Like it Or Not, Startups Are Soaring in Russia. Here’s Why
Even as the nation negotiates its fraught relationship with the U.S. government, more Russian startups are prospering than ever before.
Startups in Russia must grapple with U.S. and E.U. economic sanctions, a dearth in venture funding, and their country's tarnished reputation. Yet they routinely overcome these challenges, offering entrepreneurs everywhere a lesson in perseverance.
This year, Moscow emerged as the No. 2 city for fast-growing private companies, according to the results of the fourth-annual Inc. 5000 Europe list. St. Petersburg clocked in as the ninth best city for fast-growth firms, according to the list, which tracks the three-year revenue growth of privately-held companies. While Russia's two biggest cities ranked 19th and 20th for fast-growth companies on a per capita basis, they respectively accounted for 171 and 70 companies on Inc.'s annual list.
That includes companies like Moscow-based Varmega and Kompaniya Optima, which saw their respective revenues jolt 1,990 percent and 2,076 percent since 2013. Outside the list, the Moscow internet giant Yandex commands more than 54 percent of all online searches, generating as much as 94 billion rubles ($1.6 billion) in 2017 sales, up more than 24 percent from the year prior. And nearly two dozen smaller tech firms, including food delivery service ZakaZaka and the software service Flocktory, had successful exits.
"If it weren't for political risks, Russia could become a global startup powerhouse," says William Courtney, a retired diplomat and executive director of the non-profit policy firm RAND Business Leaders Forum in Arlington, Virginia.
Still, those risks aren't nothing, adds Courtney. The U.S. and E.U.-imposed economic sanctions, which started back in 2014 after the country's annexation of Crimea from Ukraine, are having an effect. Not only are educated Russians flocking to less controversial locales like the U.S. and Paris to find work or start businesses, the effect on the venture community has been crippling.
American investors including Kleiner, Perkins, Caufield and Byers, Accel, and Intel Capital were once bullish on the Russian market--investing some $400 million collectively in Russian startups in 2012. However, last year, no Russian startups listed U.S. investors, according to Crunchbase data. "Capital flows have stopped, and most of the local funds have left," suggests Alexander Konoplyasty, a venture capitalist based in Moscow. His own firm recently expanded its focus to Eastern Europe and Asia more generally.
The tension isn't likely to abate anytime soon. The Trump Administration is reportedly considering entirely new sanctions in response to Russian meddling in the 2016 U.S. election. Meanwhile, recent discussion of Russian bots' interference on Facebook, intending to sow division among liberals and conservatives in the U.S., is sure to hurt the perception of Russia's business climate more generally. "The perception that Russia is a global hacking giant is quite harmful to startups," Courtney adds, referring to the more recent meddling after a mass shooting at a high school in Parkland, Florida.
Too Big to Ignore
"It's a challenging environment for entrepreneurs, where you're not only fighting competition but also things you can't predict," says Konoplyasty. Even so, as the ninth most-populous country on the planet, according to research from the Washington, D.C.-based Population Reference Bureau, Russia is just too massive to ignore. It also boasts low tax rates and a relatively educated population, which is helpful for companies looking for talented workers.
Those factors helped Sergey Bulaev, the 36-year old founder of the shopping list app Buy Me a Pie, see Russia as a good place to start up. His business, which allows customers track their grocery purchases, generates sales from both advertisements and a $13 annual subscription fee, has managed to clinch more than 500,000 monthly active users since launching in 2011.
In particular, Bulaev points to the relatively low corporate taxes in his native Ulyanovsk, a tech hub in Eastern Russia. The national tax rate in Russia is around 24 percent, and regional states may elect to decrease the rate by a maximum of 4 percent; that effective rate is about on par with the international statutory average, according to the Tax Foundation. That's well below the U.S.' previous 35 percent maximum rate, as well as the rates of, say, India, Belgium and Greece.
The entrepreneur, who spent some time working in the U.S. prior to launching his startup, estimates that it's as much as five times cheaper to hire employees in Russia than it is in Silicon Valley. (It's worth noting that Ulyanovsk, however, is far less expensive than Moscow, where the average price for an apartment is 167,000 rubles, $2,969 USD, per square meter according to the Russian language price tracker irn.ru) With a population of nearly 12 million, Moscow houses top-tier talent from schools including Moscow State University, the Moscow Engineering Physics Institute and the National Research University of Electronic Technology.
The RAND Corporation's Courtney meanwhile notes that Russians often have superior technical skills, as subjects like math and science were emphasized under the former Soviet Union and remain favored today. Russia has further invested in fields including missile defense that require a certain level of sophistication among workers. "The Russian mathematicians have, if you will, a deeper understanding of complexity because of these defense problems," he adds.
But perhaps the biggest factor leading to Russia's entrepreneurial moment is its people's increasing willingness to take measured risks. As Buy Me a Pie's Bulaev sees it, the attitude towards entrepreneurship is changing: "Now, more people in Russia are deciding to launch a business--and are being thoughtful about it."