Finance, business

Russian business angels: preaching a private investment gospel

22 Dec '09
Oleg Kouzbit, Online News Managing Editor

Last month, the European Business Angel Network (EBAN) named Eduard Fyaxel, president of the Start Investments business angel association in the Volga Federal District and a founder and professor at the Venture Management Chair of Nizhny Novgorod’s Higher School of Economics as 2009’s Best Business Angel Group Leader. In this exclusive Marchmont interview, the EBAN winner talks about how exciting and challenging it is to be a private investment ‘missionary’ in Russia.

Most Russian business people still know very little about “business angels”. Who are these Russian business angels, what “heaven” have they arrived from, and what is their mission?

In Russia, a business angel is popularly mistaken for a private investor. They are synonymous indeed elsewhere in the world. But in this country business angels are not only nascent but different in nature.

When your friend or relative invites you to invest money and knowledge in his or her project and you agree, you act like a private investor here. But is this all that a business angel does? No.

There are organized or ‘orderly’ business angels in this country, and there are whom I call ‘wild’ ones. The former get together in clubs or associations; most belong to the latter, though.

In Russia, a business angel is not only an investor but also a coach who helps train innovators; a lobbyist furthering the interests of the firm he has invested in; and a promoter marketing the idea behind his firm.

He may also become an educator training youth at institutions like the venture management chair that I created here. Russian business angels are multi-faceted because they are so few. Today’s business angel in this country is a missionary preaching a private investment gospel.

When did you first become interested in being a business angel and what drove you to investing in high-risk ventures?

Venture investors (and a business angel is a venture investor) are very peculiar species. I, for one, find it dull to run an already developed company. I get excited to make a start, but as soon as a company’s in place, working and generating cash flow, I lose interest and look for new ideas. As there’s room for expansion, there’s a path to strike. And I think most real venture investors act pretty much the same way.

When I was in college many years ago, I majored in experimental physics, and since then I love experimenting and watching things progress. Fifteen years ago I met Kendrick White, a Kellogg MBA graduate who had come to Nizhny Novgorod as part of a technical assistance program, and heard from him about venture business, business angels, etc. The more I heard, the more interested I was in becoming a business angel. So I decided to study venture business in Israel; I really liked the idea.

What were your first projects?

When I came back to Nizhny, I got together some friends and we did our first venture IT project here. In 1998-2000 we lost it; it was a combination of Russia suffering from the aftermath of its 1998 crisis and the “.com bubble” bursting all over the globe that hit us.

I took a year to recover and then set out for a try in another sector. We launched a telecom project in 2001. I sold it in early 2006; its capitalization had grown 10 times over the previous four years. Several more projects were already in the pipeline by that time.

Two hi-tech projects are now nearing completion. I’ll wait for the crisis to ebb and hope to sell them in 2011. One is a “smart building” project that was much on the ball before the crisis and already working in dozens of commercial, residential and warehousing real estate projects.

The other is Internet hosting; I have some personal innovations in sales and marketing systems. It is successful and ongoing. Last year we were sixth in the Nizhny Novgorod regional service market; we are third this year, and expect to rank second in 2010. Which means the company is growing 100% each year.

We covered Nizhny Novgorod and surrounding towns this year; next year further regional expansion is envisioned. Long-term plans go beyond neighboring regions to the Volga Federal District and, possibly, Russia’s European part.

How is a business angel viewed by larger investment communities? Do your paths intersect often?

I try to only do business with investors that I have met or collaborated with in my previous projects. Of course, I do know managers of Russian and international venture funds and have been repeatedly approached to jointly buy into projects.

Such collaboration hasn’t worked out yet for a variety of reasons, but there’s a tendency for a venture fund to invite a business angel as a minority shareholder to make sure its project develops a strategy. Innovation marketing is one of my personal strengths that pays well because such specialists are few in Russia.

Venture funds that support projects at early development stages, let alone seed or startup ones, are even fewer. Most look out for mature businesses planning expansion or heading for an M&A—companies that generate enough cash flow.

What sectors promise highest returns to a business angel?

