About the project «Success Builder»
How do you find your place in life? How do you find something to do that both comes naturally to you and makes you happy? The answer is that you have to apply the knowledge you’ve gained from university and from life itself correctly. The Success Builder Project features graduates from the Higher School of Economics who have discovered themselves through an interesting business or an unexpected profession. The protagonists share their experiences, and talk about the big shots they’ve schmoozed and how they’ve made the most of the opportunities they were given.
In early 2016, the venture capital firm Phystech Ventures and the Russian Venture Company (RVC) announced that they were creating a joint fund valued at nearly 2 billion rubles. This is the third fund under Phystech Ventures’ management that will help support companies working in the fields of energy efficiency, big data, IT technologies, and more. This fund may also serve as a way to form a bridge between scientific inventions and the market. Phystech’s cofounder and managing partner Petr Lukyanov tells Success Builder where to take advantage of the investment market, how risk-taking can fuel a career in venture capital, and why one should never be afraid to slash unsuccessful projects.
How soon after finishing HSE did you start working with investments?
I began working in the field two years before graduating HSE. I worked at an investment firm that invested in the low-liquid assets of second- and third-tier companies mostly in the production sector, so not giants like Gazprom or Lukoil. The most positive and interesting part of this job was the fundamental analysis that took place. You had to study a lot of information and reach conclusions about how much a certain company is worth on the market, whether or not the company’s current price was fair, and whether it had potential for growth. I did this kind of analysis for two years, and I learned a lot about investing on public [securities] markets.
How were you able to get such a job when you were a student with no experience?
— worth of investments are managed by American venture capital funds
I was an ambitious young man. But overall, I don’t see anything stopping a graduate from the HSE Faculty of Management from becoming an analyst at an investment firm. At the start of your career, what are most important are your IQ, ability to work, and willingness to learn. The Faculty is doing a fine job in this respect.
Does HSE introduce you specifically to the investment business? Do you even need any specific knowledge to start working in this field?
In the world of investing, you acquire the knowledge you need through your experience working with real cases. Phystech Ventures, for example, invests in a dozen different lines of business, both complex and high-tech, and the technologies that our analysts assess are breakthrough developments that cannot be easily copied. It’s impossible to be an absolute expert in all fields, but the analysts’ objective is to delve as deeply as possible into a topic. They analyse hundreds of projects, read specialised material, and interact with opinion leaders from various fields. They also meet with highly cited academics, important market players, and representatives from the R&D divisions of some of the world’s leading companies.
Overall, there is a standard approach to analysing deals. We look at the terms of the deal and at the potential a particular market has. We also assess the company’s position and prospects on that market. In order to get up to speed quickly on, say, petrochemical technologies, you have to familiarise yourself with a dozen or so similar projects and develop a network of contacts in the industry, which is why working in a fund means you spend a lot of your time learning. The investment analyst’s primary objective is to analyse and systematise data, and these are the very skills that a good university education provides. HSE forms an excellent foundation that allows you to continue acquiring new professional qualities, and the university instils in you the habit of constantly growing in your position.
Think: are you prepared to work 12-16 hours a day? Because in the venture capital business, extraordinary results are achieved through extraordinary effort
What other skills does a future employee at your company have to have?
Aside from having expertise in the field of investments, it’s also important to be motivated and have a certain type of attitude. The venture capital business is a fairly venturous endeavour, which is why it is crucial that the team be inspired by the idea of success. We are currently investing correctly; we’re investing dollars that, in five years, might turn into thousands of dollars. It’s just like how each dollar the first investors put into Facebook turned into $20,000. Our figures are much more conservative, of course, but the point is, you have to enjoy taking risks in the venture capital business. This is just as important as being able to think several steps ahead. These are the factors that largely determine your success. And if you think you have these skills, then think: are you prepared to work 12-16 hours a day? Because in the venture capital business, extraordinary results are achieved through extraordinary effort.
While at the university, one can also gain an understanding of the drive that exists in the investing business, but there aren’t a lot of highly motivated, hardworking students in Russia who are dead set on working in the venture capital business. Graduates from top universities prefer large companies and consulting.
What if a tech specialist, not a manager or economist, comes to you looking for a job?
