Maxim Shekhovtsov, Managing Partner at Genezis Technology Capital in the article devoted to venture investing tasks and corresponding rules.

How to invest. “I invest in what benefits people”

Over 15 years in the venture business, Maxim Shekhovtsov has participated in dozens of projects, funds, and companies. What investment rules does he follow?

Managing partner of Genezis Technology Capital Maxim Shekhovtsov graduated from school in Stary Oskol, and his physics and mathematics class regularly produced winners and prize recipients of all-Russian and regional olympiads. Shekhovtsov was among the active olympiad participants; he also completed the correspondence school of the Moscow Institute of Physics and Technology (MIPT) and became its best student in 1993. However, unlike many of his classmates, the future financier did not enroll in Phystech: the early 1990s were hungry times, and he entered the Finance Academy.

Studying financial management was easier than general physics and mathematical disciplines, and Shekhovtsov began part-time work from his first years. In 1996, he got a summer job in the back office of the company “TsentrInvest Securities,” and in his second year he became a specialist at ING Barings bank. Shekhovtsov secured a position in the investment banking department with an excellent salary for those times of $1,200, but he only managed to work at ING Barings for six months—the 1998 crisis disrupted everything. Shekhovtsov, like many bank employees, was laid off, though he did receive seven months’ salary as severance pay.

In his final years at the academy, Shekhovtsov read Bill Gates’s book about the rise of Microsoft and became interested in the technology business. In 2001, he and a friend started their own company, Innovative Power. The business idea was simple—find scientists in research centers such as Troitsk, Dubna, or Bauman University and attract financing for their undervalued technologies. Shekhovtsov quickly succeeded in finding scientists and distributed several thousand dollars to them, but there was no commercial result. Shekhovtsov admits he was naive back then: “Scientists change the world; you can’t give them money to develop a business. You have to start with the entrepreneur”.

After closing that project, in 2003 he joined “RTI Systems,” part of Vladimir Yevtushenkov’s AFC Sistema, as an advisor on innovation and venture projects. Shekhovtsov proposed investing several million dollars in corporate technoparks in Sarov and Dubna, organized a Technology Commercialization Center at Bauman University, and signed AFC Sistema’s first public-private partnership agreement with the Fund for Assistance to Small Innovative Enterprises in Science and Technology—seven startups were launched, some of which were integrated into AFC Sistema. Later, Yevtushenkov’s company created its own corporate venture fund “Sistema Venture,” inviting Yevtushenkov’s friend, former head of the Steel Research Institute Dmitry Rototaev, to lead it, while Shekhovtsov became one of his deputies.

In 2005, the venture business in Russia seemed to gain new momentum and government support. The Ministry of Economic Development, headed by German Gref, was building a foundation for venture projects, resulting in the creation of the Russian Venture Company (RVC). Gref drew on the experience of Israel’s “Yozma” program (Hebrew for “initiative”), whose founder Yigal Erlich was even invited to the RVC board. From 1991 to 2000, “Yozma” helped increase venture capital investments in Israel 60-fold, from $58 million to $3.3 billion, creating about 800 companies. Israel took first place in the world for R&D spending as a percentage of GDP, and hundreds of Israeli tech companies went public on U.S. exchanges or were sold to strategic investors for billions of dollars.

In Russia, the attempt to replicate Israel’s success involved allocating funds through contests. Yevtushenkov’s fund Sistema Venture won the first Ministry of Economic Development contest for the right to manage regional venture investment funds, leading to the creation of the Closed-End Investment Fund “Regional Venture Fund for Investments in Small Enterprises in the Scientific and Technical Sphere of the City of Moscow” with assets of 800 million rubles, managed by “Alliance Rosno Asset Management” (a joint venture of AFC Sistema and the German financial conglomerate Allianz). Half the funds came from federal and Moscow authorities, the other half from AFC Sistema. The fund invested in Russia’s first online cinema at the time, Tvigle, the software developer for information leak protection SearchInform, and the innovative seismic exploration company “Seismoshelf”.

But the projects of the Sistema Venture fund, where Shekhovtsov worked, barely started before they nearly ended. At the end of 2006, he learned from the morning newspaper that AFC Sistema had sold its stake in the insurance company “Rosno” to Germany’s Allianz for $650 million. “Alliance Rosno Asset Management” became a subsidiary of Allianz, and no one remembered the venture funds. After difficult negotiations, Shekhovtsov himself moved to this management company and recruited new employees, including the future founder of the largest online travel seller Onlinetours Konstantin Pobedkin and Alexander Savchenkov, who founded a major player in lead generation CityAds. The new team won several more government contests to create venture funds jointly with the authorities of Perm and Mordovia and a federal fund with RVC.

The 2008–2009 crisis hit the collective investment market hard. Assets under management at “Alliance Rosno Asset Management” fell from $1 billion to $300 million. Yet the venture business looked excellent during the crisis—assets did not decline, and the venture division’s revenues (about $4 million per year) made up a significant share of the company’s income. Despite the successes of Shekhovtsov and his team, the company’s management refused to pay them the contractually agreed compensation. The conflict escalated; in 2011 the venture department was eliminated, and Shekhovtsov’s team resigned.

