From Russia With…Startup Dreams

23 Dec From Russia With…Startup Dreams

Alexander Galitsky is a man of many parts: veteran of the Soviet space program, serial tech entrepreneur, pioneer of Wi-Fi, and currently a venture capitalist whose two dozen investments are concentrated in Silicon Valley. One thing he is not is Russian, a fact that he needs to emphasize more often these days.

Galitsky, who goes by the Slavic diminutive Sasha, was in fact born in 1955 in Ukraine, in the Ukrainian-speaking Catholic community that tilts strongly anti-Russian these days. He carries a Dutch passport and says that he lives on airplanes. Galitsky works as a managing partner at Almaz Capital, which is based in Portola Valley, California, just west of Palo Alto, and counts Cisco Systems and the World Bank among its investors.

Before the fall of Communism in 1991, Galitsky spent 12 years as a rising star in the Soviet space and defense establishment, designing software for, among other projects, Moscow’s planned response to Ronald Reagan’s “Star Wars” network of orbital weapons. After the Soviet Union, he turned into a high-tech diplomat, nurturing a close friendship with legendary Sun Microsystems founder Bill Joy, while also doing stints at state-owned Russian Technologies and advising Skolkovo, the Kremlin’s version of Silicon Valley, outside the city limits of Moscow.

Until recently, such a wealth of experience was a good thing. Now, with Kremlin-backed hackers dominating headlines and defining for many the image of a Russian technologist, it’s become a liability. He prefers to avoid the R word, substituting “Eastern Europe” for the land of his earlier success, bristling when asked about his roots. “People value me as techie guy,” he says. “I get respect wherever I am, and I don’t talk politics.” Maybe that’s enough to keep him afloat as America’s anti-Russian wave crests.

The mission of his fund, Almaz, is “connecting entrepreneurs and engineering talent in untapped tech regions overseas with Silicon Valley.” Galitsky’s rival and sometime co-investor Alexander Turkot is not so sure. Turkot runs Maxfield Capital, a VC fund that emerged in 2012 from his stint running the information technology cluster at Skolkovo, the Kremlin-sponsored would-be Silicon Valley outside Moscow. Like Galitsky, he has shelved plans to invest in Russian companies as relations deteriorate. But he is shifting focus away from America, too. “Compared to the level of mutual paranoia between the U.S. and Russia, it’s very hard to explain the mutual benefit of cooperation,” he says. And Maxfield is taking a harder look at the post-Brexit, pound-devalued U.K., where its investments include commercial real estate network Hubble and medical portal Patientsknowbest.com.

Still Believing That Innovation Can Triumph Over Paranoia

Galitsky and Turkot are small fish by the standards of Silicon Valley. Almaz controls about $300 million in investment powder, Maxfield $100 million. But along with a few other VCs of Russian origin, like Runa Capital and Prostor Capital, they offer a bridge to a rich intellectual ecosystem that is sustaining collateral damage amid the fraught politics of a digital Cold War between Russian and the West. And the duo still believe that technology and innovation can triumph over nationalism and paranoia.

Take Hover, a San Francisco startup developing software that transforms ordinary photographs into three-dimensional models for planning home construction or renovation. An ex-U.S. Marine Corps officer named A.J. Altman started the company in 2011. He met Galinsky by chance a year or two later, and was soon on a plane to Ukraine to outsource programing. “There was plenty of ignorance on our side about that part of the world, but the Ukrainians are still our flagship development team today,” Altman says. “They provide a lot of the horsepower behind the deep learning that we do.” Translation: teaching a computer to recognize a patio or strips of molding from a homeowner’s snapshots. The Hover-Almaz relationship became so close that Altman’s cofounder, Ross Hangebrauck, left to head the fund’s Silicon Valley office.

Or take NFWare, a Moscow garage company that–according to its avuncular, 34-year-old, sweater-clad CEO Alexander Britkin–is set to revolutionize global telecommunications with software that’s fast and durable enough to replace the hard wires installed back in the day by the likes of Cisco and Ericsson. Almaz and Maxfield were both seed investors in NFWare, which was incubated at Moscow State University’s Applied Research Center for Computer Networks. Now Britkin spends half his time at the company’s newly minted headquarters in Sunnyvale, CA, and will invest $2 million from its latest funding round in building out a U.S. sales force. He stops over occasionally in Spain, where he also picked up some capital from Telefonica’s startup accelerator, Wayra. “We intended to become an international company from Day One,” Britkin says.

Reaping a brainpower peace dividend from the scientists and engineers who used to build Soviet weapons has been a dream for a generation of technologists around the world. It finally seemed to be coming true earlier this decade. Dmitry Medvedev, Russia’s president from 2008-2012, made the Skolkovo project a centerpiece of his “modernization” policy, with enthusiastic support from the U.S. tech establishment. MIT helped set up a graduate institute there. Cisco, IBM, Microsoft, and Boeing all promised to employ thousands of smart Russians at Skolkovo research centers.

Meanwhile a Moscow businessman named Yuri Milner was spreading Russian cash—lots of it—around Silicon Valley. A founding investor in the Mail.ru internet portal, Milner started his international career with a bang, a $200 million bet on Facebook in 2009. He followed that up with stakes in other budding giants including Twitter, Spotify, and Airbnb, earning billions for himself and his chief financial backer, Moscow-based metals and telecoms magnate Alisher Usmanov.

