Government fund of funds
Development institute of the Russian Federation

Press about RVC

RVC Should Learn How to Attract Private Money

12.10.2017
Source: Kommersant

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The head of RVC Alexander Povalko about the new strategy of the development institute

The General Director of Russian Venture Company (RVC), Alexander Povalko, in his interview to Kommersant told about the problems of supporting innovation in Russia and shared plans to create new funds while reducing the share of the company by attracting private investors.

— You headed RVC in December last year. What goals were set before you, what restrictions were indicated?

— Before my arrival, RVC did not have a general director for quite some time, there was an acting one. Since RVC plays an important role in the project office of the National Technology Initiative (NTI), this situation became unacceptable at some point. When a person is not appointed, he generally seems to be trying, but at the same time, the prospects are unclear to him. I left the Ministry of Education and Science, and in December, I was offered to become a general director with the words "go and figure out, and make it work." It was critical for us to launch a normal process to support NTI projects, it was very important to return RVC to the active role of the investment institution.

— How would you assess the situation in RVC at the time of your appointment? How difficult was it to form a new team?

— We have almost completely updated the management team since then. In the former team, the people were professional, they had worked for a long time for RVC even in the field of state administration and development institutions, but due to various reasons, they were mostly focused on themselves. As a result, the average level remained with the lost motivation; therefore, it was impossible to keep the team in suspense for half a year and keep its motivation. Although most of them, even though having lost some goal setting, were still performing their work. It was important to drag them into real tasks, to destroy their old attitudes.

— How difficult was it to build work with other development institutions, in particular within NTI? Did you manage to do so?

— NTI directly concerns RVC, as well as VEB, as there are mandates and resources have been announced. Others admit that this is an important story, but to abandon all their business and engage in NTI. Do not make me laugh! However, the process is still moving gradually, we manage to agree somehow. And on other projects — ecosystem, venture — we have more joint promising projects.

— What changes are expected by RVC as to NTI in accordance with the new strategy of the company? How much will you be free to distribute funds within NTI?

— The subject of NTI as a state megaproject touches on all the activities of RVC, and not only the function of the project office and this is an important adjustment of the new strategy. As for funding, there is a state subsidy, this money is allocated in the draft budget, and the distribution rules are defined. However, NTI is evolving, and new entities are emerging, in particular, this year, the university competence centers will be launched, the so-called infrastructure centers, that is semi-professional industry associations, that will become the centers of development of the NTI road maps. In addition, it is planned to create a university of NTI, it will be a new format of education for a large number of people on the basis of an online platform.

— Will it require new funding?

— In the meantime, we are working with the previous amount of funding. We have starting monetary funds for the next year (financing has been adjusted), and for the subsequent years it is kept at the same level that was provided for in the budget. When distributing a subsidy that goes to support projects, our task is to pack them, pull them up to internal standards, conduct expert assessments and submit projects to an interdepartmental working group that decides on their support. The second source of funds is the capital of RVC, which goes to the formation of venture funds — here we are freer.

The hypothesis is this: decision-making on projects by the state in the person of even the most advanced officials carries certain risks, but the business and the market know where to go and how to develop. Our task is to look for people who are ready to receive this support from us. Cooperation with the state requires some preparation.

— Will the RVC mandate change within NTI?

— RVC remains a project office, but a set of support tools is expanding, because giving money is a very simple, primitive and generally not the most effective thing. It is much more important to create conditions.

It is believed that the number of projects is not sufficient, but it is not. We have a huge country; most people have higher education, different qualities, but nevertheless... There are people, who make projects, but they are now incredibly mobile, they get up and go, so it's very important that they feel comfortable here, even despite our climate.

— How does the new strategy compare with other documents describing the long-term development of the Russian Federation?

— We have several basic documents that are somehow related and affect the activities of RVC. All of them contain a common prerequisite — for the CSR, among others, the Higher School of Economics, and the Ministry of Economy. All these documents are built around the understanding that if we do not have an economic leap in the near future, we will be left with nothing. There is an understanding that a technological breakthrough is necessary, it is the whole economy that is tied to it, it is necessary to somehow arrange the transmission of the technological backlog to the market.

