Start-up in Russia: Reality and Perspectives

Meet Konstantin Pigalov, MBA, director of the consulting department at “Marchmont Capital Partners”. He has a diploma in radio technician engineering, and until 1996 he was engaged in scientific and engineering work at the Applied Physics Institute of the Academy of Science of the USSR. As a business consultant, he has participated in organizing and realizing more than 100 projects for various companies, including preparation of business plans and presentation documentation for investment projects. He has experience in carrying out business, as well as expertise in innovation and investment projects. Several projects for attracting investments of more than 10 mil. dollars were successfully implemented with his help. Mr. Pigalov has kindly agreed to answer a few questions for

VV: Mr Pigalov, there is an opinion that the process of technological modernization has slowed because of the business illiteracy of our innovators. Some people say that, first of all, it is necessary to make everything clear in their minds.

KP: I wouldn’t say so. Innovators are smart people. Yes, there is always something for beginners to learn, but others understand the whole process.

VV: To learn what? Let’s suppose that a young innovator has a brilliant idea- what to do next? What is the scheme for its commercialization?

KP: For those who have an idea and don’t have experience in commercialization I will give simple hints – which are also the stages of commercialization.

First: For lack of money, invest your time in a project and finalize it on paper. Second: To protect the results of your intellectual activity and your intellectual property (IP), patent your idea. Third: Estimate commercial viability, i.e.— understand who is going to buy the product, developing these notions on the basis of a new idea/solution, what price, what volumes and how your solution is better than existing ones (features/ price/ quality). Fourth: Understand who might be interested in developing and promoting your product on the market, and who will be opposed to it. Fifth: Find out where and how to get money for support of the development phase (grants, awards, contests). Sixth: Make a product ready for the market from the idea. Thus we have very simple scheme: independent development of idea; the patenting of the idea; carrying out a business- expertise process (with the experts assistance); preliminary business planning; attracting the money of a venture investor; product design and experimental design (prototype). And then, those who directly deal with introduction to production and market realization come into play.

VV: Do our innovators understand this scheme?

KP: Yes. There are exceptions, but they are rare.

VV: There are a few details to the beginning of mass production and entrance to the market . Do Russian innovators understand the «game rules», and that they will sooner or later have to share with managers? Don’t you think that many innovators are under the spell of Gates, Zuckerberg, Jobs, Brin, and Page—all who became CEOs— and dream to do it all themselves, with no money, no skills, and no opportunities?

KP: In the area of software, the author of an idea is often a major part of production and all necessary equipment — his computers and communications. But all the men you have mentioned attracted investors and managers, and consequently shared rights to property and profit. Usually, when implementing a project, the roles of owners and general managers are different. These game rules are well understood by experienced, «professional» innovators. Beginners need to be educated. From my experience I can say that there are innovators who don’t understand the organization of mass production and output of products in a competitive market. They seek in their commercial model to take over mass (large scale) production and the conquest of markets, including international markets, not realizing that maybe the right way for them is good prototype development, patenting and licensing, or selling patents on IP to major existing players who have the resources to implement production and market penetration. Fears of «giving» their secrets to investors are well grounded, but why not use patents? And then there is the saying — «without entering the water, you won’t learn to swim.» My main advice: choose the right partners, and study the experience of those who had successful implantation, as well as laws to protect intellectual property.

VV: Share with young innovators who will read this interview: What is the scheme of financial relationships with investors — from the full purchase of the project with all the rights to the innovator to introduction to the board of directors at the company?

KP: As a rule, an innovator invests in the project not money, but the right to use intellectual property (previously estimated in monetary terms), and receives a share in a joint company that is adequate to his contribution. An investor risks his money and he is interested in how the innovator involved in the company works in the initial stages (without the innovator it is very difficult to figure out innovation). The innovator can be on the board of directors or one the company’s staff. The «business driver» of the project, however, must be from the commercial environment. Designing and managing a business are different tasks, and the professional qualities for each task need to be different. It is good if an innovator has these qualities, but this is rare. An angel investor will want exclusive rights to the invention (innovation) moved from the innovator to a new, small innovative company in which both the investor and the innovator have their shares (according to contribution). Then, in the later stages, the initial investor and innovator may earn income from the sale of licenses (in Russia this is rare), or sell their shares to financial or strategic investors.

VV: Does the number of innovators who need your advice grow?

KP: I would it like to, but our service is relatively expensive, and innovators, without government support, cannot afford it. But there is some good news: we are currently working on a project to build an innovative pre-seed preparation of innovative projects for Russia’s infrastructural system of Centers. A similar system is already successfully operating in the U.S. and other countries. If the state, on behalf of their institutions, takes an interest in this project and allocates the necessary funds, the innovators at the stages of pre-seed preparation will be able to use the services of professional experts to prove the commercial viability of their developments (as based on the grant, and in exchange for a share in small innovative companies produced by them together with the Center). This mechanism should encourage additional impulses to increase the number of successful introductions of Russian technologies.

 Prepared by Alexander Blagov