Putin Pops Russia’s Tech Bubble

Newsweek, 26.08.2014

By Kevin Maney

Russia could’ve been a borscht-flavored Silicon Valley by now, giving the world innovations with twists the West would never have thought of. Instead, when most people put the wordsRussian and technology together, their first thought is to panic and change their passwords.

This is Vladimir Putin’s hidden crime: Just as Russia’s startup culture had a hope of getting legs, Putin’s actions in Ukraine have helped knock it back down. Since economic power increasingly flows to nations that innovate around software and data, Putin is basically exiling Russia to the economic backwaters of the next decade or two.

“The last technology Russia successfully launched globally was Tetris,” quips Russia-based investor Dennis Adamovich with a sad chuckle. For the record, that was 1984.

“There are plenty of brilliant Russian programmers and technologists out there,” says Bill Browder, CEO of London-based Hermitage Capital Management, which invests in Russia and has publicly battled Putin. “They’re just much more likely to be in California than Russia.”

It didn’t have to be this way. In 1991, just before the Soviet Union disintegrated, I visited Stepan Pachikov in the Moscow headquarters of his semilegal software company, ParaGraph. You can imagine how bleak the situation was then for startups. ParaGraph had to give its employees lunch and dinner because otherwise they had to wait in line all day for food. It operated its own car repair shop since it was difficult to keep a car going in Moscow. ParaGraph was like one of those microbes that impossibly manages to live in a steam vent at the ocean’s bottom.

But Pachikov, who had studied at the USSR’s Academy of Sciences, and other Soviet engineers told me back then that they were sure they’d do great things in technology. Soviet computer hardware had always been well behind Western hardware, and computing was always a limited resource. Soviet programmers had to do more with less and learned to write clever algorithms and code. With the right conditions, the talent locked inside the old Soviet system might have exploded into a kaleidoscope of Russian startups.

ParaGraph was a hint of what could have been. Despite so much stacked against it, the company developed the world’s best handwriting-recognition software at the time, and licensed it to Apple for its Newton handheld gadget. Later, ParaGraph’s technology helped the U.S. Postal Service automate the sorting of handwritten envelopes.

But as the new Russia fell apart in the 1990s, Pachikov emigrated to Silicon Valley and started another company. You may have its app on your phone:Evernote.

Over the next decade, a lot of Russian talent followed Pachikov’s example and skedaddled. In the 2000s, Russia finally started to spit out some interesting startups, including search engine Yandex and mobile payments companyQiwi. Still, “what served as innovation was copying the best concepts, but doing it in Russia,” Adamovich says.

In the 2010s, some hopeful venture capital from the U.S. started flowing into Russian startups, in part because the home Russian market for mobile apps was ramping up. By 2013, Russian was the second most used language on the Internet (well behind English and slightly ahead of German). According to Fastlane Ventures, 245 Russian companies got VC funding in 2013—a sliver compared with the 3,700 companies that get VC funding in the U.S. each year but a start nonetheless.

Even in early 2014, the trend was rising. Investment in Russian Internet projects in the first half of 2014 was up 77 percent over the same period last year, according to CB Insights.

This is where Putin comes in. Since Russia invaded Ukraine in March and got nailed by international sanctions, Western investors have wanted to get involved in Russia about as much as the Scarecrow wants to date the Wicked Witch of the West. Add that to Putin-sanctioned raids on Russian businesses, government meddling, anti-blogging laws and word of a coming firewall around Russia, and the tech picture gets bleak.

Victor Belogub, investment officer at Direct Group in Russia, says he finds “a substantial slowdown to the VC market. You don’t have to be an oracle to see that startups will substantially decrease their ambitions and pre-money valuations in the next months. The only advice one could give to a startup nowadays: If by any chance you can get to breakeven, do it immediately!”

Ambitious tech entrepreneurs will simply leave, Browder says. “The chances of any startup working are already low, and if you add up the corruption risk and legal and political risk, it’s insane to start a company [in Russia] if you could move it to California or England.”

Five times as many Russians have left during Putin’s third term compared with the early 2000s, with tech brains among the more prominent émigrés. In one of the most high-profile cases, Pavel Durov, the dynamic founder of Russia’s Facebook replica VKonkakte and a free speech advocate, wound up on Putin’s wrong side because he wouldn’t shut down opposition political chatter. He took off for St. Kitts and Nevis, where he’s starting a new venture and wearing a lot less fur.

To the West, it looks as if the smartest coders left in Russia have joined the kleptocracy. The most public displays of Russian tech brainpower have involved Internet identity heists so brazen, they could be used as the basis forOcean’s 11 sequels. The most recent one was a Russian hacking ring that stole more than 1 billion passwords.

It’s really sad. You have to wonder what unique problems a vibrant Russian tech sector might have solved if it had followed the trajectory of Tetris and ParaGraph, inventing new stuff instead of making me-too stuff at best—and criminal stuff at worst.


Ivan Zhdakaev

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