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Russian startups – no worse off than German ones


Russian startups – no worse off than German ones

MassChallenge, a four month global startup incubator program in Boston, Massachusetts, comes to an end on Wednesday. 

Among the 128 teams that entered the incubator in June were four Russian projects:

  • Qbaka, which analyses error messages and notifies site/app managers so that they can keep their sites running smoothly. 
  • SputnikBot – a coding game that teaches children the basics of programming.
  • ZetUniverse – a system that simplifies file sharing on touch screen devices. 
  • DressFormer – an online 3D-fitting room where people can ‘try on’ shoes and clothing before buying them online. 

The teams were guided through their time in the incubator by their mentor, Axel Tillman. Axel is a serial entrepreneur with more than 25 years of entrepreneurial and senior-management experience with high-growth, venture-backed companies. He is currently CEO of the Russian Venture Company’s US branch, RVC-USA.

With the competition nearing its climax, we asked Axel about the progress the teams have made and about the challenges faced by Russian startups in general on the global market. 

Qbaka has reached the final 26 - does it have a chance of taking home a prize? 

Qbaka is an excellent company and if the final judgement committee sees it as well, by all means Qbaba could take a prize home.  They have a business model, they have paying customers and they have a going-to-market strategy.  I love these guys, they made great progress.

What about the other projects? How did they get on?

All the teams made great progress. The biggest disappointment was Dressformer, because although they have excellent technology and excellent partnerships the judges felt that they didn't demonstrate the business model and viability well enough.  However, this disappointment could be a positive thing if it helps them to understand the importance of the business model. If they can do that, I’m sure that they will make it in the real world. 

I am also convinced that Zet Universe will participate in shaping OS platform appearances in the future. This is the future of computing, but again to get there they need to work out how to secure paying customers. I told them this on day one when we met three month ago. But great things take time.  

Lastly, Sputnikbot is a great cause, enticing children to learn programming.  However, as an educational gaming company they will have to convince investors that they are not a one trick pony.  Once they do that, they will have a breakthrough.  So in my eyes they are all winners and they should take MassChallenge and what they learned to heart - and run with it.

In general, do you think that life is harder for Russian startups than it is for American ones? 

Yes I do. In Russia there is no natural ecosystem - yet. In my experience as an entrepreneur I have benefited enormously from speaking to other CEOs and industry people when facing problems and challenges.  Unfortunately for Russian startup companies entrepreneurship is rather young in Russia, so to find people with detailed business and marketing experience is much harder. 

Having said that, in terms of access to people with business experience German entrepreneurs are not much better off than Russian ones, and Russian startups benefit from more government support than German ones. RVC has been allotted $1 billion to invest in companies and develop the ecosystem, while Skolkovo plays an important role. It’s also very easy for Russian startups to get scientific advice. 

Russian projects also need to remember that success doesn’t happen overnight – even for American teams creating a successful project is hard work. 

It is widely believed that Russia lacks an entrepreneurial culture. As part of Mass Challenge the projects had to prove their marketing and management skills - do you think that the Russian projects were at a disadvantage compared to, say, their American counterparts?

Russians, like pretty much everyone else in Europe, lack marketing and entrepreneurial management skills. However, it is a misconception that everything is rosy here in the US. On average as few as 1 in 20 has their GTM (Going to Market) strategy correctly figured out, but that translates into more success stories because of the sheer volume of startups. 

All companies at MassChallenge arrive with that "handicap" and the smarter ones adapt with the help of their mentors. Qbaka is an excellent example.  

Generally speaking, the one main drawback of Russian projects is that they are so technology-oriented, and often fall into the trap of pursuing technology for technology’s sake. For example, last year we had a project that offered blood pressure monitoring with a precision of +/- .001.  They constantly opened their presentation by saying “we are 1000x more precise than our competitors”. We and everybody else tried to convince them that their technology wouldn’t sell unless they could demonstrate the need for this level of precision. Technology doesn’t sell by itself. 

In a recent interview, Alexander Borodich from FutureLabs said that "it is no secret that, in 99% of cases, no American investor will even consider investing in a Russian project." Is that really the case? 

Alexander is partially correct. He would be more correct if he would have said that in 99.9% of cases no American investor will invest into a legal entity residing in Russia.  And it is much less a question of willingness than of legal issues. American angel investors and VC Funds, according to a framework agreed with their LPs, cannot invest into legal entities outside the US. 

There is, however, a simple solution to this problem - a Delaware flip. A Russian company needs to incorporate in Delaware and then reverse merge with the original Russian startup. Lots of investors are happy for R&D to be done in Russia, but will insist on the US residency. 

This is not necessarily a bad thing, considering you need to be present in the US to enter and conquer the US market. Being present in the US also allows companies to take advantage of the top commercialization talent here. How far would have Kaspersky gotten without a Stephen Orenberg? His GTM was brilliant.  

So why don’t more companies do it? There is a chicken and egg problem here. Companies say “if you (a US investor) invest in me, I will incorporate in the US.” But in order to get a commitment to invest, it is often necessary to make the switch first. Incorporating in the US (and hiring US marketing talent) makes companies much more attractive to investors. Startups need to remember that "investors don't look for a reason to invest, they are looking for reasons not to invest."

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