Startup Hubs Around the World: St. Petersburg
Found in the northeast section of Russia, St. Petersburg is Russia’s second-largest city. While Moscow may be the capital of the country, St. Petersburg is the cultural center and boasts of a population of over 5 million people. St. Petersburg is positioning itself to be competitive on a global level and wants to become one of the world’s primary startup hubs. Considering the rising push for new technologies combined with the recently acquired freedoms that St. Petersburg is enjoying, their quest to become a global competitor is not beyond possibility.
To understand the benefits of choosing St. Petersburg as a startup, we’ll look at 1) the location, 2) the tax incentives, 3) the legal incentives, 4) investors, 5) local resources, 6) the specialization of the area, and 7) startups to watch.
The city of St. Petersburg is situated on the coast of the Baltic Sea, and is one of the northern most cities in the world. From its perch high on the globe, St. Petersburg is taking aim at the startup market and is working to establish itself as one of the top tech markets. Can it use its geographical location to its advantage?
Navigating the streets of St. Petersburg is surprisingly easy, given the large number of government established transportation options that are available. St. Petersburg is a transportation hub – amazingly, the infrastructure has kept pace with the growth of the city. The extensive system of roads is used by the national network of buses, trolleys and trams, making it easy to move throughout the city. Additionally, the city is a seaport that that serves both passenger and cargo ships. In the spring and summer, water taxis are used on the many canals that run through the city as well. The city is connected both nationally and internationally by a system of trains that connects to Moscow (a nine hour train ride), as well as Finland and Germany. There is an international airport that serves over 12 million passengers every year for entrepreneurs who need easy access to air transport.
Housing within the city of St. Petersburg is predominantly apartment or condo buildings. Recent construction has added housing developments outside of town, but the majority of city residents live in commuter districts near the urban center. The relatively low cost of living makes St. Petersburg attractive to young entrepreneurs who look for affordable housing, reliable infrastructure and workable office locations.
Advantages from choosing the city
As a port city, St. Petersburg is a bustling city that holds its own as the financial, industrial and trade gateway of Russia. With a wide range of industries from shipbuilding to computers, mining to food and catering and everything in between, there are a host of companies that call St. Petersburg home. Global automobile companies have built plants in the city, and vodka companies have a long history of distilleries running in the city. The conglomerate of businesses and industries that is located in St. Petersburg has combined to give St. Petersburg a young, thriving culture.
There are several accelerators and co-working hubs within the city that make it easier for entrepreneurs to find affordable work space. Many of the offices are available on a daily, weekly or monthly basis and have a sliding scale of services available from conference rooms to secretarial assistance. This makes it highly attractive to companies that may need a place to host a presentation, but may not need official office space in its early stages.
The city has over 200 museums, a majority of them housed in historic buildings, some of which date back to the days of Peter the Great. It is dotted with parks and cathedrals and a garden that dates back to the early 18th century. An astonishing 2,000 libraries, 62 cinemas, 80 theaters and other cultural centers are spread through the city, making it one of the world’s leading cultural cities. There are festivals, special events and highly prominent artistic displays that offer entrepreneurs plenty of ways to spend their time when they need a break from their startup.
The tax structure in Russia is complicated. The government has begun to establish technology zones that offer specialized tax rates for companies doing business within the area. Outside of these areas, however, an entrepreneur faces high tax rates, excessive fees and the potential (and likelihood) for corruption. Government ‘fees’ are high and are considered as a part of the costs of doing business in Russia. Foreign entrepreneurs who wish to establish a business in the city of St. Petersburg must be prepared to deal with the federal, regional and local tax structures which can all be applied at the same time, resulting in an exorbitant tax bill.
New legislation is underway that may extend current tax and insurance breaks to small companies (which would include startups). Additional suggestions for creating new incentives that companies can offer their employees are also being considered, but until they are signed into law, the startups are ineligible to take advantage of most of the tax incentives.
Increasing government support for entrepreneurship makes it likely that the tax incentives will continue to grow in St. Petersburg, but the wheels of progress can sometimes move slowly. Considering that it was illegal to open a business as recently as 20 years ago, the fact that Russia is even thinking about offering tax or legal incentives is mind-boggling. In 2013, Russian announced an ‘act of humanity’ – an amnesty ruling that may release as many as 10,000 businessmen jailed for corporate crimes such as entrepreneurship. With that as a backdrop, the promise of tax incentives is welcome, but not necessarily a guarantee.
To establish a company in St. Petersburg, the entrepreneur must be prepared to wade through several mountains of paperwork. To begin, a company must be registered with the State Registration Authority, the State Statistical Committee and three social funds. The paperwork must be notarized and filed with appropriate departments before a company can being working. All companies are required to have a company stamp, an established bank account and depending on the type of business, may have to obtain additional licenses.
Navigating the legal ramifications of entrepreneurship in St. Petersburg can be daunting, unless the startup establishes its headquarters in one of the specialized zones within the city that are designated for technology firms. For specific research and development industries, there are zones geared to assist entrepreneurs with taxation and legal structures that make the process easier.
A noticeable lack of venture capital is one of the downsides to the city of St. Petersburg, and provides one of the city’s greatest challenges. There are venture capital firms headquartered in Moscow, which is accessible easily by high-speed train, however, the city needs to seek out firms that will establish a presence within the city itself, if it truly wants to become competitive.
