1. Russia: land of wonders or “black hole”?
Overview of the national innovation ecosystem
Ilya Ponomarev,
Chairman, Innovations and VC Subcommittee, State Duma
Harvard Law School 11/11/2013

2. History of Russia’s innovation ecosystem
• At the foundation – Russian Academy of
Sciences, est. 1724 by Peter I “The Great”
– Internationally oriented from the very beginning,
primarily Holland, Sweden, France, Prussia
– Universities had never been influential:
• focused on education
• major research done within RAS or privately sponsored
• XIX-XX century – competition in
innovation with the West
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Railway system
Industrial innovations
Radio and TV
Aviation,Space and rocket science
Military research
• XIX cent. – privately (or personally) driven
• XX cent. – driven by government
Ilya Ponomarev, State Duma, 11/11/2013

3. Russian Academy of Sciences
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Consists of several hundred research institutes
Divided into 11 vertical divisions (physics,
chemistry, math, earth, …) and has 3 regional
branches (Urals, Siberia, Far East)
Two major “sister” Academies – Medical and
Agriculture, currently merging into one
Self-governed, organized as an elite club of
academicians, and candidate academicians
Determines directions of fundamental research
and appropriates funds allocated by the state
General subcontractor for R&D for the state, very
limited contracts with industries
Scientists employed in parallel by research
institutes and universities
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Ilya Ponomarev, State Duma, 11/11/2013
Full integration between education and research exists only
in some “science cities” – isolated problem-oriented R&D
clusters, usually with certain military emphasis

4. R&D and commercialization chain in USSR
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Academy of Sciences – state-guided fundamental
research
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All major state agencies (vertically structured) had their
own applied research institutes
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Served their industries
Procured fundamental research from the Academy
Adapted fundamental results to the requests of the particular
industries
Agencies were responsible for technological progress
within the industries
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Divided into civilian and military research fields, latter more
prestigious and better funded
In certain cases military researchers could request intelligence data
Ministry of Defense reported separatedly to Politbureau of CPSU,
and provided technology foresights
“Construction bureaus” at particular enterprises were
implementing centrally provided technologies and were
responsible for inventions
System of “specialists distribution” for universities
graduates
Ilya Ponomarev, State Duma, 11/11/2013

5. Impact of reforms of 1990s
System imploded:
• Funding dramatically dropped, Russian Academy of
Sciences experienced unprecedented brain drain
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Especially centrally based institutes
The more prestigious particular institution was
before, the less attractive it became after
Government became horizontally organized,
industries-oriented agencies vanished
Industrial research institutes were gradually
disbanded or taken over by particular enterprises
No military procurement at all
Industrial collapse in all industries except oil, gas,
mining and metals
Constant redistribution of assets within major
corporations shortened planning horizon and made
uneconomical to invest into R&D
Russian technologies could not impact valuation of
companies like Western could
Ilya Ponomarev, State Duma, 11/11/2013

6. Russia’s innovators key competences
• IT
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Mobile apps
E-payment systems
E-learning
Financial systems
Social and media apps
Telecom
New materials
Industrial innovations
Geosciences
• Emerging – clean tech
• Underdeveloped:
– E-commerce
– Life sciences
Ilya Ponomarev, State Duma, 11/11/2013

7. Pres. Medvedev’s call for modernization
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Medvedev’s “4i” initiative in 2008
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Infrastructure
Institutes
Investment
Innovation
Presidential address to the parliament in 2009
was focused on innovation
– Most fashionable discussion topic
– Now everybody is on twitter, facebook, blogs, …
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Pres. Obama “reset” policy, also started in
2009, assumes that US and Russia are building
common values
– Creating a compatible innovation ecosystem is a
perfect example
• 2009-2011 were years of multiple
initiatives in Russia
• After Putin’s return – obvious recess, but
most initiatives are already launched
Ilya Ponomarev, State Duma, 11/11/2013