In 2012, Shekhovtsov and friends launched one of the first private accelerators in Europe, TexDrive, by purchasing a franchise from the American accelerator TechStars. Shekhovtsov raised $600,000 for early-stage projects. Now he says that a private accelerator turned out not to be the most successful tool for financing seed projects—after all, it required investing a lot and often, which only the government can afford. In addition, the large number of projects does not allow deep involvement in each one, which contradicted Shekhovtsov’s principles: a venture investor dives deeply into the business together with the founders at the earliest stage. For example, one entrepreneur took the $25,000 allocated by the accelerator for himself in two months. But SiteSecure—another TexDrive project in cybersecurity—delivered 50% annual returns over several years.

In 2014, Shekhovtsov launched the investment fund Genezis Technology Capital. But the start was difficult—Shekhovtsov, like many other financiers, got stuck in Cyprus’s Bank of Cyprus. More than half the money from the first fund under Genezis Technology Capital was recovered from the bank, after which investors asked for their money back. Shekhovtsov had to launch a new fund from scratch, which invested in the project Puzzle English (online English language learning). Shekhovtsov brought in SOLventures, the fund of Delivery Club founder Levon Oganesyan, for this project. And Puzzle English became the leader in the niche of online language learning services—it has 5 million users. Shekhovtsov claims the project’s conversion rate is the highest on the market at 5%, the company is growing and entering new markets. The project generates stable income, and Shekhovtsov is in no hurry to sell his stake, although, according to him, offers come regularly.

Later, Genezis Technology Capital invested in several other companies—with a focus on artificial intelligence and robotics, such as EywaKitchen.com, an artificial intelligence project for the kitchen: using voice, it helps control built-in appliances and interior items and suggests recipes. The project already has initial orders for devices, and the company cooperates with Google and Yandex.

Most of the investments are purely industrial. The fund, for example, invested in Aripix Robotics. Among the company’s founders, besides Shekhovtsov himself, are engineer Andrey Spiridonov from Nokia-Siemens and Huawei and Shekhovtsov’s old friend Dmitry Simonenko, who was at the origins of the software company Parallels, which sells cloud solutions. With Simonenko, Shekhovtsov closed one of his best deals. He was the first investor in the Irish Innalabs, which specializes in gyroscope development; Innalabs has more than 200 clients worldwide, including Boeing, SpaceX, and Google. Other Innalabs investors include Sequoia Capital founder Bill Newton (through Cyber Air fund) and HeadHunter founder Yuri Virovets. Innalabs is valued at around $100 million.

Over more than 15 years of work, Shekhovtsov has formed his own approach to investments: he invests up to $500,000, prefers to be the first investor or even a co-founder, participates in building the business model and product, and helps form the team. He says he has always admired the approaches of the giant Sequoia Capital (one of the first investors in Apple). The firm’s partners sit in a modest office, but the fund has become the most profitable in the venture industry in history.

“I invest in what brings benefit to people, so we won’t have investments, for example, in gambling. Entering a project with a three-to-seven-year horizon, we expect no less than 20–50x,” Shekhovtsov says. According to him, today the ruble’s devaluation offers great opportunities—Russian programmer teams cost less than one IT specialist in California. Therefore, investments in companies with development in Russia and former Soviet countries and the ability to scale to other markets are what Shekhovtsov considers the most promising. He currently manages more than $50 million. The management and performance fees are standard for the market—2% and 20%, respectively. Forbes)

About Maxim Shekhovtsov

Maxim Shekhovtsov is one of the first venture investors in Russia and has been investing in high-tech companies for more than 12 years. His first deals in the late 1990s took place at a time when the term “venture investing” was virtually unknown in Russia. Maxim is a co-founder of the venture fund direction at Allianz ROSNO Asset Management (3 venture funds) and 1 private equity fund focused on high technologies. He has long been known in the high-tech industry as a successful investor. Maxim was the first venture investor in companies such as Tvigle Media (the first truly media company on the Internet in Eastern Europe selling advertising on licensed clean content), Searchinform (a leader in the enterprise information security market offering solutions based on a built-in powerful full-text search module), Seismoshelf (developer of an innovative total seafloor seismic exploration technology (Dense Seismic on Seafloor – DenSoS) that enables the construction of a “seamless” seismic section at the land-shelf boundary and adjacent shelf areas), Biopipe (the only owner in Russia of the technology for manufacturing composite pipe from heat-resistant polyethylene with a colloidal nano-matrix of silver ions on the inner layer), as well as InnaLabs, Mobile Doctor, Mobile Innovations, Delis Aliance, Wilpul, Ankilon, and a number of others.

Areas of professional interest: IT services, products and technologies, new materials and nanotechnologies, new media, new telecommunications services (VoIP, WiFi, WiMAX, 2.5G/3G etc), mobile devices and platforms, online games, services and networks, e-commerce, high-tech services in the oil and gas production sector, etc. Professional experience Mr. Shekhovtsov began his career in the investment banking business, working at companies such as Centre Invest Securities, ING-Barings, and others. He was engaged in entrepreneurial activities and investing in venture projects in the fields of IT, communications, multimedia, new materials, and biotechnology. At the RTI Systems Concern, Mr. Shekhovtsov held the position of advisor on venture projects and innovative activities; in the corporate venture fund “Sistema Venture” he served as senior vice president for venture funds, and also as director of the Center for Innovative Development of AFC Sistema.