In the modern era, no one dares argue that venture capitalism as a phenomenon originated in the triangle between New York’s Wall Street, California’s Silicon Valley, and the northern industrial belt of the USA. Moreover, researchers are in no disagreement regarding which organization is considered the first full-fledged venture capital fund.
By all accounts, the American Research and Development Corporation opened its doors in 1946. Other regions of the world within the critical sphere of financial and innovative businesses are still forced to catch up, Russia being amongst them. In recent years, however, a full-fledged generation of successful domestic venture investors have appeared and began gaining strength. Although they cannot yet compete with the numerical leverage of established American founders, they show flexibility and creativity. In some respects, they may already have enough experience to teach their overseas colleagues a few lessons.
The History of the Industry as a Russian Roller Coaster
Just a few years ago, the Russian venture capital market was growing at a staggering rate. In 2017, experts recorded the growth of the total volume of such investments to the figure of $125 million, a great success by its own merit. However, by 2020, that figure had already risen to around $850 million. That same year, however, the venture capital market would be hit by the coronavirus pandemic; by the end, the market had dropped to a still imposing $720 million.
Of course, investment markets are much more complicated than before the pandemic. The profile portal, TAdviser, illustrates the rate of decline in industry activity, uncovering information such as a drop in investment in domestic IT startups by a measured tenfold. Generally, they also suggest that the market is not as bad as this, but there is still an evident decline in activity. However, despite these difficulties, the venture capitalists who had earned a positive reputation while created an impressive, varied portfolio of investments have continued to remain active, which is an encouraging notion.
The Russian venture investment market is divided into three unequal parts, as it is in most other countries of the world. The first sector is private venture capital funds, the second is public-private institutions (the largest of the sectors), and the third and rarest sector is corporate funds.
Most corporate funds operating in Russia were structural divisions of international giants such as Intel, Cisco, and Deutsche Telecom. Against this background, the corporate funds created by Russian market players looked all the more enjoyable. Among these was Oradell Capital from Anatoly Karachinsky, of which was a ‘business angel’ for the well-known company Yandex and also for Medialogia, which later grew into one of the leading Russian media analytics.
We will get into more detail over the practice of another corporate venture fund, Euro Venture, created by the developer from St. Petersburg, the company Euroinvest, led by the billionaire Andrey Berezin.
A Developer with Innovative Ambitions
It was Berezin and his Euroinvest partner Yuri Vasiliev who, judging by all appearances, were the main initiators in creating their venture fund.
All of this happened during the industry’s rapid growth period, though it is unlikely that the experienced entrepreneurs allowed themselves to be carried away by the prospect of turning a quick profit. Much more important than this is that, at that time, the investment company Euroinvest was transforming into a holding company, actively developing a non-core industrial direction.
It was non-core because Euroinvest and its owners saw development as their primary business from its foundation. Resultantly, they built with both their funds and mortgage loans, implementing large housing projects and managing to meet the deadlines and quality requirements of the project. Contrastingly, industry associations have repeatedly remarked on the punctuality and responsibility of the company.
By the beginning of the decade, Euroinvest was outgrowing the real estate development market and began to look for new investment niches actively. This search began with moderate success. For example, the agro-cluster that was constructed in the Pskov Region is still operating to this day. However, it has not become a vast project capable of competing with the main task of holding. Instead, it performs image functions, showing the ability of the company’s management to build its policy flexibly, ensuring sustainability throughout even non-core projects. It should be mentioned that Leningrad Zoo ended up becoming a partner of the agro-cluster; the animals which will be fed with the fodder were produced on Berezin’s fields. Although it is a critical success, it still lies in the same symbolic sphere.
In contrast to the previous example, the story of creating the company’s portfolio out of industrial enterprises turned out to be much more viable and fruitful for the holding. Andrey Berezin and Yury Vasilyev consequently purchased three enterprises: the Svetlana plant, the Rigel enterprise, and the Recond plant. Even at the stage of capital investments in the development of the production base of Svetlana, the owners of Euroinvest had established the idea of creating their venture fund.
Fresh People, Fresh Approaches
In the first information message about the start of Euro Venture, Berezin specified its atypical specialization: the fund will invest in potentially profitable and socially essential initiatives.
“As an investor and a citizen of St. Petersburg, I am interested in creating a comfortable business and social environment in our city. Creative projects contribute to creating a quality social environment and reveal human and creative potential, especially for young people. Here I have to specify that our Fund will be more interested in ideas and projects aimed at enlightenment and education, both in humanitarian, scientific, and technical spheres. This is our form of social responsibility,” he emphasized in 2017.
Such a dual agenda from the fund required particular care in solving the staffing problem. The owners of Euroinvest found an exquisite solution, calling in the head to the new structural unit, a person well-versed in the investment business, but who was not a member of it. The head of the fund was Roman Romanyuk, who, until then, had been known in the northern capital as a long-time editor of the Delovoy Peterburg portal and editor-in-chief of the Expert Severo-Zapad newspaper since 2013.
In the first stage, Berezin and Vasilyev entrusted the total purse to the newcomer was 10 million euros. From then, electronics, new materials, and projects in creative industries were defined as the concrete priorities for their investment.
If the latter direction was taken to instead grow up, then electronics and new materials would appear for specific tasks at the time associated with the need to improve the quality of the selection of investment projects going towards the already acquired Svetlana plant.
