More and more Russian startups are relocating to the U.S. and other Western countries, according to recent reports. Should Russia be concerned that it is falling behind as a global innovation leader?
Prime Minister Dmitry Medvedev, center, attends the Startup Village international conference in Skolkovo. Also pictured: Moscow Mayor Sergei Sobyanin (left) Viktor Vekselberg, right, president of Skolkovo Foundation, chairman of the directors' board of Renova Group. Photo: RIA Novosti
For a very different take read: "Why start-ups are really leaving Russia"
Recently, Russian startups have become a topic of discussion in the U.S. Russian high-tech projects are settling confidently in the international market in general and the U.S. market in particular.
There are some objective reasons for this trend. Russia has traditionally boasted a high-quality educational system, a long track record of scientific achievements, technologies, and innovative business ideas as well as a pipeline of “the best and the brightest” capable of implementing those ideas.
The activity of Russian startups in the U.S. is all the more significant and meaningful today against the backdrop of the complicated relationship between Russia and the U.S., a relationship that has largely been overshadowed by the impact of economic sanctions.
Why are startups relocating from Russia to America?
Confusing matters even more, the relocation of Russian startups to the U.S. is often presented almost as a forced escape from the “harsh Russian realities” of an unstable, underdeveloped economy and lack of business prospects.
However, we live in the 21st century, an age of innovative technologies, high-speed communications media, globalization of the world’s economy and the international division of labor.
Any startup is subject to one overarching goal: realizing its full potential, both for the founders of the startup and its financial backers. Lacking opportunities for realization in a particular city, a startup moves to another. If a project does not work out in a particular country, the founders will find another.
It is not that some countries are “better” than others. All countries are different, each with its peculiarities, while startups are usually highly specialized and aimed at specific market segments.
It is often the case that a target audience for a startup is just absent in its home country. For example, increasingly popular in the U.S. is the Russian TruckerPath startup developing a mobile application for long distance truck drivers, which helps them select locations for finding a rest stop, parking, washing a vehicle, etc. Obviously, the peculiar pattern that the development of the U.S. transportation system has taken provides more prospects for the project in this country than in Russia, Japan and Norway.
Examples of startups growing successfully in Russia
In contrast, Eldis, a startup introducing cloud technologies into the urban engineering sector, has been developing successfully in Russia for three years already.
As a reform of the urban engineering sector started in Russia, with the municipal companies and housing facilities switching over to energy-saving technologies, Eldis developed an online system for automated distance monitoring of energy resources. Today, the system is in operation in 35 regions of the country. The company’s near-term plans include covering the markets of the former Soviet Union and Europe.
In August 2015, the annual rating of 100 Hottest European Startups published by Wired magazine included 10 startups from Russia. Among them were the following:
- Zdravprint, a company that has developed a unique technology for making individual orthopedic devices through 3D printing;
- Knopka, a business service providing legal aid and accounting assistance;
- Coub, a service for making microvideos, or short, cycled video spots;
- Panorics, a developer of video cameras for high quality of video recording and 360-degree view;
- CarPrice, an online service for selling second-hand cars.
All these projects are being successfully implemented in Russia. Where there is market demand, a startup has prospects for development.
Why a comparison with Israel is appropriate
A similar situation can be observed in many countries of the world. Israel’s experience is the most significant here.
The foundations of the high-tech sector of the country’s economy were laid a little over 20 years ago, in the early 1990s, when Israel’s Ministry of Industry, Trade and Labor launched Yozma (“Initiative”), a national venture capital financing program for high-tech projects.
The start of the program coincided with mass migration to Israel of highly skilled technical specialists from the USSR, which is considered by many experts as having made a considerable contribution to the development of the nation’s technological industry.
With 11 percent of GDP and over half of the country’s exports attributable to high-tech products, today Israel is one of the acknowledged world leaders in the area of innovative technologies.
With a population of 7 million, Israel numbers about 5,000 startups, a vast majority of which are understandably aimed at external markets including the U.S. Very many startups cannot be realized in Israel because objectively, a target audience for them is lacking there.
On the other hand, they are being realized to a high degree in other markets such as the U.S. or Europe. This does not mean that Israel has a “bad,” obsolete economy where new technologies are stifled.
