Russian VC invests $60m in Israeli high tech

A large delegation of Russia's top venture capitalists will attend the "Globes"-Ernst & Young Journey 2013 conference on Thursday. They will be joined by CEOs of prominent Russian high-tech companies, including Yandex CEO Arkady Volozh, Game Insight CEO Alisa Chumachenko, who will participate in a special event to tighten Israeli-Russian ties and encourage the search for opportunities in the two countries. Ernst & Young estimate that Russians have invested $60 million in Israeli in the past two years.

"Total venture capital investment in Russian high tech now equals investment in Israel, about $1 billion a year, and it is growing steadily," says Ernst & Young Israel partner Noam Canetti. "Although bureaucracy and the business environment continue to be a challenge, foreign venture capital funds have begun making direct investments in Russia, and Russian companies have gone public in the UK and the US."

Ernst & Young estimates that 20 venture capital funds and private investors operate in Russia, in addition to foreign funds.

In the past few years, the Russian government has provided billions of dollars in support for high tech, through grants and investments via organizations and funds, such as RVC, a government company similar to Israel's Yozma Venture Capital, and Skolkovo, in order to accelerate the development of industries based more on innovation than natural resources, such as oil and gas, which are the mainstay of Russia's economy.

The IPOs mentioned by Canetti include Yandex NV (Nasdaq: YNVX), a search engine, which has a market cap of $12.6 billion; and two companies floated this year, Qiwi plc (Nasdaq: QIWI) and Luxoft Holding Inc. (NYSE: LXFT). The model of Almaz Capital, one of the Russia's leading venture capital funds, developed in a way similar to Israeli venture capital, says founder and managing partner Alexander (Sasha) Galitsky. His career as an entrepreneur and investor has been impressive, even by the standards of Silicon Valley, let alone Israel.

Despite the size of Russia's economy, its computer market is small, with few companies on the scale of IBM Corporation (NYSE: IBM), Cisco Systems Inc. (Nasdaq: CSCO), or Microsoft Corporation (Nasdaq: MSFT). "In this sense, we're similar to the Israeli model, with companies developed to succeed in overseas markets," Galitsky says. Almaz was one of the first investors in Yandex, and has also invested in US companies, such as Vyatta, which was sold to Brocade Communications Systems Inc. (Nasdaq: BRCD) a year ago.

Almaz has not yet invested in any Israeli company, but Galitsky says that matchmaking between investors and companies on both sides is almost a matter of course. He is making his second visit to Israel, although he says that he still watches the Israeli market from afar, and he does not yet feel ready to invest here. "I look at the Israeli high-tech ecosystem slightly differently now," he adds. As for Israeli investors interested in Russia, he advises, "There are many opportunities in the Russian Internet market."

One of Russia's most prominent Russian high-tech entrepreneurs will arrive in Israel: Serguei Beloussov, who is behind several companies, such as Acronis, Parallels, and Rolsen, and is a founder and senior partner of Runa Capital. "Russia's high-tech market now has some multibillion dollar companies, compared with 20 years ago, when there were none," he told "Globes".

Notwithstanding the rapid development, Beloussov says that Russian high tech faces difficult challenges, which are similar to the claims frequently made in Israel. "The number of people with skills in the hard sciences (such as physics and mathematics) is a tenth of what it was 20 years ago, which poses a major challenge for the future," he says. "Although there are many Russian scientists, who even win Nobel Prizes, they're not in Russia, and they don’t teach Russian students."

This is Beloussov's first visit to Israel, and he is coming as both an entrepreneur and as an investor. Some of his companies have partnerships with Israeli companies; Parallels acquired Israel's Sphera Corporation in 2007, and Runa Capital has invested in Cellrox Ltd., which has developed a multi-persona platform for running multiple personas on a single smart mobile device, and other Israeli companies.

Published by Globes [online], Israel business news - www.globes-online.com - on October 16, 2013