Ben Aris in Moscow -

Five years ago, then-president Vladimir Putin floated the idea of a state-backed venture capital company to "leverage Russia's intellectual capital." No one disputes the Russians are clever or have good scientists - Russia was first to put a man into space after all. The problem is that businesses see no point in investing into highly risky, long-term technology projects when they could still earn a guaranteed double-digit return for doing no more than buying German equipment and putting it into a regional sausage factory. So the Russia Venture Company (RVC) was born and five years on its first projects are starting to hit the market.

Backed with $880m of state money, RVC co-invests with privately owned funds, providing half the money, but taking only 49% of the shares for the most part. And the first crop of investments are starting to mature, Igor Agamirzyan, CEO of RVC, tells bne in an exclusive interview. Last year, RVC successfully listed Russian Navigation Technologies (RNT) on the RTS New Market, a special platform for smaller companies, raising $10m.

RNT is exactly the sort of company RVC is always on the hunt for. A shipping specialist, RNT develops, produces and installs its GPS/GLONASS-based telematics system that allows the owners and customers of cargo ships to follow their progress. The company already has 60,000 ships in its system, or about 20% of Russia's entire merchant fleet. The technology was developed thanks to investments made by RVC and its partner VTB Venture Capital Fund, a subsidiary of the state-owned VTB Group. The company wants to use the fresh capital to expand its sales overseas.

Agamirzyan says he will look at anything, but the obvious sectors for the fund to target are IT, biotech, alternative energy and e-commerce. "We have another biotech company that is just about to sign a deal with [state-owned technology agency] Rusnano tech for a second round of financing that will be used to build a production facility to produce hi-tech capsules to deliver a dermatological product it has been developing," says Agamirzyan.

Sowing the seeds

RVC officially began making its first investments in 2007, typically contributing up to $5m for early stage companies or $500,000 as seed capital, and today the company has 12 funds with RUB26bn ($867bn) invested in 104 companies. In addition to its own funds, the Ministry of Economic Development and Trade appointed RVC to oversee another $500m worth of funds that have been established by a troika between RVC and the federal and regional governments to promote projects at a regional level. Agamirzyan says that Tomsk and Tatarstan already stand out as champions when it comes to regional tech funds. "Most of the companies in our portfolio are still only two to three years old, so we are only just beginning to reach maturity amongst a few of the first investments we made," says Agamirzyan.

Still, all the effort is starting to make a difference. Economic Development Minister Elvira Nabiullina predicted at the start of April that the innovation sector is expected to gradually raise its share in the Russian economy to 12-13% from a current 11% by 2015, and to 16% by 2020. E-commerce is one of the fastest growing sectors in Russia at the moment, but RVC has invested the largest market of its cash into biotech. "There are a lot of copy cat internet companies out there that are growing very fast and they are developing something that has proven interest in other countries. But there are also a lot of private investors interested in this sector. We are a state company with a mandate to promote development of high technology companies, so we look further afield than just the obvious projects," says Agamirzyan.

The most prospective companies are those that cater to either business-to-consumer demands or business-to-business, but specifically targeting the needs of the people running those companies, believes Agamirzyan.

Ironically, Russia's difficult business climate has proven to be an advantage for some young companies like 1C (the name is in Cyrillic and pronounced "one-s"), one of Russia's largest software developers. At home it became well known for its Russian accounting software, but abroad it is better known now as a games developer. "1C grew up meeting the needs of the domestic market and then branched out overseas, but there are other companies like Transas that produces port navigation simulators used in training around the world and other marine software. It made their first money abroad and only came back to Russia once the market was ready for it," says Agamirzyan.

Most of the co-investors into RVC's funds have been either Russian-specialist funds or local investment banks, but Agamirzyan says RVC hopes to bring in more foreign money as well. "We already have a couple of funds outside Russia that co-invest with the biggest international players in companies overseas, but have some Russian angle," says Agamirzyan. "But now we are seeing the start of a much bigger interest from foreign tech funds, who are allocating part of their portfolios to emerging markets and Russia in particular. These world famous funds are starting to get really excited about the prospects of investing into Russia.

Part of this international interest may have been sparked by the IPOs of internet and software companies Mail.ru, Yandex and EPAM Systems over the last couple of years, but Agamirzyan still only has a few trophies to hang on his wall.

The benefits of RVC are only just starting to become apparent, but Economic Development Minister Nabiullina is very upbeat, saying that the macroeconomic effect of innovations will start to make themselves felt in 2018-2020. The current growth might seem low, but she adds: "Never before has there been this type of long-term growth in Russia amid a decreasing labor force."