RD Interview: A top Finnish entrepreneur explains Russian innovation’s peculiarities, suggests what Russia should do to boost its high-tech development and explains why people should invest in Russia.
Prime Minister Dmitry Medvedev, right, and Serbian Prime Minister Aleksandar Vucic at the 4th Open Innovations International Forum in Moscow, October 28, 2015. Photo: RIA
Innovation has become a key factor in the successful economic development of Russia. When Dmitry Medvedev became the Russian President back in 2008, he chose innovation and high-tech development as key priorities for the country’s new economic development. “We have money but don’t have our Silicon Valley,” said Medvedev during his visit to Silicon Valley.
In 2010 he gave the order to create an innovation center, the Russian analogue of Silicon Valley, which was named Skolkovo. It was supposed to be a project “that would become the largest test ground for Russia’s new economic policy,” Medvedev said.
Since the start, this project has been subject to tremendous scrutiny, both at home and abroad. Skolkovo has come under severe criticism, including accusations of uncontrolled spending and absence of any concrete results.
However, now in its fifth year, Skolkovo is starting to deliver results. To learn more about the current state of innovation in Russia, including the main obstacles and incentives for Russia’s high-tech sector, we sat down with the advisor to the president of Skolkovo and Finnish entrepreneur Pekka Viljakainen.
Russia Direct: What are the successes of Russian innovation development and startups? What is their recipe for success?
Pekka Viljakainen: Well, first of all I think that the biggest success is that there are more and more Russians who understand why we are doing this. I remember when I came here four years ago for the first time, I really felt that actually people are viewing this like some kind of an entertainment for youngsters or some kind of modern thing, but not as a reality or something that has a connection with the future of Russia. Now, I must say not only in Skolkovo but also in Russia in general (I have been to 56 Russian cities in two years, I have met with most of the governors, I have met tens of thousands of people in the regions) huge numbers of people understand it.
Just a month ago, we were at the Sochi International Investment Forum, which gathered together 3,000 people. And the talks about entrepreneurship and why it is important were absolutely different from what they were three years ago, and I think this is the major achievement.
I also think that this current economic slowdown and even sanctions have raised another issue that is supporting us: Why it is important that Russians use their own technologies? Because in the world if you only produce oil and gas while everything else goes abroad and you are all the time dependent on somebody else, it is simply not sustainable. Do not get me wrong – I am a full supporter of free trade between countries. But it is a good way for Russians to think about how you use your own assets: Where do you grow your tomatoes? Where do you grow your salmon? What technologies you are using?
Then, of course, on the smaller level, there are other elements. There are a lot of companies we made in Skolkovo – everyone can see what kinds of companies are here. I have said to everyone: the buildings we are making, the logos we are creating – is irrelevant. The only thing that matters is the quality of the companies and I think that anybody can objectively see that the quality of companies has increased a lot. Of course we still have a lot to do – I am not saying that we are already perfect – but we are definitely on the right track.
RD: What impact do sanctions and the economic crisis have on innovation and startup development in Russia? Do they help? Or hinder?
P.V.: No-no, it definitely helps. If the oil price would be $200, nobody would care about innovation, honestly. You can see it in Saudi Arabia, or in Norway, or in Kuwait – it is not only Russia’s issue. Those economies that have been heavily dependent on oil and gas have been doing innovative development like a hobby.
Think, for example, about Finland, which does not have any oil. We have had Nokia, which was our “oil” but we have a lot of high-tech jobs now. It is our future because we do not have anything else.
Of course sanctions have also a negative impact: People are not willing to invest in Russia so much because of it. So, it is not only positive. But if you ask me whether I would choose the current situation or $200 oil prices, I would definitely think that the current situation is much better for future innovation.
RD: What are the main problems in developing Russian innovation?
P.V.: Well, firstly I must say that the Russians are very strong in science. If you give a Russian engineer any problem he will find a solution. It might not look beautiful but it will be a solution and a reliable one.
However, the biggest problem I think is that Russians still have mistrust in each other. If you have an idea, if you are a great engineer, you need somebody who can make a business out of it. Then you should team up with somebody you don’t know – it’s not your mother or your brother – it might be somebody else who is good in doing business. But you are not going to do that because you are afraid that he might steal your idea.
