boom in Russia, which according to the country’s business angels association will see the number of business angels in the country reach between 10,000 and 15,000 by 2015.

In the post credit crunch era, countries are working hard to encourage investment in innovation and encourage investment from VCs and business angels offering a variety of tax breaks as well as setting up special funds for key sectors.

With this in mind, even if Russia goes on the charm offensive it is hard to see how it will attract significant amounts of investment from VCs and business angels beyond its borders. Business angels are statistically far more likely to invest close to home even within the geographical boundaries of their own countries.

There is also Russia’s global economic competitiveness ranking to consider. The main question from foreign investors should be ‘Has Russia got its act together on the world stage?’ The indications are that it hasn’t if the recent world Economic Forum report is anything to go by.

Russia is still an economy in transition and ranks a lowly 63 for global competitiveness behind the Slovak Republic and Sri Lanka. This is because the old problems of stifling bureaucracy and restrictions on foreign ownership still persist. According to the report ‘Competition, both domestic and foreign, is stifled by inefficient anti-monopoly policies as well as restrictions on trade and foreign ownership.’ The country also suffers in the rankings due to insufficient protection of property rights and weak corporate governance standards.

However despite these findings, Russia is regarded as having high innovation potential which, if the conference this week is anything to go by, is attracting the attention of European investors. Russia’s investors have a strong track record for investing in European and US ventures, take the $200 million investment in Facebook for example, but for significant investment to be going the other way into Russia, there is clearly a need to address the shortcomings mentioned earlier.

Until then, Russia has some way to go before it realizes its potential amongst foreign investors.

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  • As recently announced by EBAN – The European Trade Association for Business Angels, Seed Funds, and other Early Stage Market Players, the 12th EBAN Congress will take place in Moscow next spring 2012.
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