Sergey Vakhterov, Managing Director for investment activities at Rosnano, talks about venture investments: on how to look into the future, what makes you move forward, and how to manage risks.
Pay tribute to people who have been in the venture business for 10–20 years
… Sergey Vakhterov explained how private funds differ from state-owned ones, what mistakes occur in the venture business, and how digital technologies merge with traditional engineering.
Each fund is tailored to specific technological sectors. They are specified in the mandate. Based on it, we choose an industry and examine the prevailing technologies within it, study key players in the sector, and then look for those who have substitute technologies or new technological solutions for the market, selecting the most promising ones among them.
You decompose the industry into its elementary particles and, at that level, look for where profit can be made. Then you invest — not in scattered elements, but in a set of technologies that, when combined, can generate a multiplying effect. At first glance, it may seem like just a simple set of small technologies, but with skillful use, they can be turned into a major story.
Suppose you decide to invest in industrial robots operating in a warehouse. There are several trends in this market: autonomous driving, 3D warehouse recognition systems, and so on. You see that in the warehouse segment there are small robots like those at Amazon that can carry up to 5 kg of cargo; robots that move carts around the warehouse; and forklift robots that move loads along a predefined route.
You determine which type of robots you are interested in and look for an upfront technology. For example, robots that can, based on a given 3D model, build a route from point A to point B and move along it while recognizing obstacles of different priorities. Then you examine major players and their corporate developments, as well as smaller ones — startups that are technologically advanced but lack financial capacity — and invest in them.
For a long time, the venture investment market developed weakly. Only individual enthusiasts believed in and worked in this market, which is why a certain circle of funds formed that investors trust. These include Almaz Capital, Baring Vostok, Elbrus Capital, and others. They have historical groundwork, proven effectiveness, and established reputations. They have successful closures and exits, as well as experience and competencies.
Transferring money to external management funds in Russia is difficult. It is more unaccepted than accepted. There are very few venture funds capable of confirming their competence and success with historical results. This is one of the reasons why many small funds emerge, where people who have earned money elsewhere try to build their own success story in venture business. In the near future, many of them will realize that fund-based models are more efficient than working independently. This is exactly how the venture investment industry developed worldwide.
Working with private capital implies higher returns compared to the benchmarks set by funds with state capital — that’s the first point. Second, the speed and number of deals are higher due to less regulation. Third, the approach is often more systematic — because resources are limited, and the funds are focused on high returns.
There are very few venture funds capable of confirming their competence and success with historical results.
Within the professional community, the culture of reflecting on failures is well developed. Everyone understands that there are both successes and failures. We all make mistakes — some deliberately, others due to circumstances. And if you have such experience, it means that, as a reasonable person, you have drawn certain lessons and try not to repeat past mistakes. Meanwhile, people who have never experienced failure and operate only in a state of euphoria tend to cause fear and suspicion rather than trust.
The first common mistake is investing in technology that is too breakthrough for the current state of the market. You assume it will work tomorrow, but in fact, the market will only be ready for it the day after tomorrow. For an investor, this means higher financial costs and lower returns, because you have to sustain the company until the market naturally matures enough to adopt the new technology.
The second mistake is team assessment. Many people change during the course of a project. When you have nothing but technology, it’s one set of challenges. When everything starts to grow rapidly and production can’t keep up with the number of orders, people begin to behave differently (often turning 180 degrees from how they started) and refuse to honor the agreements made at the outset.
People who have never experienced failure and operate only in a state of euphoria tend to cause fear and suspicion rather than trust.
Large enterprises will consume innovations only when it becomes a matter of survival. This can occur under one condition — when failing to adopt an innovative solution in time causes you to fall behind competitors. Therefore, the state must ensure a competitive market and conditions for its development. Once real competition appears, companies will begin to adopt innovations in order to be better than their competitors tomorrow.
A good example is Yandex and Mail.ru, which aggregate innovations at a tremendous pace. Ideally, there should be 5–8 such companies in each economic sector. For instance, one creates Yandex.Taxi, another invests in City-Mobil, a third develops car sharing, and so on. In this way, the innovation market grows at a multiplied rate.
We support Far Eastern companies and those who see this region as a platform for further growth. Practice shows that such companies exist: many young and developing entrepreneurs view the Far East as a promising region for expansion. Some are attracted by the presence of large corporations, others find it convenient to have a warehouse there, and some launch R&D based, for example, at the Far Eastern Federal University.
Localizing a company in the Far East is not easy — especially when there is a 7–8 hour time difference. This is compounded by the long distance from Moscow and the travel required. But even if it’s tough right now — the road is made by walking.
Both local and global solutions are in demand. Everything related to infrastructure monitoring — power lines, gas pipelines, etc. — is in demand. Since the region is cold, there is a need for solutions such as engine-start systems for vehicles operating in such specific conditions. Renewable energy will also develop. Because there are many isolated areas, it’s more cost-effective to install a solar panel with a wind turbine. With such a symbiosis, you get lower fuel consumption and a longer lifespan for the power system. At the same time, there are technologies not specific to the Far East but highly in demand, such as cloud-based IP telephony solutions.