8. Priority #1. Financial resources
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Government created numerous financial institutions
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Many large businessmen are thinking about investing
in hi-tech
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DST owns 10% of Facebook, recently made Mail.ru IPO
Some VCs are formed, many with foreign capital
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Ilya Ponomarev, State Duma, 11/11/2013
Equity financing
• Rusnano – $10b investment company
• Russian Venture Corp – $1b fund of funds
• Rosinfocominvest – $150m PE fund
• Bortnik Fund – seed and pre-seed grants
Debt financing
• Vnesheconombank
Infrastructure support
• Hi-tech parks
• Special economic zones
• Skolkovo Foundation as an entry point
Tax vacations:
• Special tax regime for hi-tech companies
• No capital gains tax for investments over 5 years
Most successful Russian search engine Yandex.ru was
started with Massachusetts money

9. Problems with funding still exist
• Limited exits within the country
• Lack of internal demand
– Foreign technologies still usually
preferred over Russian
– Government is yet to come
• Deficit of physical
infrastructure
– Inexpensive offices
– Business services
– Quality housing
• Insufficient number of
experienced investors
Ilya Ponomarev, State Duma, 11/11/2013

10. Priority #2. Legislation
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Significant progress has been made during recent
decade
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Corporate law, introduction of LLP/LLC
Securities law
State procurement
E-Commerce
IP regulation is copied from German IP law
Tech transfer law (similar to Bayh-Dole Act)
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Skolkovo Law unveils possibility to solve many
issues “manually”
– Taxation
– Immigration
– Construction permits
• Controversial Academy of Sciences reform
– RAS is stripped of appropriation and management
function
– Funding focus shifted to universities
Ilya Ponomarev, State Duma, 11/11/2013

11. Real problems with legislation
• Law enforcement
• Some Russian laws are incompatible
with usual approach legal acts:
– Corporate legislation – options, stock
series
– Technology transfer act – bureaucratic
• In some Acts bad wording leaves
room for unfavorable
misinterpretation
– Software VAT exemption act
– Privacy protection act
• Main points of immediate attention
– Internet crime liability definition
– Bankruptcy regulations
– Miscellaneous industry-specific acts
(telecom, advertisement, mass-media, …)
Ilya Ponomarev, State Duma, 11/11/2013

12. Priority #3: Entrepreneurship and VC
• ~920+ mln. USD invested (201 deals)
in 2012, 5th largest VC market in the
world
– ~790 mln. in IT (168 deals), ~100 in industrial
technologies (incl. cleantech), ~10 – life sciences
– 37 mln. seed, 100 mln. series A, 255 mln. B, 517
mln. C+.
– Tendency to shift towards later stages
– 5 mln. - average deal
• 12 exits, ~370 mln. USD,
incl. $100 mln. in 3 large deals
• During last 3 years – several major
IPOs (incl. Yandex and Mail.ru), most
major telecom and IT players are
public (usually NASDAQ, NYSE and
LSE)
• Most investors are either former PE
people, or former entrepreneurs
Ilya Ponomarev, State Duma, 11/11/2013

13. Situation with investment targets
• Huge Soviet legacy of technological
ideas
– Primarily in places like Novosibirsk
Akademgorodok
• Insufficient knowledge and
experience in protecting IP
• High desire of researchers and their
students to get involved in
commercial activities, but
– Lack of experience
– Unadequate self valuation
– Limited knowledge how to follow the
market and find niches
• Strong deficit of smart money
Ilya Ponomarev, State Duma, 11/11/2013

14. Main problem of Russia’s
innovation ecosystem – human resources
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No entrepreneurs, even less – experienced serial
entrepreneurs
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Lack of international business experience and proper
connections
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Education, research and industry are disconnected
Heavy impact of brain drain
Demographic crisis of 1990s starts to hit
No adequate business schools, professors with first-hand
experience
Negative legacy
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Ilya Ponomarev, State Duma, 11/11/2013
No success stories to follow
Language barrier
Education reform is controversial
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High entrepreneurial potential of Russians is focused on
avoiding government regulations
Russians are willingly taking economic risks, but current
institutions punish such behavior
Decreased level of people’s geographical mobility
Excessive concentration of business activity in Moscow,
colonial policies towards other regions
Housing and utilities deterioration

