Kendrick White speaking to ICANN, the International Community Organization of Nizhny Novgorod
Editor's Note: This post originally appeared May 4, 2009 on Kendrick White's blog at the Marchmont Capital Partners website (www.marchmontnews.com).
I had such an interesting set of meetings last week. After long preparations and much organizational work, I finally had an opportunity to meet the CFO of a large industrial group with 10 factories spread across Russia.
While I could find little info on this group to prepare myself, one of our partners assured me that this was a very serious group with hundreds of millions of dollars in annual sales. They made big metal things with lots of electronics inside, nothing secret in their production, but you know, they had really serious owners behind this group “very well connected” as they say.
After such descriptions from my partners who were organizing the meeting, I had ideas of huge capital requirements for modernization and innovation. This was, after all, a potential national champion in the making – a future global leader. What a chance to be able to meet with one of the top managers, and discuss strategic planning…
What a let-down. The blank look on this guy’s face when I asked him about capital requirements, strategic plans, innovation R&D, improvements of any kind said it all...
“We only need new cheap credits to replace our current expense credits”, he drawled.
That’s it?
“What about competing in global markets.” I naively asked?
“We only need to fulfill government orders, from budget organs. This is what our owners told us to do.”
So I pressed on asking if they needed additional project financing or perhaps VC partners to help their suppliers to improve the quality of their inputs and lower costs, but all I got was “nyet!” Later that week, back in Nizhny Novgorod, I met with a group of young entrepreneurs. They were all excited and had fire in their eyes! They had continued to invest all of their profits from several trading businesses built over the last ten years into the development of a revolutionary new IT product, one that was seriously disruptive and exciting!
Now they needed about $ 1.0m in VC financing to take the project to the next stage.
Unfortunately there are few investors for such small projects here in Russia.
I was hard pressed to advise them so I told them about the upcoming Russian Tech Tour (www.techtour.com), which will invite over 50 European VC fund managers to review Russian projects later this year in September.
This is going to be a big deal for Russia and attract a lot of attention, but could they hold out for another six months?
But they needed the money ASAP. The crisis was sapping the profit out of their original businesses, and they didn’t have the cash flow to finance this project. Sadly. I had to tell them that in this environment, with so much money to be made in speculative Russian stock market plays on Russian “blue chips”, few funds were interested real innovation here.
What an irony--people are so used to making and losing money here quickly, that the culture of patient angel investor support for a fledgling business is considered too risky. I only know of a handful of such angels and even they are having difficulties in today’s environment.
So here we are in a country that has hundreds and even thousands of large scale enterprises that badly need innovation and new products, but for some reason are unable or unwilling to spend money to invest in their development and commercialization.
There are literally billions of dollars sitting in a larger number of mid-scale PE funds ready to finance expansion and large scale production for late-stage innovation, but many of the companies which SHOULD be seeking this money to upgrade themselves, show little interest to do so.
On the other hand, Russia has hundreds of thousands of brilliant young scientists and entrepreneurs in desperate need of start-up and early stage expansion capital and guidance, but there are few high net worth individual investors willing to take on the risk of such projects.
Why are these two sides of a single coin unable to find a common ground? What’s wrong with this picture? If you have any ideas on how to unlock this secret, please fill me in!
Kendrick White is the Founder & Managing Principal of Marchmont Capital Partners, LLC, a financial services advisory boutique and bilingual business news company based in Nizhny Novgorod Russia, where he has resided full time since 1993.
Comments
Dear Kendrick, what is lacking here is legitimacy and trust.
Frankly, most large enterprises were basically stolen. Owners of stolen goods have zero incentive to take good care of their ill-gotten posessions -- they can be claimed back by legitimate owners at any moment.
Because of that most large legacy Russian enterprises are run like a car stolen for a joyride. No oil change, no service, run the thing into the ground and if it breaks down just steal a new one.
As for enterpreneural financing, there is very little trust that angel or early stage VC money will be used for declared purpose. Even if it will be, there's even less trust that in case of success the investor will see any return on his money and effort.
I am afraid that there is no fast or easy way out of this situation. It has roots in complete and utter collapse of ethics and morality in the Russian society in the late 80's and 90's. The hope that many investors pin on institutional reforms are misplaced. You cannot attach a policeman to every person, and even if you could where would one find honest policemen? Any laws and institutions that humans can invent other humans can twist and find a way to misuse to their advantage. Honesty, eithics and social capital must come first, and institutions are merely an approximate framework for relationships already existing in society. If one tries to graft the rule of law onto a society where stealing is a social norm, the outcome is either mass incanceration or total disregard for law.
To sum it up, short of a sudden Christian revival or no less sudden restoration of rule of law (and I can only think of divine intervention here), there are no solutions to your puzzle that will make things significantly better in the next decade or more.
Posted by: Alexey | June 17, 2009 1:22 AM