And vice versa, if you are a sales guy you should not try to invent everything - you should team up with those who have those innovations. So, that’s why we are talking about the entrepreneurship ecosystem, where the ecosystem means that people who are thinking in the same way are in the same room. It’s like dating: business people see innovators, innovators see business people – they team up together and then they create such companies that attract investors.
So the biggest problem of the innovation ecosystem is: How we can get heavy scientific people to meet with heavy business people and to make a great team and leadership out of that?
RD: And what do you see as the main Russian economic issues that hinder innovation from developing in a better way?
P.V.: I think it is only a leadership and people issue. Of course you might say that Russia should invest more in science and in basic education and it is the right thing to do as the quality of the education system correlates directly with the quality of innovations. But it is a long-term issue anyway: give it at least five years and you will see the change there.
I think there are two issues: the first one is that every Russian should understand why entrepreneurship is important and trust between people must be built. The second issue is, how do we use in a smart manner governmental funding, private funding to invest in such early stage companies because the innovation issue cannot be solved only with money. If you just give money to people they will become lazy, they will just wait for the government’s money. That is why successful entrepreneurs have to be “hungry enough.” Giving millions to some guys does not make them entrepreneurs.
RD: Do innovations have regional or state peculiarities? How is the approach to developing innovation in Russia different than in Europe or America?
P.V.: Basically there is no difference. The process is pretty much the same but there are weaknesses and strengths. And once again I would say that here in Russia we do not need much focus on the scientific or engineering part – that is pretty strong.
But the real weaknesses include design issues – how products and innovations are designed, how do they look. Another weakness is that Russia has a lot of business-to-business innovations while very little of business-to-consumer innovations. In Skolkovo, for example, we have about 20 percent business-to-consumer companies.
Because Russia is a big country, many people do not think from the very beginning that their product will become internationally successful. So, they think if they firstly do it in Russia and if they sell it to 140 million people then they will go to the next level. In the globalized world, with or without sanctions you can buy Italian sunglasses everywhere and consumers behave pretty much the same, and the same is true for innovations. That is why one of the peculiarities is that Russians are not very well connected with foreigners. They do not know what foreign competition is, for example. Thus, that is definitely a problem.
In mid-November we and 250 people from Russia are going to Helsinki for the biggest European innovation event which is called Slush. It is a fantastic event and is a really good benchmark. Moreover, it is only 900 kilometers (530 miles) away from Moscow, so why do you need to go to Silicon Valley if you can go there?
So, it is international benchmarking, which is missing.
RD: And does Russia need its own approach to the development of innovations?
P.V.: Of course Russians cannot copy the Silicon Valley model, because they have their own weaknesses and their own strengths. So we should be strong enough to strengthen those areas where we are weak.
But it does not have to be a totally different model because entrepreneurship is pretty much the same everywhere. Yes, there are certain focus areas, international benchmarking, consumer products. We have some issues with language - we should invest much more in language study, because it is practically impossible to get a product accepted by the foreign markets if you do not speak English, or if you go to China and do not speak Chinese – it is a waste of time.
So, these kinds of issues we have to focus on.
RD: With the lack of funding sources and overall reduction of the state budget, the issue of investment is very acute. How, in such conditions, is it possible to attract more investment in developing innovations?
P.V.: The Skolkovo model from the very beginning was not established with governmental funding. The entire Skolkovo model for 10 years is that we gradually decrease the governmental funding and increase the private funding. And the same is true for our grant policy: you might get a grant with 50 percent of government funding for your company, but for the next round you receive only 25 percent and 75 percent comes from private investors. Thus, Skolkovo is not designed for just giving oil money to the startups. We have changed the model a little bit. It is now healthier than at the beginning – it is much, much better. In that sense we are going in the right direction.
RD: How, given the current economic situation in Russia and political uncertainty, is it possible to attract more investment?
P.V.: For example, if you come to Slush you will see that foreign investors there are not politicians and do not care about politics. They are already ready to invest in any good idea whether it is a Russian idea, Finnish idea or American idea. Nobody will stop investments just because you are Russian. The question is: How do you reach these people and what is your story?
I think it goes like this: If you have a good team, if you have a marketing team, and science people, and your project is competitive on the global arena, you will find the financing, honestly.
RD: The U.S. is a global leader in innovation. How does the U.S. model of innovation development fit Russia? What is the level of cooperation in innovation between Russia and the U.S. on that level?