Galitsky, Turkot, and Runa’s founding guru, Serguei Beloussov, had the bicultural chops to take advantage of this thaw on a smaller scale. Turkot, who graduated Tashkent Technical University in 1983, worked on early Soviet attempts to build personal computers. After emigrating, he made a career with IBM in Israel and the U.S., and then Medvedev’s circle invited him to Skolkovo in 2010. There he met a billionaire backer of his own, aluminum and oil tycoon Viktor Vekselberg, who headed up the whole Skolkovo project as a public service, and became one of the investors in Maxfield. Beloussov is a St. Petersburg native who started half a dozen businesses in post-Soviet Russia and, as a side project, a Southeast Asian software distributor that was acquired by Microsoft.

How To De-Russify Startups

But the ground shifted beneath these investors when Vladimir Putin moved back into the Kremlin in 2012, determined to revive Russia’s traditional military/strategic power. Putin’s invasion of Ukraine in 2014 and the resulting Western sanctions scared global private equity funds away from Russia, depriving its startups of financial oxygen. The multinationals pulled out of Skolkovo, diminishing its ambitions. And Russian money has become tainted, attracting suspicion abroad. Even Milner, who moved to California after his big kills and became a pillar of Silicon Valley society, fell under a cloud recently when the “Paradise Papers” data dump revealed that his investment consortia included two big Russian state financial institutions.

Yet ex-Soviet engineering talent has only become more attractive economically, thanks to a nearly 50% devaluation of the ruble since oil prices crashed three years ago. And men like Galitsky and Turkot have learned over the years to be adaptable.

One adjustment is to de-Russify Russian companies like NFWare. A more dramatic example of this process is Acronis, a data backup and security provider that is the crowning achievement of Runa Capital founder Beloussov. The company now claims to have been founded in Singapore, where it maintains an “international headquarters” along with a “corporate headquarters” in Switzerland, and a U.S. office outside Boston. Beloussov, who returned to run Acronis after internal strife in 2013, took Singaporean citizenship, and lately bolstered his Asian bona fides by donating Acronis funds to build schools in rural Myanmar. You have to dig deep into the fine print to see that Russians continue to play a key role in the company; a new laboratory flagged as reviving the firm’s software edge is co-sited in Moscow and Arlington, Virginia.

Writing Beloussov’s native country out of his company’s history may seem a bit Orwellian, but it’s working for now. Acronis has avoided the suspicion that has swirled around better-known cybersecurity provider Kaspersky Labs, which remains headquartered in Moscow.

Another way to de-Russify is to shift toward Ukrainian nerds, who share their Russian colleagues’ intellectual DNA but without the political baggage. Aside from Hover, Almaz is deepening its Ukrainian ties through Pet Cube, a Kiev-San Francisco pioneer of cloud-controlled laser dog toys, invented after one of the young founder’s neighbors threatened to call the Kiev police on his own barking pet.

An even more exotic pairing joins Almaz-funded Octonion, a three-year-old Swiss-based company working to connect internet-of-things sensors to cloud servers, with 50 engineers in Minsk, the capital of Belarus. This Russian client state of 9.4 million may be best known as “Europe’s last dictatorship,” but it is also a neglected oasis of innovation, claims Cedric Mangaud, Octonion’s ebullient French CEO. He started working there in 2006 with a previous startup, having cycled through offshore programmers in the Philippines (too much employee turnover, he claims), China (contractors stole the source code, he alleges), and India (“They say ‘Yes, yes,’ but don’t do things well.”)

Octonion’s dependence on the Minsk techies made Almaz a natural choice as an investor. Galitsky joined the company’s board, where he rubs shoulders with co-investors including Taiwanese manufacturing superpower Foxconn and Swiss Telecom. “Sasha is very helpful with what we are doing in Belarus, and has a very strong vision of where we can go,” Mangaud says.

Then there are startups who have nothing to do with Eastern Europe, but just like the “Russian” VCs because they are smart, open-minded, and supportive. One of these is DrChrono, a medical records automator founded in 2010. CEO Michael Nusimow moved to Silicon Valley, but found local investors turning up their noses at his pitches. “If you didn’t roll out of Stanford, MIT or Harvard, the prestigious Valley funds don’t want to talk to you,” says Nusimow, a proud engineering graduate from State University of New York at Stony Brook.

He found a warmer reception from the ex-Soviets, starting with Milner, who at the time was handing out $150,000 to any company that graduated from his Y Combinator incubator. (DrChrono did in 2011.) Milner, the “Michael Jordan of Russian investors” in Nusimow’s phrase, introduced him to Maxfield and Runa, who headed an initial $2.8 million financing in 2012, and have doubled down on every round since. “It’s great to have investors who are entrepreneurs themselves, and who are always looking across the globe beyond the Silicon Valley bubble,” Nusimow says.

A similar bond developed between Maxfield’s Turkot and Oren Bass, founding CEO of Pave, a New York-based startup trying to broaden the availability of consumer credit with a scoring system that includes such items as rent and utility bills. Bass found himself below the radar of venture capital titans such as Sequoia or Greylock Partners (“They want to write a check for $5 million or more,” he explains.) Turkot bridged the gap between Pave’s early angel investors and these heavy hitters, leading an $8 million A round for the company last year. He took time to learn the business, too. “Alex is an engineer himself by background who has become pretty knowledgeable about blockchain technology,” Pave says of Turkot. ‘He is not afraid to roll up his sleeves and get involved.”

Whether it’s blockchain, IoT, healthcare, or telecoms, the Russian (or “Russian”) venture capitalists clearly love big ideas. That and their connections in “Central and Eastern Europe” could allow them to punch above their weight. The Soviet system, which built space stations and hydrogen bombs while most citizens had never even seen a washing machine or checkbook, left behind a difficult if not dangerous political legacy. But it also gave us a technological and scientific inheritance that it would be a shame for the rest of the world to lose.

Source: Fast Company