Russia facing risk of entrepreneur exodus

State-owned Russian Venture Company (RVC) said this month it had launched a joint-venture with financial group Finematika and private investors to invest in space technology, hoping to raise RUB 3bn. It will commit $1m-$6m per project, focusing on companies producing components and materials for makers of spacecraft.

Although this may seem a positive development, it might be too little, too late for Russian entrepreneurs. A recent article in Foreign Policy details the story of the Skolkovo innovation centre - a $4bn incubator and start-up hub modelled partially on Silicon Valley.

It was launched in 2009 by then-president Dmitry Medvedev to stimulate start-ups and help diversify the country's economy away from traditional industries such as oil & gas and mining. While showing some initial promise, since Vladimir Putin's return, Skolkovo has been defunded and the target of corruption inquiries, severely hampering its potential to properly support Russian entrepreneurship.

Between the conflict in Ukraine, economic sanctions, a suffering economy, isolationist policies, authoritarian control of the internet, and a dearth of funding, Russia is becoming an increasingly challenging place from which to do business, particularly if you want to expand internationally.

One of the key factors for a successful start-up today is scalability, and the ability to tap into international markets. For Russian entrepreneurs looking to grow outside of their home market, the economic sanctions currently in place as a result of the tensions in Ukraine present a complication that may require substantial resources to navigate.

Likewise, the economic instability affects start-ups developing consumer-targeted financial technology, retailers or mobile gaming apps. Furthermore, the uncertainty surrounding the economic future of Russia could begin to deter entrepreneurs from developing their ideas altogether.

There is already evidence of early-stage ventures leaving the country with Silicon Valley among the popular destinations for the Russian diaspora, but European countries are also seeing an influx.

Abundant alternatives
Russian entrepreneurs that are feeling under-supported by their government and as though their home country no longer gives native companies the best chance of succeeding would not have to look far to find an environment more conducive to growing innovative start-ups.

The Baltic region, in particular, could be a cultural middle ground, linking Russia in the east to the Nordic countries and onto the rest of Europe. Notably, Estonia and Latvia have embraced entrepreneurship and their burgeoning start-up environments with legitimate support systems are beginning to see results.

Cities such as Tallinn and Riga are becoming regional tech hubs as a result of a stable regulatory environment, low living and office space costs, as well as a pool of increasingly well-educated young people.

The region is also seeing more interest from the media and – more importantly – investors, as the recent Latitude 59 start-up conference in Estonia showed.

In addition to existing CEE-focused VCs, Nordic VCs including Inventure and Creandum have also taken note of this evolution, and have committed capital to start-ups in the region.

Finland also has a long-standing – albeit tumultuous – relationship with Russia, and can currently boast one of the most promising upcoming start-up scenes in Europe, making it potentially attractive to Russian start-ups looking for a new home.

Despite recent submarine-related debacles, Russians could also look to Sweden and Stockholm for a tech-hub closer to home, where the environment for entrepreneurs is nearly unrivalled in Europe, and VC funding abounds.

For Russia to have a chance of stopping its entrepreneur brain drain, real change needs to happen soon, with encouragement and support from the Kremlin, as well as a more stable economy and improved international relations. However, given the current political situation, it may be some time until these vital steps are taken to support young and innovative businesses.

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