In addition, within the framework of the law on strategic planning in 2018, a strategy for the development of the venture market should also be developed. The basic messages of the RVC strategy are that the venture market has been launched, but has not passed to the state of a mature stable market. The gaps were identified that are associated with this and describe the tools to overcome them. This involves working with other regulators. For example, one of the main institutions that invest in venture funds and funds of funds in the West are institutional investors, pension funds. It has been permitted to invest a small share in a limited range of conditionally risky instruments, but not yet in venture funds. This will require the decision of the Central Bank; there are some joint ideas.

— When can the situation change?

— It is too early to talk about it.

— There is a lot of talk in the market about the shortage of venture funds' withdrawals from investments, including due to the fact that state companies are the largest consumers of technologies. Their innovative development programs do not successfully stimulate this demand. What else can I do?

— This is a difficult question. This is not even a matter of monetary motivation: if we reduce everything to management, we will only get a simulation of the process. Gradually, new people come to the state-owned companies, who are more advanced, less inclined to the thesis "we know everything better than everyone else and know how to do it better than anyone else." We have 140 million people in our country, and another 7 billion in the world; therefore, saying that we are smarter than everyone else is a mistake, simply because of the incomparability of the scale. When people in state-owned companies understand that small start-ups can be smarter than huge collectives can, then they will more actively monitor this. For example, Rostech bought several start-ups, and not just lured the teams, but it develops them as businesses.

Now we are negotiating the creation of corporate venture funds with Roskosmos, Rosatom, UAC, USC and Rostech. They have different approaches, some try to slide into the simulation, others approach very seriously and the team is selected, and the projects are looked at, and the size of the funds is quite decent planned.

— What does RVC co-operate with Rusnano, RFPI, Industrial Development Fund, and VEB on?

— With Rusnano and the Far East Development Foundation, we are launching a joint venture fund for projects in the Far East. With Skolkovo, we agreed to synchronize the regulations so as not to duplicate the support for innovation. It is more difficult with VEB, however. They are very large, have many directions, but for us the key task with them is to build a mechanism for financing projects within NTI. As they enter projects at higher stages of development, building a normal joint procedure to search projects and make quick decisions on them is also a way of obtaining the next rounds of financing, and for someone — a way of getting out. Now we trying to agree on internal procedures.

— Does the budgetary consolidation limit you? The strategy of RVC sets the goal of increasing the volume of funds to $3 billion, which will require additional capitalization...

— I always feel these limitations — both in the situation of consolidation, and without it. Yes, this goal will require extra capitalization, but this process is already progressing — it is more about the acceptance of additional money under management. It has been decided to form a venture fund to support NTI projects, and we need to make one fund by transforming our existing subsidiaries, and the second one will be financed directly from the subsidy.

— What will the volume of these funds be?

— The state part — up to 1.5 billion rubles, and the total amount — up to 3 billion rubles, for "seeding / late seeding" projects this is a sufficient amount.

However, the ambitiousness of the task is not so much to persuade the budget holders, but rather that RVC should learn how to attract private money under its management. People need to be convinced that the interests of the state associated with different assignments will not conflict with their expectations on profitability. Yes, we are working to develop the market, which implies a relatively low yield. The available amount of funds under management allows you to maintain the market at the current level, but it is not so large as to grow and move to the desired level.

— The volume of venture investments has been decreasing in recent years...

— and the word 'decreasing' is put mildly. It has just collapsed. However, the venture market is relatively small everywhere. The volume of venture financing in leading countries is 0.4% of GDP. In Europe, an average of 0.2%, while in the US, for example, according to various estimates, companies that have received venture financing, today provide more than 50% of total capitalization.

— How do you plan to attract private money to the funds? The market is small, and many funds prefer to invest in projects that have the opportunity to attract the next round abroad...

— It is a difficult question. The contradiction is that a successfully developing start-up inevitably goes to the foreign market, and we as a development institution are responsible for the development of the Russian economy. The value added should be created here, but for this, you need to do everything to make it easy for people to do it, even if they work in foreign markets.

— Will the RVC's fund management policy change? It was announced that ten new funds would be created by 2020, three of which you agreed to create together with Skolkovo.

— These three funds have already, or rather, we have prepared the documents, the two funds are fully formed and operate, and as for the third one, biomedical, we still have questions. The starting concept was not fully thought out. It will be necessary either to reorient this fund, or to close it.