State support of startups in Russia
Speaking of state support of the high-tech industry, the U.S. should be given its due for the important work that is done in the country to develop small and medium-size businesses in general and startups in particular.
For example, the New York City administration, in association with IBM, is implementing the massive Digital NYC project, a program incorporating over 6.700 technological startups in the city, about 170 investors as well as accelerator companies and business incubators. This accounts in part for the popularity of New York among Russian “startuppers.”
No less importance is attached to this industry in Russia, where an efficient system has been set up for the support of technological production. Active are numerous programs, both state and non-state, as well as development institutions and foundations (Foundation for Assistance to Small Innovative Enterprises, Russian Venture Company, Agency for Strategic Initiatives, etc.). Startups are given special purpose grants and bonuses.
In August 2015, a report by the Russian Federation Government was published stating, among other things, that in the period from 2009 to 2015, state-funded institutions provided financial support to 20,000 Russian innovation companies, the allocated funds totaling 210 billion rubles ($3 billion).
Moreover, the total revenue of the companies in receipt of state support over that period exceeded 839 billion rubles ($12 billion), of which revenues from export were over 71 billion rubles ($1 billion). The total volume of the venture market in 2014 amounted to $480 million.
A new platform to meet Russian startuppers
Today, a special emphasis is placed in Russia on the issues of stimulating the demand for innovative products and engaging the technological industries in the implementation of import substitution programs in some key sectors of the economy. A growing number of various forums and exhibitions devoted to the development of innovative technologies are held In Russia annually with support from the government.
One of the most vivid, large-scale events is the “Open Innovations” forum, which represents an important meeting venue for Russian and foreign technological enterprises, young startuppers as well as representatives of venture companies and state institutes for development.
Every year, dozens of agreements are signed at the forum between companies, Russian regions, and scientific research organizations. This year, the forum will last 5 days (Oct. 28 through Nov. 1), its business program including 115 events. Over 12,000 people will take part.
Among the participants on the first working day of the forum will be two representatives of the U.S. — the legendary aerospace designer Burt Rutan and the noted economist and author of the concept of the “third industrial revolution,” Jeremy Rifkin.
New centers for Russian innovation
There is another significant example of Russian innovation at work. In the republic of Tatarstan, the “smart city” of Innopolis is generating new attention.
Some 20 miles away from Kazan, Tatarstan’s capital and one of the major Russian metropolitan areas, a whole city has been practically built from scratch — a sort of IT capital of Russia, a center of information communication technologies (ICT), and a unique spot for effective interaction between science, education, and business. Innopolis has an area of 1,200 hectares.
In the city’s territory, a university and a training and research center have been opened, and residential buildings have been built. An important component of the city’s ecosystem is the Special Economic Zone, which provides a preferential tax and customs regime as well as special working conditions to foreign IT companies that are Innopolis residents.
In August, the opening of a business incubator took place in the city’s university, providing an infrastructural support and access to the IT training programs for students and interested companies.
Startup migration can help to repair relations between Russia and the U.S.
It is no secret that the graduates of Russian higher education institutions and technical specialists are in wide demand by foreign companies, which assist to a great extent in Russian tech workers moving abroad.
The U.S.-based company F5 Networks, which is engaged in developing network application programs, provides a good example. On August 17, the company shut down its representative office in Tomsk, announcing at the same time that most of the office’s employees (about 70 people) would be employed in the company’s other offices in the U.S.
It is worth noting that, in principle, many American companies engaged in the support and development of foreign technological projects hold the physical relocation of a company to the U.S. as a necessary condition for further cooperation.
Russia is a powerful modern state and an important participant of the global economic processes that commands high quality resources with regard to technologies and labor. Russian companies, including startups, that work successfully throughout the world is evidence not of the Russian economy’s backwardness, but rather of its flexibility, multi-faceted character and great potential.
A growing number of young, energetic Russian startup founders and employees that work in the U.S. will have a positive impact on the quality of economic cooperation and the general level of mutual understanding between the two countries.
The opinion of the author may not necessarily reflect the position of Russia Direct or its staff.