Business Management

Alexander Egorov (Russia): Good or Bad News for Startups in Russia?

Some observers of the Russian IT scene are anxious about how life has changed for small IT and internet startups in the country.

It’s true that the entry barrier for new market entrants in Russia has become much higher over the past 20 years, which automatically reduces the number of startups that can launch without significant funding. This happens when any market begins to mature. Reksoft’s first five employees cost a total of $12,000 a year in May 1991, only a few months before collapse of the USSR. At this time, there was virtually no demand for software developers within Russia. The extremely low comparative cost of R&D contributed a lot to the first wave of success for the domestic IT industry, when unemployment among highly-trained IT specialists was considerable and wages were low.

The second wave began in 1997-1999, with mainly foreign investors rushing to grab a slice of the Russian software market as the global IT boom gathered momentum. During this time, Reksoft was able to spin off some of its in-house developments (such as the online retailer Ozon.ru and the payment service provider Assist.ru) and raise first venture money to continue successful development of these projects. This way of startup funding was as good as unknown in Russia at that time.

Domestic demand for highly-trained IT specialists has increased gradually over the last decade, and today $12,000 will get you five software engineers for a month, not nearly long enough to create anything significant. As competition for the best workers has risen, especially valuable employees can effectively name their own terms as their market value increases. The rising cost of living in Russia has also played a part in pushing up prices.

Nontheless I trust we are currently on the crest of the third wave, with the Russian government pledging huge subsidies to support domestic companies, and companies like Mail.ru, Yandex.ru or Ozon.ru are raising hundreds of millions of dollars in investment from Russian and overseas stock markets and venture funds.

It should be noted that the knowledge ecosystem that has long been present in technology hubs like Silicon Valley has only recently been formalised for young people in Russia.

On one hand the e-business pioneers have delivered first undoubtful success stories without any links to the traditional Russian revenue sources such as the oil & gas, aerospace or defense industries, hereby giving the signal that the ways to building new great companies in the country are open.

On the other hand, Russian government managed to succeed in some of its infrastructure projects intended to foster innovation. Ingria, one of the leading IT business incubators founded by St. Petersburg City Government, is just three years old, but its WebReady contest held this year for the third time has already become a place to be for most interesting internet startups from Russia, Ukraine and Baltics. The Skolkovo project led by Federal Governement looks set to boost the industry still further.

So while financial entry barriers for an IT startup have undoubtedly risen, the good news is that the level of support for those startups has also gone up significantly. As a result, a whole new generation of projects is ready to enter the scene and we can expect to see some terrific examples bear fruit between 2012 and 2014.

By Alexander Egorov, Co-Founder and CEO of Reksoft. His short resume can be found here.  


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