The sectors currently in vogue are nano- and biotechnologies. But there are sectors that I believe open great windows of opportunity for business angels.

In Russia, it’s IT, no doubt: it requires reasonable investment, gives an easier feel for success or failure, and enables remote interregional operations via the Internet.

In bio- or nanoprojects, you may have to wait for more than 10 years before they pay off because they involve very costly equipment. A business angel could invest early for a short time and then find a larger investor and exit.

What are the pitfalls that make your work difficult?

There are pitfalls aplenty. One of the most insurmountable is poor communication between an investor and an innovator. They speak different languages; they worship different gods. There’s no shared innovation culture. An innovator expects fraud from an investor who “could steal his business” and therefore fights to keep the largest stake in the company; an investor is suspicious, too, and also wants to retain control. Both keep forgetting that neither will be in charge at further investment rounds, and look kind of bewildered when told about it. As a result, there’s no ‘ecosystem,’ which is sad.

For an innovator, his project is his ‘baby.’ The same way a sane parent can’t sell his child; the innovator can’t sell his project. If it takes shelving it indefinitely, let it be—but letting go is out of the question. An investor is ‘minor league’ for him. “He just funds what I have invented,” the innovator thinks. He doesn’t seem to understand that unless ‘smart money’ comes on time, his invention will be outshone in a year or two, and his project won’t be worth a dime. Being in the right place in the right time is just not part of his thinking.

Innovators are generally ignorant about how much money and time are required to nurse their baby. Their most common ‘dream of dreams’ is “building a small factory.” When confronted with a bleak reality, in which that factory would have a negligible market share, unless there was a plan to develop it into a big one, or selling licenses, they are haunted by the fear of being ripped off. Or else they refuse to sell because they expect the license to keep paying off forever.

Understanding even the basics of project commercialization is just beyond them. Valuation bloopers are phenomenal. In some business plans I have assessed (and laughed at) net profit and EBITDA were identical!

What kind of innovators are easier to work with?

Young IT guys are easiest to work with. They quickly come to grips with what it is all about. To tell you the truth, when I hear some say we need to re-train scientists, I argue that coaching youth is a much smarter investment. This is an investment in both the innovators and business angels of the future.

Many of the ‘old scientific guard’ think in terms of “living off government appropriations” as they did in the Soviet Union. People itching to promote projects and make money are rarely among them, and this country needs such people today.

All people capable of generating ideas are ‘serial.’ Not only can killers be serial but creative guys too. They are hot when they start a project; then they move to another one as soon as the project is on its way. This is the way it should be: professional managers must take over at a certain stage, freeing the innovator up for new endeavors.

In Russia, however, innovators think they need to become another Bill Gates and single-handedly run another Microsoft. They won’t admit that Microsoft or Google are exceptions rather than the rule or that the big guys usually buy innovation SMEs, or their ideas, and then ‘debug’ them to get them into shape.

What are your personal criteria for electing projects for funding? Does ‘the sixth sense’ matter here?

In my doctoral dissertation I dedicated an entire chapter to methods of how to value an innovation company. For early stage development, I specifically underscored what I referred to as an ‘agreement-based method.’ It develops from intuition, a flair.

When asked if this is another word for ‘experience’, I reply that intuition includes but is not limited to experience. I can’t logically explain it, but I can feel the right time to enter or the right time to get out.
I have had instances of nearly shaking hands on a deal with an innovator and then having to bow out at the very last moment because something inside said something wasn’t right.

This is intuition. One is either born with it or without it. Of course, to err is human; what’s important is learning not to repeat the same mistake twice.

What are sectors your heart is firmly set on? Are there any other areas you would like to check out?

I’m presently investing in telecoms and IT, but I used to engage in micro-electronics in my “prior lifetime”, so I would like to try my hand at nanotechnologies. I find biotech interesting and having a future but unfortunately, I’m not knowledgeable enough. If I have a partner well-versed in the sector, I will gladly enter it.

Long story short, the most promising is always what consumers use. I consider B2C most appealing; I can see the end consumer and recognize if he needs what I offer or not. I like areas in which I can figure out what I still need to do to whet the consumer’s appetite for my product.
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