Recent political and military actions by Russia have adversely affected the number of investors willing to risk investing in startups within the country. A lack of established fund companies within the city, combined with a negative environment for entrepreneurs has the startup market in St. Petersburg (and Russia) scrambling to secure their company for the future – both financially and legally.
Several Russian investment companies have established offices elsewhere in the world, for the purpose of securing funding and bringing attention to Russian startup companies. While this is a successful method of raising capital, the lack of major angel investors within the city will be problematic in the future.
Another method St. Petersburg uses to draw attention to their startup market is through their annual St. Petersburg International Economic Forum. This global conference, hosted by St. Petersburg since 1997, brings key international business leaders and investors to the city. Through workshops and presentations, forums and think tanks, entrepreneurs have the opportunity to meet with representatives from around the world. In return, the business leaders have the chance to find investment opportunities in the Russian startup market.
The city of St. Petersburg has a unique blend of skilled and educated engineers with a considerably lower cost of living than its competitor, Moscow. With two leading universities in the city: St Petersburg State Polytechnical University and the St. Petersburg State University of Information Technologies, Mechanics and Optics (ITMO), the city has a large number of high caliber engineers and developers. This educated workforce allows for the easy transition into entrepreneurship, and provides qualified workers for the existing startups.
The entrepreneur in St. Petersburg has learned to move fast. The Sapsan Express Train which connects St. Petersburg to Moscow makes the trip between the cities in only four hours – a trek that used to take an entire day. WiFi enabled, the train allows entrepreneurs to move between the two tech cities easily and not lose valuable work time. In addition, the young entrepreneurs have learned to maximize their relationships and will prioritize their business dealings based on the strength of their relationship.
St. Petersburg is home to a research and development center that is home to some of the world’s largest technology firms; Google, Corning, Intel, and HP Labs, for example. Within this R&D zone, developers are finding innovative solutions to global problems. This specialized zone is also set apart by the government for specific tax credits, legal incentives and development assistance that will provide the entrepreneur with tools and resources to be successful.
Another of the assets to entrepreneurs wishing to establish a startup in St. Petersburg is the presence of Ingria in the city. Ingria is an incubator that houses 80 companies, with plans to continue to grow.
While St. Petersburg is home to a vast number of industries, they have only one goal in mind for their startup specialization: high tech firms. Recent modernizations have begun to bring the internet (and the world) to Russia’s citizens, creating an environment that is ripe for technology based firms to find a market share. For the entrepreneur in St. Petersburg, that market share is likely to be in the field of nanotechnology.
St. Petersburg’s ability to become a significant player on the world’s startup stage is hampered only by the roadblocks that their own government places in their way. The risk of failure in Russia brings more than the concern for a bankruptcy filing, and the process for closing a business is almost as difficult as starting one. Startups in St. Petersburg are equally as talented as the companies that are found in Silicon Valley, and other major startup hubs, but the drawbacks of government interference will keep the entrepreneur several steps behind their counterparts around the world.
In recent years (mainly the last five), St. Petersburg has taken massive steps to increase their ability to participate in the global startup scene. There is still limited competition for tech firms in the country, so entrepreneurs who are establishing new business models or adapting existing foreign models have the advantage.
In spite of the potential barriers, the time has never been better for St. Petersburg to make their move towards innovation. Russia has opened the door to the global economy and while there are those who may try, closing it may be like trying to close Pandora’s box.
STARTUPS TO WATCH
Curious about the startups that already call St. Petersburg home? Keep an eye on these rising stars in the startup world.
VK.com: Perhaps the best known startup out of St. Petersburg, VK.com (formerly Vkontakte.ru) is technically no longer a startup. Founded in 2006, it has established itself in the city’s history as one of their premier success stories, and deserves recognition for its continued success. A social network (often called the Facebook of Russia), VK.com has a strong focus on mobile connection and is over 80 million members strong. Mark Zuckerberg (Facebook’s founder) praised their work, stating they “…did an awesome job cloning Facebook.”
Kuznech: Based on the idea that consumers are visual, Kuznech allows customers to shop by browsing online images and then use shopping apps to discover similar items based on appearance.
Oktogo: This online accommodation company processes hotel reservations specifically geared towards Russian travelers. With over 350,000 hotels globally and more than 5,000 Russian hotels, Oktogo handles 1 million visitors monthly.
Optogan: One of the fastest growing LED companies, Optogan is combining physics with technology and creating energy efficient, cost-effective solutions for business, residential, outdoor and industrial settings.
SPB TV: Mobile app SPB TV allows users to view live and on-demand video. With a host of channels available, millions of smartphone viewers can watch tv where ever they go.
The city of St. Petersburg is a puzzling mix of entrepreneurship and confusion. The fast moving dynamics of Russia, due to political and economic changes and challenges, has created a situation where no one is entirely sure what the current state of affairs is. One report may indicate that the startup market in St. Petersburg is vibrant, while another paints a picture of government interference. According to one source, funds flow freely and the next source relays that no one will invest in the Russian market. Many entrepreneurs consider the confusion an unnecessary burden on a startup trying to find its footing, and take their company elsewhere. Others, however, view the disparity as part of the early stages of a startup market and seize the opportunity. Regardless of the confusion, it is clear that changes are taking place within the borders of Russia. St. Petersburg is on the frontlines of the changes in the country and is setting itself up to take full advantage of the resources in the city to propel itself to greatness.
Russia is determined to establish itself as a startup powerhouse, and St. Petersburg may be the answer to their demands. The startup stage is waiting – who will end up in the spotlight? Only time will tell.