Startup Hubs Around the World: Moscow
Far to the north, Moscow holds the rank of having the world’s largest urban economy, and as of March 2013, had the highest number of residents who are billionaires. The capital of Russia, this mysterious city is a mix of historic buildings and modern skyscrapers. The city is determined to find its place in the modern global marketplace, and has determined to become a leading technology start-up hub.
We’ll examine 1) how the location of the city is helping their quest, 2) the tax incentives available in Moscow, 3) the legal incentives, 4) investors in the city, 5) local resources, as well as 6) the specialization of the city and 7) some startups to watch.
The northernmost megacity in the world, Moscow is far removed from California, but has aspirations of creating their own Silicon Valley. Located on the banks of the Moscow River, the city has the largest population in Russia and is one of the fastest growing tourist destinations in the world. The city is growing – will its location help springboard it into becoming one of the top startup hubs of the world?
Being able to navigate through the city is important, and Moscow has a variety of options available for residents. Entrepreneurs in Moscow can take advantage of the five major airports that serve the city, making air transportation in and out of the city readily available. Transportation within the city is a mix of old (tram service) and new (monorail service) so there is a service that will be able to handle the transport needs of the city. The most popular form of transportation in the city is the Metro – a service that sees over ten million passengers every day, making it one of the busiest metro systems in the world. Roads are lacking (there are only three main highways that transverse the city) which is compounded by the fact that automobiles are becoming more popular, making driving challenging.
Moscow consistently ranks as one of the most expensive cities in the world to live in. Rents are high and living spaces are small, but policies as recently as 1990 make it difficult for securing living quarters. Many Russians find that they are renting out their homes in the city and moving outside the city limits where the cost of living is not as exorbitant.
Advantages to choosing the city
Entrepreneurs who choose Moscow as their startup location are heading into a city rich with history. Established in 1147, Moscow has a timeline that is older than many of the world’s nations. Leaving its tumultuous past behind, the city is slowly becoming a vivacious and thriving center of growth and development.
By selecting Moscow, entrepreneurs are choosing a city that is looking toward the future. In 2009, Moscow introduced the Skolkovo Foundation, an initiative by the Russian government to establish new and innovative businesses. The 1,000 acre hub was intended to establish an entrepreneurship culture that would move the Russian economy away from depending on natural resources and embrace technical research and education.
Moscow is a city on the brink of an entrepreneurial shift. Starting a company in Moscow offers the chance to be a part of what startup accelerator spokesman Vladimir Skripnichenko describes as, “Youngsters, ideas, investors, and capital put in one big melting pot.” With the addition of training centers and university courses that promote entrepreneurship, Moscow can improve the skillset of their residents, and help to generate a skilled labor force for the startups.
With the establishment of the startup hub by the Skolkovo Foundation, the city of Moscow is positioned to take the lead on innovation and design. Another indication of the willingness of the Russian government to encourage tech startups is the addition of tax incentives for the entrepreneur. Within the Skolkovo zone is a range of tax incentives that allow the startup to get established without excessive taxation. These tax policies provide unique tax breaks for entrepreneurs that can last from five to seven years.
In World Bank’s ‘Ease of Doing Business’ ranking, Russia placed 120th out of 183 countries. The overall tone of Moscow has changed in recent years, but old habits are hard to break. Moscow has a reputation of being difficult to do business, and while the policies may be improved it will take time for the general public to believe in the changes. Initiating additional tax incentives outside of the Skolkovo facility may help entrepreneurs choose Moscow as their headquarters, as well as encourage growth in existing businesses.
Until the early 1990s, it was against the law in Russia to start a business. It was not until 2009 that legislation was passed that allowed research facilities and universities to establish a corporation. As an entrepreneur, it may be legally acceptable to start a company, but culturally the process is not smooth. Government officials are still seen as corrupt and bribery is still considered a normal part of the business process. As recently as 2010, Russians paid $581 million in bribes and protection. Clearly, there is still work to be done in Moscow’s legal incentives for businesses.
Further, filing for bankruptcy protecting is extremely difficult in Russia, providing a new perspective on startup risk. An entrepreneur ‘Startup Visa’ offers foreign-born entrepreneurs the opportunity to work in the Skolkovo facility, and offers a way to avoid the stringent, anti-business laws that are already in place in Moscow.
Investing in one of Moscow’s high-tech startup companies can be difficult. There is a major funding gap for Moscow’s startups – from conception to market the amount of funding drops almost 93%. As a company progresses through its developmental stages, the available funding goes up marginally, but is still not substantial.
Perhaps part of the lack of funding can be explained by the reluctance of Russian investors to invest in something they aren’t familiar with. Moscow’s funders are less ambitious, and entrepreneurs are more likely to seek funds from family and friends. Another cause of the lack of funding may be attributed to a less-than-friendly tax rate that offers only a 13 percent tax rate for foreign investors.
Kite Ventures, an early-stage startup fund, explains that investing in Moscow startups is an exercise in control: the investors want to minimize their risk, but the entrepreneur is not sure how to exhibit the power needed to get their start up established. Investors generally shy away from these poorly managed companies, of which there are a number of in Moscow. Finding an investor (or an investment fund) may not prove to be impossible, but it is more of a challenge than it is in other startup zones.