— What is the problem?

— It is very small. Biomedical projects are significantly more difficult in terms of investment than IT and even hardware projects. Although hardware projects at some point begin to rely on the fact that they need to create a production, but if there is a prototype, there are technologies, in principle you can find the means — turn to VEB, or the Industrial Development Fund. And in the biopharm, at each stage of the test the project can be unsuccessful, and the cost increases exponentially, with all the tests, including the early ones, quite expensive.

— But we also have large private players in the pharmaceutical market...

— Yes, and we have funds with these companies. The R-Pharm fund is three years old, and the first exit has already taken place. There are not so many projects; therefore, non-standard solutions are needed here, possibly due to integration with the programs of the Ministry of Industry, FAO and universities. There is no any simple solutions like "we give you some money, go and have fun".

— In which areas will new funds be created, mainly under NTI?

— NTI for us, of course, is a priority, and the first funds one way or another work in the interests of these markets. Funds associated with Skolkovo within the mandate of RVC are required to invest in projects in the NTI markets. However, in addition to supporting projects, it is important for us to support management teams, which, like start-ups, tend to migrate to where they feel better and our task is that they do not lose the Russian focus. Hence, we solve several tasks by creating these funds.

In the pipeline of our funds, there is also a project that builds its business model in cooperation with universities, but not with one, naturally — there are not so many projects in our universities. We are talking about consolidation and networking. The role of the fund is to collect projects: there are pieces of technology in different universities and they need to be gathered as a mosaic. On a very small scale, this works for one Tomsk University, but it is not serious yet. In reality, chances for these projects to become a success are slim, but when they are gathered — they may succeed, especially if there are sensible leaders running the business. In the previous strategy, there was a notion of "university funds", they say, if they have it in Stanford, we also should have it — the only problem is that the amount of funding in our universities has nothing in common with the one of Stanford.

— How will the share of RVC in the capital of funds created with the participation of the company change? It exceeds 60% now.

— We reduce our participation in funds and when creating new funds, we intend to limit it reasonably; we do not have a goal to give somebody the state money to be managed in a faked way. But there is a goal to form a market; people with their money should come, they answer not to the prosecutor's office, but to their investors.

Into the funds of early stages, we plan to attract up to 3 billion rubles, of which the share of RVC will be up to 50%. In heavier funds — up to 6 billion rubles, the share of RVC is up to 30%. We expect that, on average, the share of RVC will be less than 40% for new funds, and in the aggregate we want to gradually reduce it to 50%, given that we now have a significant part associated with subsidiaries, where the share of RVC is almost 100%.

— What does the optimisation of investment in RVC assume?

— Speed. We have very long preliminary and interim discussions. When you are "receiving projects," you do not have a clear understanding of what you want, therefore, it takes you long to select projects. Now we have formulated priorities for ourselves: in NTI, we want funds that work with end-to-end technologies. It is clear with whom and what to discuss, in addition, we are much more rigidly fulfilling our commitments.

If we talk about funds that are created with market players, then we are LP (limited partner) — a partner with a conditionally limited liability, we participate in the investment committee, in some cases we have the right of veto, but with escalation — the decision can be made at a higher level, of course, not to block the entire work. However, we are not responsible for building an investment process, selecting projects. Where our funds are conditionally directive, our position is slightly more rigid; in the places with more market conditions, we transfer more authority to the management teams. Directive funds are foundations, for example, Skolkovo, here we have a leading voice, and we are in the role of the main LP. For new teams, our participation is slightly more stringent, because they involve higher risks. There are no serial investors on the Russian market, but if a team created three funds, it means that they understand how this model works — they are not just lucky.

— You headed the working group in the direction "Formation of research competencies and technological reserves" of the program "Digital Economy of the Russian Federation". What are the tasks for the working group?

Our partners in the working group are Rostech and Rosatom, both corporations decided not to concentrate everything on themselves, and agreed that the program should be broader than, for example, the digital economy of Rosatom. It seems to be a trifle, but in fact, it is a big change. We must make such a transcript of the road map and convince everyone that the new tool we are proposing will contribute to the solution of the goals set. The task of the working group is to determine the tools and form the project budget.




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