Everything that lies at the intersection of digital and traditional industrial solutions is promising: the industrial internet, robotic machinery, data processing, and predictive analytics based on big data, etc. The latter, for example, allows you to understand which batches came out with stable quality, when there were failures, and whether the production process was properly and efficiently structured — and based on that, make management decisions.
The most in-demand solutions are those that allow integration of different systems in production. Often, safety systems, production, warehousing, and procurement operate independently and are only brought together at the reporting stage. A unified analytics system allows the company to become more flexible and faster — and flexibility and speed are the key to successful development.
BLITZ
— A role model in the investment business?
— One must pay tribute to people who have been in the venture business for 10–20 years and look up to them, understanding that experience and reputation are earned over many years.
— The most successful project in your portfolio?
— I would name two — Profotek and Geosplit. Both started from scratch, developing their own technologies, and are now competing with large international companies. These are worthy projects that should, in the future, repay the investment and achieve the expected return.
— The most promising technologies?
— Technologies in the field of cybersecurity, as more and more data are processed in the cloud and need protection.
— The main event in the Russian venture market over the past five years?
— On the one hand, major deals that showed that the venture business is a serious industry. On the other hand, corporate conflicts of recent years. People realized that the venture market is not only about good relations between company founders and co-investors but sometimes also about tough corporate interactions.
Once You Stop, You Start Losing
– Do you play computer or board games?
I play chess.
– The need to think several moves ahead is directly related to your work, isn’t it?
Of course. We invest money for the long term — and no one knows what will happen in three years, or even in a year. In practice, things often don’t go as planned. People who invent and produce a product want to impress investors; they promise that tomorrow everyone will bask in the glory and profit together, conveniently forgetting to mention the million obstacles along the way. And if the investor doesn’t anticipate these risks, problems are inevitable. Chess helps you sit down and calmly think: what if events unfold differently from what I planned? Another question is how efficient that foresight will be.
– Your investment portfolio was formed between 2009 and 2011. What amount were you managing at that time?
In rubles, it was around 28–30 billion.
– Managing that amount of money is a great responsibility. How do you look into the future to avoid mistakes?
You need to foresee what steps will come next. You must have a technology that preferably surpasses what’s currently on the market — and, without fail, R&D. When you build a plant today for one technology, you need to anticipate the next one and develop a product that will be in demand tomorrow. The average technology lifecycle is five to seven years, and in some industries even shorter.
– So the production line must initially be designed for constant change.
Otherwise, you won’t survive: you might keep working on the old technology for another 5–10 years, but in 15 years your plant will shut down and become just another monument of industrial architecture.
Next, you must have a competent team — people who understand what they’re doing and can keep their word.
The third step is to conduct an expert evaluation and talk to the market. Very often it turns out that the technology is unique but unnecessary.
And the fourth step: if the entire market agrees that the technology is useful, you need to look at it from a financial perspective — to understand in advance who you plan to sell your product and production to.
We have young companies that are developing quite promising products, and they are fully competitive in the international market.
The Russian optical fiber market is about 4 million km per year, while the global market is 480 million km — of which roughly 250 million km is consumed by China.
– For example, which ones? Are they part of your portfolio? Among what I’m looking at right now are projects from our joint fund with AFK Sistema. For instance, autonomous unmanned loaders that operate warehouses without human involvement, or construction 3D printers that can print a house in a day.
– You co-manage a private equity fund created by Rusnano together with AFK Sistema. Was the communications project launched at the intersection of your interests?
No. That project emerged a bit earlier and is being implemented jointly with Gazprombank and the Government of the Republic of Mordovia. In September 2015, the first and only plant in Russia producing telecommunication optical fiber that fully meets all international market standards was launched. As of now, 90% of the plant’s output is exported.
– Isn’t it needed domestically?
It is. But the Russian optical fiber market is about 4 million km per year, while the global market is 480 million km — of which roughly 250 million km is consumed by China.
– Why so little in Russia?
Right now, there’s a unique situation where prices in China are the highest in the world. Meanwhile, due to unfriendly actions by international players, the Russian market has some of the lowest prices.
And in less than two years of operation, the plant has become so successful that it’s now expanding production capacity and starting construction of the second stage of raw material production, which is truly unique. Only five companies in the world possess such technology. It’s a non-exportable technology — it never leaves the territory of its owner.
– What’s unique about the technology? We already had internet, television, and telephony before 2015.
Yes, but at different speeds. And it’s clear that in the future, Big Data will continue to grow and demand larger data centers — and that, in turn, requires the transmission of massive data volumes. To create the infrastructure capable of supporting that, optical fiber is essential.
– So this product drives other industries as well.
Yes. The direct connection is cable manufacturing — the cable industry. The second one is the production of various polymers.
When we say our internet is wireless, we mean the symbiosis of wireless and wired technologies, which will certainly coexist for at least another 20 years.
