Russia's Venture Capital Boom

Tech startups in the Federation are coming of age and starting to attract serious VC funding from the U.S. and Europe

by Jennifer L. Schenker

When Guiseppe Zocco, a founding partner in Index Ventures, a Geneva-based venture capital firm, entered the May 24 board meeting of Ozon, an online e-commerce startup, he felt as if he could have been anywhere in Europe. The chief executive officer was Swiss, the auditors British, and the lawyers American.

If it hadn't been for the maddening Moscow traffic jams on his way to the meeting, says Zocco, he would have never even have known he was in Russia. But thanks in part to such increasingly global and sophisticated management, tech startups in Russia are coming of age. Indeed, after years of promise and potential, Russia finally looks poised to become the next hot destination for foreign VC investment.

Take Ozon. Russia's answer to Amazon.com (AMZN), it's a vivid example of how Russian tech companies and even the government are attempting to adopt Western practices to attract Western money. The company, which claims to be No. 1 in e-commerce in Russia, raised $18 million in venture capital in April, much of it from Switzerland's Index, best known for its investment in Skype (EBAY). The Ozon investment was Index's first venture in Russia.

Matching Funds

Also joining the deal were U.S. network equipment giant Cisco Systems (CSCO) and German publisher Axel Springer. Cisco is also a newcomer to Russian investing. "We have been in Israel for over a decade, in India for quite a few years, and in China since 1999," says Yoav Samet, Cisco's director of corporate business development in Israel, emerging Europe, and Russia. "As we look globally to where the next venture asset class is going to emerge, it is definitely Russia and Central and Eastern Europe."

To encourage such investments, the Russian government has set up a trust that matches investments from private venture capitalists. Already, it has agreed to dispense nearly $100 million to three groups of investors. Among them: Asset Management, run by legendary Silicon Valley venture capitalist Franklin "Pitch" Johnson, which has secured $52 million in matching funds from the Russia government for a new investment vehicle called Bio-Process Capital Partners. The Russia-based fund will scope out investment opportunities in biotech.

Other experienced tech hands also are piling in. Roel Pieper, a seasoned industry executive now based in the Netherlands, has set up a new fund primarily targeting Russian opportunities, including hydrogen technologies and light jets. Alexander Galitsky, a well-known Russian entrepreneur-turned-investor is planning to launch a new Russia fund later this year, in partnership with unnamed Western venture capitalists. And in April, Boston-based OpenView Venture Partners teamed with Moscow-based ABRT Venture Fund to form a "partnership for Russia" investment program targeting information technology companies in Russia and Eastern Europe.

Long Way to Go

"This is just the beginning," says Joe Bowman, a U.S. venture capitalist working for Russian Technologies, a Moscow early-stage $50 million venture fund. "We're entering a new era for Russian venture capital."

To be sure, Russia still lags far behind other global destinations for venture capital. Since 1999, foreign venture capitalists have invested only about $300 million in total in the country's tech companies, says Yuri Ammosov, the adviser to Russia's minister of economics, who is overseeing the government's new investment fund. That's less than venture capitalists invested in China in the first quarter of this year alone, according to figures from Ernst & Young.