The results of connecting Euro Venture to Svetlana’s innovative activities subsequently followed. Just two years later, reports on the successful development at the plant of a unique device for the radiation treatment of oncological diseases appeared for the first time.
The device can hardly be called a development of the plant alone; the doctors of city hospital № 122, scientists from LETI, and developers of robotics from specialized Central Research Institute of Robotics were also involved in the implementation of the project. Just the fact that such a representative consortium was assembled based on Svetlana and under the supervision of Euro Venture continues to speak more in favor of the organizers.
In 2020, the business showed a prototype of the device to Health Minister Veronika Skvortsova. She was told about the device’s capabilities, which significantly exceed those of even the best analogs. Among the capabilities she was informed of, she was then informed of the possibility of using the widget directly during surgical interventions and influencing an X-ray beam to go directly on tumor sites, thus avoiding damage to healthy tissues. The head of the department was more than pleased with what she saw, giving the go-ahead for its launch which is expected to happen very soon. In its current state, the device is undergoing the last of its necessary approvals and modifications.
This is not the only project launched and successfully implemented by the plant with the support of Euro Venture. Based on the same X-ray tubes produced at Svetlana, examples like a device for express diagnostics of breast tumors and a camera for assessing the quality of semen material are being developed today. The latter allows you to see a range of problems, from infections and diseases to seed malformations; all this helps with a high degree of reliability in assessing potential germination.
Some innovations are working on other physical principles. Ultra-short pulse location sensors developed by the plant team have become the basis of devices designed for estimating the thickness of ice. Russian oil industry workers are planning to use them, including a drone capable of implementing the design. In turn, the device for heating the asphalt pavement uses microwave radiation sources. As expected, its use will vastly change the speed and quality of road works because, in contrast to all existing analogs, heating with wave radiation will help to influence the thickness of the asphalt rather than just the surface layers.
Connecting the resources of the venture fund had a beneficial effect on another enterprise of the holding: the Rigel battery plant. The enterprise concluded some strategic agreements after receiving new equipment and engaging with new technological possibilities. One of them was with Almaz-Antey Concern. According to the agreement, Rigel will produce traction batteries for the E-Neva electric vehicles produced by the concern. Another contract with NIAI Istochnik concerns the joint development of batteries for various mobile electronic devices.
From Point Projects to Systemic Influence
A separate point should be made of the cooperation between the Euro Venture Fund and leading St. Petersburg universities. The agreement on the strategic partnership between the foundation and St. Petersburg Polytechnic University Peter the Great gives the university additional finances to opportunistically implement its Science and Technology Initiative program. The fund, thanks to the agreement, has strengthened its expert base by attracting scientists from the University; they now participate in evaluating innovative projects considered by Euro Venture.
However, some facets of cooperation between the Fund and the scientific and educational centers of the capital are not spelled out in the contracts but are visible in practical activities. It is noted that, in recent years, the representatives of both the Fund and the Euroinvest holding have begun active work to attract the best students and graduates of the universities to their projects.
It is also worth mentioning that the Euro Venture Euroinvest bundle is increasingly significant within the educational market. Several years ago, they launched their line of scholarship support for distinguished students and postgraduates within the scholarship framework named after cosmonaut Georgiy Grechko. In addition, some projects in this area were implemented in cooperation with the Leonhard Euler Foundation, which works with mathematically gifted children and other similar organizations.
In the summer of 2022, the holding company, through the mouth of Andrey Berezin, announced the launch of a large-scale initiative to create a new educational institution, St. Petersburg Governor’s Lyceum. The holding is ready to undertake its construction and financing of the current activity, including the payment of teachers’ salaries. The central place in the formation of the lyceum methodology will be taken by experts attracted by Euro Venture. The ambitiousness of the project manifests itself, both in terms of space and staff recruitment. For example, in terms of space, it is planned to build a whole complex of educational and residential buildings for the Lyceum, and in terms of staff recruitment, they plan to attract employees from the best schools in St. Petersburg.
To summarize: in Russia, despite a concise history of existence and development of venture funds as a class of investment companies, some influential players in this market have formed. Many of them, using the support of parent corporations, have not only managed to establish a successful selection process and approval of promising innovative start-ups, but have already become an essential factor in the development of the entire system of science, education, and technological development.
This experience may well be considered as a model for investment practices in other countries, including the pioneers of venture investment format from the U.S. Even in current circumstances with the unlikely chance of an exchange of experience, the situation in the economy and political relations is changing rather dynamically. This means we may realize this potential in practice in the future.
Key Priorities of the Euro Venture Fund in the Field of Science and Technology:
- Digital design and modeling, including supercomputer engineering
- Sector-specific applied programming and automation
- Instrumentation and robotics, including flexible manufacturing cells and robotic systems
- Automation, sensors of all kinds, industrial internet
- Electronics, microelectronics, telecom
- Small-scale power engineering, energy-efficient technologies (aimed at reducing power consumption by industrial, housing, and public utility facilities and municipal infrastructure)
- Additive and hybrid technologies
- Technologies of virtual and augmented reality
- New materials, first of all, composite ones
- Waste processing and reclamation (recycling)
- Mining, metallurgy (medium-format projects), and hydrometallurgy
- Biotechnology (not related to clinical trials)
- Food and processing industry