Innovation and the Bottom Line

Erik Panov

A growing number of entrepreneurs is addressing the deficit of small and mid-sized companies in the Russian economy. The drivers of this growth range from investors and venture capital companies to business schools and start up academies.†

Small and big business are not the opposite ends of the spectrum as people often suppose. Mature companies often rely on small companies to generate new products but the relationship goes deeper than simply 'buying up' innovation and talent. Startups are nimble and small firms can change and adapt more quickly — something that big firms now recognize as a valuable trait.

This has produced a whole industry of "change consultants" and motivators but it has also switched the focus of business schools, which do less teaching by the book and now try to get involved in the very process of reshaping businesses.

Pekka Viljakainen recently joined the Moscow School of Management SKOLKOVO as a mentor, leading a bimonthly program. A successful international businessman, he was recently appointed to the board of Pochta Rossii, the national postal operator, which has 400,000 employees.

The much-used word, "change' means little, he argues, unless executives have access to information about their own company, free of bias or personal interest. Executives must then use that information to imagine, visualize and predict what the market wants. Leadership is no longer simply about control. Rather it is about feeling confident enough to make mistakes and competent enough to correct them quickly.

"The leader's key competence is to be creative. Creativeness is to give your own flavor and predict where the world is heading but most leaders are frightened to predict because somebody might say they made a mistake.

"If you are in a silo-based monolithic organization you order some slides from a consultant and the board says this is our strategy. If it goes wrong you blame the consultants. This is not how you do change in a modern organization because instead of three lovely consultants, you want 20,000 people to tell you how to change your organization. You want to hear from those who are in the very frontline dealing with the clients. The whole mentality to identify and develop that information is very different. You have to discover it fast and then you have to be the guide to lead this change."

One attribute that small companies can teach bigger firms is their internationalism. The Finnish company Supercell is the most expensive games company in the world. It was started four years ago and is now worth 3 billion euro. It has 250 staff from 60 different nationalities. "They know when they have finished their product that it is already suited to the Brazilian market or the Argentinian. But that needs a different type of leadership that builds trust with the staff whether they be Polish, Argentinian or Chinese."

Some small Russian companies are actively reimagining reality — creating a market for a product that did not previously exist. The video creation and sharing service Coub is building a market for ultra-short films that are a kind of visual Twitter. Anton Gladkoborodov and his brother Igor founded the firm in 2012, which now employs 30 people in its offices in Moscow and New York.

The firm attracted $1 million of investment from Phenomen Ventures, which also invested in the taxi app Hailo, and Brothers Ventures, founded by entrepreneurs David and Daniil Liberman. Later Vaizra Investments provided another $2.5 million. Coub boasts a monthly audience of 50 million people globally, while over 600,000 coubs were made in the last 12 months.

Anastacia Popova, head of marketing, said Russia currently accounts for up to 70 per cent of Coub users, while the rest of them mostly come from Ukraine, Hungary, the United States and the Baltics.

Augustin Celier, a graduate in political sciences from Paris, chose Russia as the most promising location for his furniture business, founded two years ago. He spotted a gap in the market, between self-assembled furniture and expensive imports. His answer was to begin manufacturing his own designs, selling them through a showroom in Elektrozavod, in eastern Moscow. He also imports mid-priced sofas from France.

Celier found a Russian partner with whom to start the business, which he believes will become the next big seller in Russia's furniture landscape. His company Marc-Aurele, part of another company he founded, Udobno, designs furniture in Russia but has it manufactured by a third party in Romania. In addition it imports from France and operates its own showroom. It markets and sells furniture through the Internet.

Celier says the Russian market was lacking a provider specifically targeting the middle-market price range. "Stylish furniture at affordable prices is completely lacking in Russia today, despite increasing demand in Moscow and St. Petersburg and other important cities, as proven by the significant volume of imported furniture from Europe at incredibly high prices."

A mobile chip and pin validation system for credit cards, and a wearable alarm button for vulnerable people are among successful startups launched by alumni of Moscow School of Management SKOLKOVO. Both firms have already raised millions of dollars in funding from investors.

Knopka Zhizni or Life Button has raised over 35 million rubles, or about $1 million, for its medical alert service for the elderly and disabled. Founded in November 2010, its financing came from Rintech, a systems integrator in the social and health sectors. The company also sees applications in the corporate sector.

Smartfin, producer of the 2Can payment card reader for use with smartphones, launched in September 2012. Its product, comparable to Square and iZettle of the US, allows merchants to accept bankcard payments from their customers using a mobile terminal. The company has so far raised more than $5 million from venture capital partners. Nikolai Zhmurenko, CEO of Smartfin, had worked for 13 years in telecoms companies, including as a CFO, before he joined Moscow School of Management's Startup Academy. "Managing your own project, even if it is not as big as previous companies I worked for, requires somewhat different, broader competencies than working as an employee. I was looking for where to get the missing experience and the Startup Academy Skolkovo caught my attention."

Despite these success stories, SMEs represent only 15 per cent of Russia's gross domestic product (GDP). The burden of administration and penalties is only part of the issue. Germany has the best-performing SMEs in Europe. They account for 54 per cent of GDP and 62 per cent of employment. That share of employment is evenly divided between medium, small and micro business.

Michael Harms, Chairman of the German-Russian Chamber of Commerce, said the structure of industry in Germany is very different. Most Russian SMEs are in services and local industry, unlike German mid-sized companies that are active in industry and on a global level. "To transfer this whole philosophy and the whole structure is not easy. Even the United States does not have such an SME sector, which is a feature of German or German-speaking countries predominantly, though also in Italy."

On the other hand the question of the Russian SME sector is in the first instance a question of business climate. "You need low transaction costs, a stable business environment and economic freedom. You do not need too much state interference or the dominance of large state-owned monopolies. Unfortunately we have all these things in Russia. Politicians clearly see this problem; prime ministers and presidents have mentioned this in their speeches for 10 years now."

Pekka Viljakainen said he saw signs of change: "If you look today at the 20 biggest Russian companies, their leadership teams are younger than anywhere in Europe. Look at the ministries: the deputy minsters are young compared to me and I'm the old guy at 42. I call them the digital cowboys, born post Soviet time, or since 1985. I clearly see that the same generation is also taking power in politics."†

Doing Business in Russia 2014
Doing Business in Russia 2014
The СCEO of the Year Russia 2014Т awards come at just the right time. They celebrate the achievements of the best CEOs. They are a lesson in the possible, a benchmark to aspire to and something to be proud of.
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