President of Russia Dmitry Medvedev: Colleagues,
Today, we will continue our discussion on venture capital investment. For all of us present here this is an important but difficult subject. I am not referring to our foreign friends who have joined us today because they have no problems in this area. But in Russia the venture capital infrastructure and the scale of venture capital remain very modest. And, although we have made a transition to practical work and the trend of Russian companies increasing their spending on research and scientific development has became apparent, we have very little venture capital, to put it plainly.
One hundred and eight venture funds are operating in Russia now. Of those, according to a report I have read, 43 are active. As I understand it, that means the rest of them are passive, or something like that. What does that mean? That means, 43 of them exist and all the rest do not. So, the correct number is not 108 but 43, with the total volume of capital amounting to about $2 billion.
“ Emerging venture capital funds and start-up companies deal with much higher levels of risk and enter into more complex relationships. We also need new organisational and legal structures that will be best suited for addressing these challenges.”
Yet, everything depends on what we compare it with. Say, ten years ago we would have thought it was very cool. But now we realise that $2 billion is not that much for a country such as ours in comparison with the funds that are available in other developed countries.
Another factor that limits the development of our innovation market is the lack of demand for high-tech products. We have discussed this more than once and have concluded that one of the reasons is the lack of economic incentives, shortage of funds for transforming innovative ideas into finished products, and, finally, just the general unwillingness to tackle such a complex, cumbersome and risky business. We have discussed this too, including with our colleagues from other countries, from the United States, when we met with venture capital representatives.
We need concrete measures to change the situation, and let us look at each of them. First, it involves the transition of the state to an innovation economy and increasing the complexity of business relations. Emerging venture capital funds and start-up companies deal with much higher levels of risk and enter into more complex relationships. We also need new organisational and legal structures that will be best suited for addressing these challenges.
Second, we need to develop a system of expert evaluation and a whole range of services. I mean the services that traditionally accompany business, for example legal services, information services and accounting. Any start-up is doomed to failure without such support, without the opportunity to conduct business in a civilised manner. But business support must be reasonable and sufficient, because not every start-up company needs to hire a legal department straight away, or a huge accounting department. Usually that is a step in the wrong direction.
Third, it is vital to expand the areas that are funded by the Foundation for Assistance to Small Innovative Enterprises, using mechanisms such as grant and repayment financing.
“We need not only to attract foreign investment, but also to develop the domestic financial market for this.”
Fourth, we need not only to attract foreign investment, but also to develop the domestic financial market for this. That will mean that the raised capital will remain in Russian companies regardless of the situation in global financial markets or other factors.
Some things have already been done in this area. We have adopted legislative solutions that protect investors from the bankruptcy of financial institutions. We have introduced tax incentives to encourage scientific work, R&D and innovative technology.
We will continue to reduce the administrative burden on investment funds. Moreover, exports liberalisation for innovative products is also an acute problem, given the very complicated procedures for customs clearance.
Finally, we need to ensure continuity of all parts of the innovation chain and coordination of development institutions. We have set the objective of creating an innovation boost for high-tech companies. It is time to create a single database of such projects and a system of project logistics.
“ We have adopted legislative solutions that protect investors from the bankruptcy of financial institutions. We have introduced tax incentives to encourage scientific work, R&D and innovative technology.”
Colleagues, we must also not forget that our country has excellent research potential and the number of enterprising and talented people here is certainly no lower than in other countries. Nevertheless, there are some problems in this area. I have just talked with students at the Moscow Institute of Steel and Alloys, and with young scientists who are involved in different projects. In general, all of this looks very attractive when it is backed up by technology. Incidentally, I had a discussion on this subject at Seliger as well.
But to be honest, there is still a feeling that the system at work here is fragmented, because where such projects are realised it tends not to be the result of systematic work. Often it is just luck: the right people met in the right place and managed to find the money somewhere, or sometimes they haven’t found it yet but they are looking. But the system as such does not look like a success so far.
We have a number of successfully implemented venture capital investment projects in this country. And of course, it would be nice if they became examples for others, or stories that people tell. But we should realise that such a business as venture capital investment will never be risk-free. Mistakes are made even in big businesses, even in the operation of oil and gas companies. Surprisingly, some of them even go bankrupt.
But if we look at innovation business from the point of view of venture capital financing, we realise that the percentage of failure is higher in this area. However, what matters is that these failures are properly perceived by the state, because all of our monitoring mechanisms are based on the concept that if a result is not achieved, even if it is a result only on paper, then there are grounds for prosecution, a tax investigation or sometimes even a criminal case can be made. With this attitude we will never have any venture capital because time and time again different inspectors will visit a company asking to see a report, and if the result is negative there will be problems.
“All the laws I have signed today are a result of our joint efforts, including the instructions I issued on the Commission's findings.”
Therefore, we need to change legislation in this area. It would be preferable, however, to do it in such a way that all sorts of crooks don’t rush to take advantage of this. That is also possible, and then we will have only negative results and no achievements, which happens in science. Our legislators and the Government will have to find a way to balance this mechanism. Therefore, I instruct the Government to consider this issue.
I would also like to say at the beginning of our discussion that today I have signed a series of laws which I hope will contribute to technological modernisation and scientific progress. In particular, I have signed laws on amendments to the Law on Higher and Postgraduate Professional Education and the Law on State Science and Technology Policy. Among other things, these laws stipulate a simplified procedure for recognising academic degrees, titles and diplomas.
I have also signed a law on the organisation of government and municipal services, which provides for the establishment in our country of special multi-service centres that should work on the so-called one-stop principle. Let us hope that this will contribute to the development of direct contacts. As a result, people will be able to use online government services without the participation of officials. This is very important, and we have often talked about it. I hope that the system will begin to show real results in about five years from the moment the legal framework is adopted, that is if we don’t have another Singapore in a year’s time.
I have signed a law on the Russian Research Centre Kurchatov Institute. So now we have the first such full-fledged research institute. And I hope that this centre will become one of the key elements in the national innovation system.
I have signed the law on heat supply, which regulates the issues related to the production, transmission and consumption of heat, with the creation and development of heat supply systems. The law defines the powers of state and local authorities in this area, and the rights and responsibilities of consumers.
I would like to say that all the laws I have signed today are a result of our joint efforts, including the instructions I issued on the Commission's findings, further efforts by the Government on drafting the bills (in some cases, it was the work of the Presidential Executive Office) and the adoption of these laws by the State Duma. I would like to thank all of you because I believe this is all very useful.
“Without addressing these issues, no technological modernisation and no innovation economy are possible. These are the issues of fighting corruption and reducing administrative barriers in our country, as well as promoting fair competition.”
And one last thing I would like to say: today, I read in a newspaper, the Vedomosti I think it was, that in our country the people’s idea of modernisation is very different from the President’s. Well, of course it is the media’s job to exaggerate, that is absolutely normal and maybe even sometimes necessary but I think everyone here understands that neither I nor any of you present here have ever taken modernisation to mean simply a transition to innovation economy or technological upgrading.
This is certainly a very important part, but there are other conditions involved in this process that are equally important. Moreover, without addressing these issues, no technological modernisation and no innovation economy are possible, as people have been saying and it is difficult to disagree with that. These are the issues of fighting corruption and reducing administrative barriers in our country, as well as promoting fair competition. The fact that our people name these three factors as key is, I think, very symptomatic. This is to ensure that we understand where we are going.
Let's get down to work.