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Growing up yet? Incubators and Accelerators in Russia

0 January 2014

Incubators and accelerators are one of the key elements of a startup ecosystem. These organisations develop projects at an early stage, turning them into a business that be sold at market value rather than at cost. Worldwide incubators and accelerators are working with a large group of projects and sharing the risks of their investors. However, success in this area has only been achieved by a few.

Russia is yet to find a stable business model for incubators and accelerators - even though there are more than 100 organisations, only 20 really do anything and just a handful of these have achieved commercial success. Therefore you can’t say that Russia has an incubators and accelerators market - there are just individual initiatives, like FRII (Internet Initiatives Development Fund). The infographic below provides an outline of the fledgling sector. 

What do we mean by 'incubator' and 'accelerator'?

In the classic sense an accelerator is a venture market institution engaged in turning people’s innovative ideas into real businesses. In fact, its often the first place startups can turn to after they’ve exhausted the family and friends (FFF) option. Accelerators usually feature a program for rapid project development, which include a theoretical course introducing founders to the basics of venture entrepreneurialism and project management, and practical classes to help them apply their knowledge to their project.

Usually the accelerator has a team of entrepreneurs with experience in creating their own start-ups and who are attracted to investing in new ventures, as well people offering services to resident companies - lawyers, accountants and designers.

The incubator differs from the accelerator in that it works on growing businesses that were formed before they have attracted investments from funds. This means that their programs may delve deeper into the issues of investment analysis, the deal-making process and communication with investors. 

How effective are they?

Incubators and accelerators tend to process hundreds of startups, and receive a share in the projects in return for the services they offer. When projects seek further investment, investors tend to look well on teams having spent time in an incubator or accelerator - it is considered a mark of quality. 

This is because the demanding nature of the programs offered sifts out projects with legal, strategic or relational problems. Abroad not more than 75% of projects graduate from accelerators, while between a quarter and a third complete incubator programs. This doesn’t mean that the projects that don’t complete the programs are necessarily destined for failure, but they do find it more difficult to find investment if they don’t change their development strategy.  

Incubators and accelerators earn money in two ways – firstly they provide paid services (other than those included in the standard offer of an exchange for a share in the project), and secondly, through the sale of a project to a major investor or IPO, merger or buyback of an accelerator/incubator’s stake by a project’s founders. This means that incubators and accelerators often play a similar role to venture funds, who themselves often organise or support incubators and accelerators themselves. 

The main objective of the incubator and accelerator is to increase the professionalism of startupers and create conditions for the development of a product or service to increase their market value. One way to assess the success of such projects is to measure the growth in the value of startups that have passed through incubators and accelerators. Outside Russia these organisations often aim for a startup to grow by 3 or 4 times, but if they keep their stake and then sell it on to a major player, they could make a profit of 8-10 times their initial investment.      

The 'Russian model'

Unfortunately startups and new technologies don’t just ‘appear’ because the government creates an SEZ (Special Economic Zone), or announces that a region “needs to increase innovation”. Startups and incubators need sufficient funds so that an entrepreneur can focus on creating a quality product or service - and this is not always the case in such regions. Furthermore, almost no projects make a profit in their first two years, which is the ‘tax-free’ period offered by the government. 

This means that you can’t just build an incubator or an accelerator in a random place and expect it to be successful. You need money - and so in Russia, like in the West, incubators and accelerators appear where the money is. However, in Russia most such organisations are less like societies of entrepreneurs and more like groups of projects dominated by one fund (like FastLane Ventures), that uses its accelerator to develop its own projects.

Most Russian startupers have a day job, and their project is something they build in their free time. This inevitably impacts on the quality of the projects and what they are focused on. Attempts to alleviate the tax regime don’t have any effect on startups - tax breaks only help those companies that have profits.

Entrepreneurs need support of a different kind - they need mentors - people with experience and knowledge who have already “been there, done that”. Unfortunately such people are still sorely lacking in Russian incubators. They also need a convenient place to work and meet with investors. At the moment Russian incubators, accelerators and technoparks are too often located in places that are awkward for everyone - founders, mentors and investors. 

If the sector is to grow up and Russian incubators and accelerators are to start churning projects capable of local and global success, some of these things have to change.  

Text: Rusbase Analytics 

Translated by Nadia Amroon

Top image via Shutterstock

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