Inside Information at High Frequency

A venture cycle lasts about a decade on average. In the past, the venture market experienced upturns in 1964-1971, in 1978-1987 and in 1994-2000. Correspondingly, it hit bottom in 1975 and in 1992. Where is the bottom of the current downturn? The engineering market began to go downhill in April 2000, or more than three years ago, approximately the average period of downturn in a large cycle. There are good reasons to think that the market reached bottom in late 2003, and that we are at the beginning of a new long cyclical upswing.

Acting like lemmings

Taking the frequency of the venture cycle into consideration, it's not that difficult to project investments to meet the next wave, provided that investors don't behave like lemmings. In financial circles, those who make decisions along with the rest of the crowd are nicknamed "lemmings." According to the old legend, lemmings scurry in droves to a river or sea where they all ultimately drown. Russian technology investors are still thinking much like these legendary creatures. Russian investors simply dropped the ball on last technological boom, partly because of the 1998 default and the GKO collapse and partly because they learned about the technological boom from newspapers as it approached its peak. Russian investors also found out about the end of the new economy's golden age too late, and some became aware of it almost a year after the internet crisis.

Today, however, some investors have grown wiser. Expert knows of at least three new venture funds with a total of about $100 million, which are being set up in Russia. The funds already in operation have a few deals on the table close to signature, and all the funds are confidently drifting towards earlier and earlier stages of projects development. Given that many investors, including big ones, got burned by technology once upon a time, the new venture funds in a few years will have plenty of lemmings to sell portfolio companies to, once the boom becomes evident to everyone.

Thus, 2004-2005 may turn out to be the most favorable moment for aggressive technological investment in new breakthrough companies, and from all evidence, the most sensible investors have already started.

Russian radio

The boom in the 1960s was based on microelectronics. PCs were the basis for the boom in the 1970-80s, and the internet was behind the 1990s boom. Only after some time will it finally become clear what will power the next wave. However, if we were to place bets, mobile and wireless technologies or, more simply, various radio applications, predominantly in the GHz range, are the undoubted favorite of the last few years. Arseny Tarasov from Cisco Systems explained that this range is attractive as it has enough space for all technological plans of the next decade.

And engineers and managers at engineering companies have big plans. Radio technologies underlie all mobile and wireless devices. Properly speaking, mobility is unthinkable without wireless functionality. Telephones, camera-phones, smart-phones, organizers, and other mobile devices lose two thirds of their functionality without wireless capabilities. Computer accessories and peripherals more and more often fit the Bluetooth standard for wireless communication. Computer networks are being ousted by radio channels based on Wi-Fi, Wi-Max, UMTS (the 3G cellular communication standard) and so on, right up to UMB (the ultra-wide band that does not yet exist but is already in the making). RFID (radio frequency identification), which is expected to make a revolution in trade and security technologies, rests on the possibility of creating "smart" digital labels with radio transmitters. Mobile devices require completely new standards of weight, power sources, and power consumption, which in turn spur the development of new generations of batteries, accumulators, and fuel cells, as well as nano-materials that reduce power intensity and weight, among other things.

Today, wireless technologies are entering the field of medicine as well (for example, as remote sensors for monitoring patients' health, which are very in nowadays). There is plenty of work to be done here, just what the doctor ordered for a fourth venture boom of the second half of 2000s. If mobile and wireless features of all types really become the basis for the new breakthrough, this means Russia might have a chance of joining in the boom.

Not all branches of scientific and engineering knowledge are equally developed in Russia. However, Russian radio engineering has more than a century of tradition and in terms of quality Russia is on par with the world's leaders. The Russian radio industry has never experienced a shortage of financing, qualified personnel, or production facilities. Dozens of small companies engaged in radio engineering and telecommunications, both on their own and for various international companies, are already operating in Russia right now. Research in radio engineering has continued to cover a wide range of problems (the currently popular GHz range was the subject of research for the Russian defense establishment back in the Soviet era, and it is just one of Russian engineers' numerous achievements).

Many have already realized that the technological frontier of the new generation of radio technologies runs through Russia. In late April, Patrick Gelsinger from Intel paid a visit to Russia. The Chief Technology Officer of the leading manufacturer of semi-conductors made three recommendations. First, Intel sees the coming third era of computers (after mainframes and PCs) in "convergent devices" - mobile and always on-line devices like notebooks, palm/pocket PCs, and "smart" phones. Secondly, in the next few years, Intel will predominantly concentrate on integrating radio function into its chips (and an important part of these technologies is being developed in Russia at an Intel laboratory in Nizhny Novgorod). Thirdly, Gelsinger proposed that Russians pool their efforts and make Russia a model Wi-Max country. This latest standard of long-distance and high-speed wireless communications fits Russian conditions extremely well.

Thus, Russia has the technological experience and the people to make an impact in the most probable area for the next technology boom. Investments, however, remain an issue.

Money and the bureaucrats

A boom will only be possible in Russia if it is financed by Russian money. Venture capital has become international of late, and large venture funds always take the same course of action: they wait until a country has proven itself a source of interesting technologies and companies and only then do they get involved.

The venture market is not a place where investment opportunities are sought publicly. However, intensive and increasing activity is currently under way behind the scenes in Russia. Both large and medium-to-small investors, many of whom are from Russia's regions, are getting involved. Alexei Gostomelsky, Head of A4Vision, one of the most successful Russian companies, told Expert that recently dozens of potential investors have been asking him almost every day how to invest in technology.

Things are changing in terms of the number of investment-quality deals and technologies, too. According to Mikhail Gamzin, Head of Russkiye Tekhnologii (Russian Technologies), one of the most active Russian technological funds, "inventors and developers have already changed. Now they realize the difference between financing and investing." In investors' opinion, Russian engineers are now able to see venture capitalists' needs and are willing to cooperate with them efficiently, meaning they are ready to transfer control, to share future profits, and to do business based on market requirements rather than scientific interests.

The government plans, strange as it may seem, could become yet another factor capable of supporting the coming venture boom in Russia. Over the last few years, the Russian leadership's policy has looked right through the innovation business. Although speechwriters have being penning phrases about the need to back up innovations for quite some time, that's about all that gets done. Until recently, the Finance Ministry's stance had been the main obstacle to technology policy. The turning point came in February 2004 when, Vladimir Putin spoke at a Security Council meeting in favor of transferring ownership of intellectual property created with state participation to its developers and of boosting the development of venture capital, as well as other types of private investments in industry. Moreover, the president expressed himself on the matter completely unambiguously, which came as an extremely pleasant surprise to the venture community.

Early in 2004, Economic Development and Trade Minister German Gref proposed the idea of "free economic zones." Under Gref's plan, two types of zones would be established, technical-implementation zones and industrial-production zones. Preferential tax and customs conditions would be in effect within the zones. However, the Ministry of Finance was once again the main opponent to this initiative.

The government's plans provide for other measures to encourage investments in the technological sector. In the near future, the government plans to develop Russia's innovation infrastructure by building technology incubators, technological parks, and innovation centers, to finance start-ups from the state budget (with what is called "seed money"), and to exempt venture funds from double taxation.

Thus, four factors could promote a Russian venture boom. The global venture market is on the verge of a new upturn. Russia has the technology and the people to meet this new wave. It also has domestic investment resources and favorable government plans. Each of these factors taken individually would be unable to ensure that the boom will take place. Taken together, they point to the fact that a boom is not only coming, but has already begun. For the time being, only insiders are aware of it. When everybody spots it, this will mean that the boom has been in full swing for a while and that it's time to prepare for another downturn.