15. Skolkovo project
1. To develop Russian innovation
ecosystem by creating a universal
entry point to
– Make Russian businesses global
– Attract international businesses to
start R&D and hi-tech manufacturing
2. Create in Russia new companies
and/or their divisions, to develop
new hi-tech services and products
3. Develop Russia’s human
resources:
attract foreign specialists and
support local talents in hi-tech
Ilya Ponomarev, State Duma, 11/11/2013

16. Skolkovo’s key principles
• Project is managed by a non-for-profit Skolkovo
Foundation, governed by a special law
• Project participants receive set of business services
as well as certain incentives for companies with
revenues up to 3 bln. Rbl. (USD $100 mln.):
– 0% profit tax, VAT, property tax
– 14% (vs. usual 35%) social payments
– 0% custom duties
• Each department is supposed to grow into selfsustainable operation
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Education
Research
Commercialization, tech transfer and business development
Investment
Real estate
• Each service is to be provided on competitive basis
• Business model is developed as a private-public
partnership, but assumes separation of public and
private funds. After a while Skolkovo Foundation
should become independent of state funding
• At heart of the project – SkTech – “Russian MIT”
Ilya Ponomarev, State Duma, 11/11/2013

17. US-Russia cooperation
to develop innovation ecosystem
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In 2009, contacts between Russian and MA organizations, incl. MIT,
began to outline practical cooperation. Rusnano develops close
cooperation with MIT for training and discusses joint projects
Jan. 2010 Russian Government delegation, led by First Vice Prime
Minister visits MIT. Decision to initiate Skolkovo Project has been made
Feb. 2010 US State Dept. takes “RusTechDel” delegation made of 10
West Coast CEO’s (incl. eBay, CISCO, twitter, …) to Moscow and
Novosibirsk
March 2010 - another Russian delegation in Cambridge/Boston
– Cooperation agreement signed with Novosibirsk hi-tech park
– Russian sponsorship for MassChallenge.org business plan competition
– Negotiations begun with MIT to become a co-founder of Skolkovo
Project
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April 2010 – Massachusetts Senate invites Pres. Medvedev to come to
MA
May 2010, Delegation of 20 prominent venture capitalists to Moscow
(VC Trip), supported by State Dept. No participation from MA.
June 2010, Skolkovo Board of Directors announced - 6 Russians, 6
foreigners, incl. 3 Americans – all from West Coast.
June 2010, Pres. Medvedev visits Silicon Valley, not MA.
– Several high-profile agreements were signed
– President ordered to open Skolkovo project office in Bay Area
– Agreement with MIT signed in US Chamber of Commerce “lobby,” not
main hall, and only after enormous pressure from Russian side
• September 2010 – NYAS delivers report “Yaroslavl Roadmap 10-15-20”
• 2011 – Skolkovo Institute of Technology established together with MIT
Ilya Ponomarev, State Duma, 11/11/2013

18. Why cooperate and
• Russia’s 5 technological priorities match
Why now?
MA core competences:
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Biotech and life sciences
Cleantech - new energy sources
IT and supercomputing
Space and telecom
Nuclear technologies
• Russia can become resource for
manufacturing facilities, R&D personnel,
scientific advances to be commercialized,
clinical trials
– MA can host Russian corp. offices, tech holding
companies, provide training to entrepreneurs
and financing of new companies.
• Russia’s domestic market, especially for
new energy and biotech projects with
underlying layer in nanotechnologies, is
very promising
• Right now major Russian businessmen
are looking to form joint ventures to
invest into hi-tech, and actively touring
West – primarily Silicon Valley