– Who supplies the polymers? Are they ordered from Russian companies? No. Unfortunately, all materials are purchased abroad. Developing domestic production is one of our goals, as it would reduce costs. Consequently, telecom drives infrastructure for homes, cities, and data transmission — essentially, the entire field related to data transfer. And today, everything revolves around data transmission.
– But data transmission is trying to move away from cables. The internet is becoming wireless. How does that affect the company’s future?
Wireless internet still relies on a router that distributes and receives a signal to transmit it elsewhere. To connect that router, you need to run a cable to a data center where the information is stored. So when we say the internet is wireless, we mean a hybrid of wireless and wired technologies that will definitely coexist for about 20 more years. Several generations of improvements will pass before a true alternative to the traditional cable emerges.
– Your colleagues have modern art on their office walls, while you have coils and panels…
It makes things easier to explain. Speaking of panels: the Russian company Hevel, with a plant in Novocheboksarsk, produces solar cells. Their HIT technology and panels have an efficiency rate of 22%, placing us among the top three industrially produced solutions in the world — competing with Panasonic and UBS. In terms of performance and cost-to-quality ratio, these panels are also among the global leaders.
– What is the efficiency of these panels?
They capture sunlight better and store more energy.
– A panel cannot exist independently; it must be integrated into infrastructure that converts electricity for transmission to the grid.
Currently, there is government support in this area. You build solar or wind farms, connect them to the grid, and supply certain capacities. The government says, “If you guarantee to supply me with this amount of energy, I will purchase it from you at guaranteed rates for the next 15 years.” And the company already has orders to construct alternative energy facilities totaling around one gigawatt. There is also a strategy to enter international markets in the coming years. I understand that, at this point, this initiative cannot compete with traditional energy, but I support it because I recognize that this production is more environmentally friendly.
Those who stop, do not come to us. There’s simply no point in talking to them.
– Alternative energy could help remote areas that are otherwise hard to reach.
There is experience with this. A significant number of settlements in the Far Eastern Federal District are isolated and operate exclusively on diesel — the so-called “northern supply,” which comes with certain challenges. “Hevel” developed a hybrid system, solar-diesel: during the day, you generate electricity using the panel — at night, the diesel operates. At the same time, storage batteries are installed, which also allow some electricity to be supplied during the night.
– How much more environmentally beneficial are these solutions?
Up to 40%. This is the result from the implementation of one project. In a year or three, due to the scale effect, the numbers will become even more impressive.
– What about other projects?
There is “Akrilan,” a company in Vladimir that produces dispersions for water-based paints. One in every five cans of water-based paint made in Russia uses dispersions produced by Akrilan.
– How quickly have they grown? Now — one in five, but two years ago, how many?
One in eight. We compete with the world’s largest chemical company, Dow Chemical. Every year, we take a small piece of the market from them. The team is constantly developing.
– What motivates them? What kicks in once certain material needs are met?
Self-actualization. I think it’s important to be part of something big, something right.
– But some stop, and there are plenty of such examples.
Those who stop, do not come to us. There’s simply no point in talking to them. Once you stop, you start losing. Unfortunately, it doesn’t work any other way, because there are always those who do not intend to stop.
Another example of a standout startup is “Profotek.” The team developed optical voltage measuring transformers. Only three companies in the world have implemented such a solution.
– How does the implementation of this solution impact our daily lives?
This is part of the so-called “smart grid.” It automatically transmits all electricity readings: how much electricity passed through the network, at what capacity, and at what voltage. There is virtually no loss — a problem that is very significant in the power industry. After all, as consumers, we often end up paying, in part, for these losses.
Currently, we have sent Profotek’s products for testing to Canada, Italy, and Switzerland. Recently, EDF in France said: “Guys, we want the exact same transformer.” And the team — only 50 people. A real startup-startup. They operate at Technopolis “Moscow.” This year, we will double their capacity, and next year we plan to modernize and increase production several times over, depending on orders.
Another company, “RST-Invent,” recently became well-known due to the introduction of mandatory RFID tagging for all fur coats imported into Russia. The team uses RFID technology — automatic object identification. RFID tags are applied to the coats and allow product information to be read with minimal loss or distortion, from the moment the item is tagged at the border until it reaches the customer.
Not many have built 80 factories in six years. In this regard, our accumulated experience is certainly unique.
– Practically blockchain for fur coats.
Practically. There is also “Russian Quartz,” which mines and specially prepares quartz sand used in microelectronics production. 100% of its products are exported: every third circuit board made in China, Japan, Taiwan, or elsewhere contains Russian Quartz.
– Who did they work with before Russian Quartz entered the market?
There is an American company, Unimin, which holds roughly 70% of the market. We are actively pushing them aside.
– Why are the founders of all these companies willing to work with you as an investor?
Besides investing money, we provide administrative and managerial support. Not many have built 80 factories in six years. In this regard, our accumulated experience is certainly unique. A separate value is the synergy with the productions we already have.
Sources: Snob; Inc.
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