Moscow (and Russia) has been largely successful in training engineers, mathematicians and scientists. Unfortunately, they failed to prepare the individuals for entrepreneurship – a shortcoming that can be clearly seen when entrepreneurs present or pitch their products. To help combat this, Russia has created the Russian Venture Company. This venture group has launched over ten high tech firms globally, and has plans to continue to invest in high-tech firms both financially and educationally.
The Skolkovo facility is destined to be the startup hub center of the new tech-savvy Moscow. Within the 1,000 acres there will be research and development facilities, office space, a technology university and residential locations for employees and their families. With up to $10 million in non-refundable grants available, there is a strong push towards technological startups. An extremely strict selection policy will limit the number of companies accepted into the foundation’s program. Only one out of six companies will be accepted, and only one in four of those will receive a grant. The Russian government has poured over $15 billion into making the facility a success, and they will have to wait another 10 to 15 years before they will begin to see any form of return on their investment.
More than 800 startups have already made Skolkovo their home, and there is plenty of room for additional companies to join them. With an estimated completion date of 2018, the facility hopes to become a mini-city that boasts over 70,000 people who live and work in the tech zone. Some of the world’s largest companies have already agreed to open offices within the new Startup zone: Oracle, Cisco and Facebook, to name a few.
In an effort to improve the overall technology availability to the entire city, the government is offering broadband services to every town with over 250 people. An ambitious and expensive initiative, only time will tell if the promised wiring becomes a reality. If it does come to fruition, it will be an impressive boost to the ability of Moscow to compete globally.
Why Should Entrepreneurs Be Excited About Moscow’s Startup Scene?
There is no subtlety in Moscow’s plan: dominate the tech startup market. There are several industries that have begun to establish a foothold on the Moscow market, but primarily Moscow (and the Russian government) is focused on high tech firms.
Through special tax programs and legal incentives, they have made it clear that the government is in the business of starting business. The development of the Skolkovo foundation and the government’s continued role in providing capital, grants and other supportive tools, Moscow is well underway on its plan to dominate the startup market.
The newly developed annual Startup Village events (it began in 2013) bring entrepreneurs, startups, venture capitalists, Government officials (along with entertainment) to a three day weekend. Through the course of the weekend, attendees have the opportunity to investigate new startups, seek funding and promote their services and products. Attendance has grown astronomically since its first event, and the event continues to grow with seminars, learning opportunities and more.
Startups are the key to Moscow’s diversification needs. The Russian economy is heavy in oil and gas investments, a risky and volatile market. By seeking out investment opportunities through the implementation of the startup program, government officials can begin to diversify the holdings of the nation providing even greater financial security. This diversification can be seen in the growing nanotechnology industry, a science park and special economic zones that are created to encourage innovation.
Not only does Moscow need entrepreneurs, they need managers and engineers, as well as developers and manufacturers. To further encourage innovative thinking and development, Russia has partnered with colleges to establish training facilities that will teach entrepreneurs in business practices, and will also train business professionals in the startup industry. The multi-faceted approach is another indication that Russia in in the tech startup race for the long-haul: they are not content with what can be done in the next year; they are establishing a plan for the future.
STARTUPS TO WATCH
For a country that has only embraced entrepreneurship within the last twenty years, Russia has managed to distinguish itself as a country that is not afraid to experiment. Moscow has brought some vastly unique and different companies to the startup market, and more are starting every day. As we watch this iconic city grow into the future, one can only imagine what will be accomplished by this determined and resourceful country. Here are some of the amazing companies that have already been established in Moscow:
NormaSugar: For the individual struggling with diabetes, NormaSugar offers an app that conveniently monitors and records blood sugar counts. An efficient way to communicate with your doctor, NormaSugar takes the guesswork out of what your sugar counts have been – it records it instantly and uploads it to cloud storage, easily accessible for health professionals.
Mail.RU: A popular internet company, Mail.RU began as an email service. It evolved into a social media network and now operates the second and third most popular services in Russia. A free, spam-free email service that operates in several cities around the world, Mail.RU primarily has service for Moscow and her surrounding cities.
Vizerra: Cutting edge, Vizerra offers 3D technology to designers, engineers and architects. Through the use of social media and gaming technology, they create innovative experiences of buildings and environments.
Penxy: For business professionals who find themselves at the front of a room offering presentations, Penxy is a presentation streaming tool that allows the user to stream, record and broadcast presentations through their iPod or iPad. Also a slide generator, the iPhone control allows the speaker to move through the conference room and advance slides with the swipe of a finger.
Zingaya: A team effort between Silicon Valley and Moscow, Zingaya allows users to place phone calls through their computers without the necessity of using a phone or downloading a file. By simply putting a “Call” button on a corporate website, users are instantly connected to the company.
KaperskyLab: One of the world’s largest end-user cybersecurity protection companies, Kapersky Lab is a provider of security systems for digital applications. Started in 1997, the company is an innovative securities firm that can manage private and corporate systems. Through anti-virus system checks, Kapersky is partnered with some of the world’s leading companies to ensure that customer data and information is protected.
Ostrovok: A hotel booking service, Ostrovok is leading the Russian travel market with price comparison shopping.