Urals Venture Capital Looking For Capable Manager

08.12.2009 — Analysis

Hundreds of millions of budgetary and private money accumulated in venture funds in the Urals region cannot find its intended use. The RusBusinessNews observer has been monitoring financial flows hitting the innovation blind end.

Venture funding of innovation projects in the Urals having just started a couple of years back is winding down virtually everywhere. So the Venture Fund of the Tyumen Oblast is expecting to be disbanded after its management company from Moscow has lost its license half a year ago.

"There have been two calls for proposals to find a new managing company but both have been unsuccessful due to the lack of response. The Fund's money is deposited in Deutsche Bank. At the moment only 249 million roubles remain there out of the initially deposited 280 million while the Muscovite managing company has not invested a single rouble into any investment project. Private investors lose their money and thus interest in maintaining the Fund," Oksana Polupanova, a consultant to the Department for the Strategic Development of the Tyumen Oblast, told RusBusinessNews.

The establishment of venture funds in the Urals RF subjects started 3-5 years ago predominantly on the initiative of regional authorities for the financing of various investment projects in the small business sector. 25% of the funds' assets constituted property contribution from the subject of the Federation, federal budget subsidy amounted to the same sum. The remaining half of the assets was made up of private investments which should have been found by managing companies.

It was expected that venture funds would purchase shares in registered capital of limited liability companies or shares in closed joint-stock companies. The profits of the fund would have been formed through sales of its shares which would have gone up in price after the implementation of an investment project.

The problems have begun before the crisis. In 2006 in the Sverdlovsk Oblast the Urals Venture Fund ceased to exist. Investments in the development and production of innovative products with dubious profitability involved extremely high risks. Managing companies of surviving regional venture funds have learned their lesson in a very interesting way - in the conditions of the crisis due to the risk of bankruptcy they practically ceased purchasing shares in innovative companies. Funds' money is just kept in deposits in banks, and melts away due to inflation. Private investors raise the issue of getting their money back.

Out of 280 million roubles of the Sverdlovsk Oblast Venture Fund established in 2007 only 70 million has been invested. Only two projects have been selected for investment. The first one is 30 million roubles funding for CJSC Laser ITC specialising in the production of optic communications systems. The second project is the purchase of 40 million's worth of share in the Ekaterinburg RTs Online Ltd. This company is specialised in the development and promotion of internet payment system for services.

The Chelyabinsk Oblast Venture Fund is half frozen - this fund is one of the largest in the Urals with the 480 million roubles budget. "This, unfortunately is a nationwide trend. Companies which manage venture funds are not interested in venture deals," reckons Yuri Uzkikh, the Deputy Executive Director of the Chelyabinsk Oblast Venture Fund. "They get a certain percentage for managing the money. It is easier for them to make money keeping fund's money in a deposit than in a high risk operations in innovative business. We need capable innovation managers, maybe from abroad, to manage this money.

The Chelyabinsk Oblast Venture Fund has been established very recently, the projects for investment are just being considered. One of the most promising projects is the establishment of a small company for the development and implementation of energy saving technologies in metallurgy based on the Chelyabinsk Electrometallurgical Combine.

The paradox of the Urals venture finance market is that even during the crisis there is money for investments which does not find its use. The problem is in the manner of management of venture capitals. "Managing companies are licensed to work in the securities market and their work when managing venture funds boils down to just selling to the highest bidder shares in the investment companies they purchased earlier. Unfortunately many companies do not have own investment projects, do not participate in the process of commercialization of scientific developments as they have no incentive to develop the information infrastructure. This situation has already resulted in that virtually all regional venture funds either stopped working or are being disbanded," Andrei Schitik, the Director General of the MIC Venture Fund, told RusBusinessNews.

The MIC Venture Fund was established in Ekaterinburg in 2005 and remains the only example of a Urals venture fund in the establishment of which neither federal nor regional budget took part. It was formed on the initiative of several Sverdlovsk companies of the defence industry sector and then became self-sufficient. At the moment the Fund's assets amount to 65 million roubles, by February 2010 it is planned to re-evaluate and increase them to 350 million. The core source of revenue is the participation in the implementation of innovation projects which are ordered by, amongst others, regional and federal authorities.

The most successful example of a innovation project sale by the MIC Fund is the sale of the share in the registered capital of the company which designed new X-ray diagnostic equipment. The Fund's investment amounted to 450 thousand roubles, a year later, before the crisis, the Fund managed to sell its share for 7.5 million roubles. The 45 employees of research team of the Fund work in such spheres as superconductivity, IT, nano-silver solutions, nano-powders. The Fund's employees combine academic and applied work in research and development institutes in Ekaterinburg, Lipetsk, Voronezh, and Novosibirsk.

"Today we have masses of offers to participate in various innovation projects like growing crystals, the development of new technology for chrome plating, the implementation of IT solutions for industrial enterprises," Andrei Schitik pointed out. "Sometimes we do have comical offers, of course, like charcoal diapers or a flying chair for farmers. The most important thing for us to follow the market demand for these designs. Unfortunately, the need for innovation in Russian industry is extremely weak. This is why the Fund has been looking at international markets from the start. The German Plasma Institute, for instance, expressed interest in our nano-powders and we will provide them with the technical specifications."

Experts are pushing for the consolidation of venture capitals of all the Urals RF subjects as large scale investments are required for the production of world-class goods and promoting them in international markets. Only then will we be able to talk about the efficient work of venture funds. The second precondition is the appointment of innovation managers to manage these resources; these people must have experience in the production start up and the commercialization of scientific developments, they must be able to assess the market's need for an innovation correctly.

Pavel Kober