P.V.: Well, if you think of a big picture, if you think about sanctions (EU or U.S.), science, startups and high-tech are practically excluded from those sanctions. There are, of course, some sanctions on military technologies or oil-exploration technologies, but the big picture is that science is not included in the sanctions. That’s why there are no major barriers; it is more in the heads of the people, so to say.
In general, Russian startups should learn from all over the world. I have to say it is great to deal with the Americans but I am from Finland and the biggest European startup event is happening in Helsinki which is 900 kilometers from Moscow, so why don’t you to start international benchmarking there? Why don’t you start benchmarking with German companies or British companies? There is still enough market and enough funding.
So, that is why I would not kind of exaggerate the importance of the U.S. Certainly, the U.S. is a big economy, there is a culture of innovation, a great culture of entrepreneurship, and we should learn from that but when you are talking about building global products you can make those everywhere in the world.
RD: Can you give some tips on what Russia should do to enable startups to commercialize their ideas in a more successful way?
P.V.: There are three major issues. Number one – every single Russian who has any spare money, who has any experience in doing business should become a business angel. Historically, Russians were buying houses, apartments for a black day and that was good when the real estate prices grew 20 percent per year, but now they are going down. So, if you want to make money, some part of your money should be put on these new startups - and not only money but also your heart and your soul.
Secondly, what should definitely be done is that you should team up with foreigners, meeting people in Europe and elsewhere so you can understand the market. It is the same as if an American tries to make a product for Yakutia or Astrakhan and tries to understand how consumers are behaving without knowing people there - it is unlikely to work out.
In the same way startups should team up and this makes you automatically more international.
And thirdly, which is extremely important, is that Russian heavy science people should have the trust to team up with the best business people of this country, because there is a little bit of mistrust: people are afraid that somebody will steal your idea. Entrepreneurship does not grow in mistrust.
If you think about the U.S. and California in terms of innovation, the greatest thing there is that people by definition believe in you, they trust in you. In Russia, people are saying: Who are you? What you are? Are you going to steal from me? So this mistrust is the biggest barrier of business.
Finland, where I am come from, is somewhere in the middle: We are definitely not Californians, we are not Russians, so that is why I can see that an issue of trust is an extremely important one to fix.
RD: More and more startups are leaving Russia for the West. Politicians say that it is not connected with the underdevelopment of the Russian economy or the complex political situation. Do you agree with that?
P.V.: I think every individual has his or her own reasons why they come to Russia, why they leave Russia. I cannot over-exaggerate it. But I think that the major issue is that young people who are normally doing this, they are thinking about the living conditions: whether they have a good school, house, everything like that. I think Russia has improved a lot in these areas. Ok, Moscow traffic is still bad but everything else is quite OK.
Secondly, it so that if you do not find that trust in business partners here, then of course you need to go outside. That is why this ecosystem, the whole environment of how entrepreneurship is being viewed, how it is being supported, how people understand that: Is it important for this country or not? Are you respected if you are an entrepreneur?
I think this current economic slowdown, this drop in oil prices is a healthy thing because it will lower prices of housing and, secondly, it will increase the importance of other industries.
As for politics, I do not think entrepreneurs are so much thinking about politics, honestly. I started my company 30 years ago when I was 13 and I never thought a thing about politics. I just love my innovation and I want to make money.
RD: Why do you invest in Russia?
P.V.: First of all, I invest everywhere. I split my risk into several countries: some in the U.S., most of it in Europe, some in China and a lot in Russia.
Why in startups? Because I never invest in companies just money - I invest my head and my soul and my time. And that is why to make that happen I have to be close with the companies. It is also a cultural connection. I have a lot of Chinese friends but it is very difficult to understand Chinese culture for a Finn. It is not only language and the Chinese see me always as a foreigner.
In Russia I feel different because of the closeness of the Russian culture with Finnish culture, trade relations and it is quite easy to build this trust. I am constantly highlighting the importance of trust and that’s why for me it is easier do deal with Russian companies.
RD: Why should people, businessmen or other states invest in Russian innovation and startups?
P.V.: There are three aspects here. First of all, right now due to the Russian ruble’s depreciation, it makes a lot of sense to invest it Russia: everything is cheap or relatively cheap.
Secondly, because some investors are hesitant, you can find the best companies quite easily – there is less competition.
And, finally, the root cause is still that there are a lot of great scientists and engineers here and a lot of untapped potential.