We need both types of competencies, so this wouldn’t be a bad thing. In his or her work, an economist learns how to understand technical terminology, while an engineer might delve into an economic analysis of the industry. In the venture capital business, which is now tied to technology, a lot of my colleagues have a technical education, but I also know people who have achieved great success in the field without having a strong background in technology. Venture capital is diverse. A technical education is less of a necessity at funds in their later stages that invest over $10 million in projects and look more at financial metrics and the market than at the technological decision-making that goes on. This is already largely economic.
In order to gain experience in the venture capital business, a lot of people go abroad to intern at large banks. You never tried taking this route?
Those who have experience in the venture capital business would never want to go work at a bank. In a large sense, this would be a step backwards. My colleague, a graduate of Harvard Business School, once told me about how HBS students look for a job. Six months before graduation, consulting companies contact the soon-to-be graduates, and the students who want to play it safe end up accepting these companies’ offers. The others wait for the next offer. Closer towards graduation, corporations come in and snatch up everyone else who didn’t jump on the first train and decided to take the risk and wait. And when the main exams are over, venture capital funds swoop in and take the bravest and most confident of all the students. I’m mentioning this because the venture capital business is an elite field in a certain sense. The absolute best practical education you can have in the venture capital industry, I find, is the Kauffman Fellowship, which is a two-year programme specially organised with several large venture capital funds. But in order to participate in the fellowship, you have to work at the foundation already.
Can you talk a little bit about how you ended up working in technology and why you decided to stay in the field?
I was always interested in technological progress, and I understood rather quickly that I wanted to work specifically with prospective technologies. In 2008, when I started working at my first fund, I encountered the technology sector for the first time when I was working on early-stage investments in projects that dealt with new materials and sensors at the International Foundation of Technology and Investment (IFTI). It was much like ‘love at the first sight,’ and I never again strayed from the path of technological investments.
Where does one find capital? If you want to start your own venture capital fund, what kind of capital do you need and how much?
was the total worth of deals on the Russian venture market in 2015
Formally, you can start a fund without investing any of your own money, but a certain life hack exists in the industry: it’s easier to convince other investors when you use yourself as an example. At the majority of western venture capital funds, a managing company invests between 1% and 2% of a fund’s capital, which is standard practice. But one example of using your own investments is still not enough. It’s important to act as a manager who has to control a fund’s resources himself. Aside from experience with deals while working at other funds, I also had experience with three successful investments of my own, and I shared this experience with the other prospective investors. Plus, my partner at Phystech Ventures has an extensive background in angel investing, which added to our credibility. As a result, the fund attracted a total of 17 investors.
Is it possible to say that the main activity of a venture capital fund is to bring together investments and technologies?
No, we don’t bring anything together. We make decisions on which projects we do and do not want to invest in; after all, we are talking about money investors trusted us with. At the same time, we carry out fundraising activities, but we don’t attract investors to specific projects. This is more like consulting, which other companies in Russia handle.
How do you look for promising technologies? Do you analyse trends and visit tech fairs?
There are global trends. The world’s top funds are investing in 15-20 technological areas, and this isn’t a secret to anyone. We choose the areas that have proven themselves and for which we have connections in the locations where our companies are developing. The geographic focus of our fund is Russia, Southeast Asia, Europe, and the U.S. Out of all of the market opportunities and global trends out there, we single out those where our expert opinion and support will help young technology companies achieve maximum success and get closer to the centre of the world’s venture capital market – the United States. This is why our portfolio includes a lot of American companies, while we bring the companies that aren’t American to the U.S. market, where the world’s largest funds set investment trends.
Which direction has been most successful for your fund?
In Russia, one of the most successful fields has been technology for the oil and gas sector. This includes developments for increasing wells’ oil production rate, software solutions, high-tech equipment, sensors, technologies that lower environmental risks, and technologies that increase the efficiency of oil and gas exploration, drilling, production, and refining.
The Russian venture capital market looks better than most have become accustomed to thinking. It’s fairly well developed, considering the fact that it was practically non-existent in the 2000s
Depending on the sector, the market for these kinds of technologies in Russia totals hundreds of millions, even billions of dollars, while the global market is at $10-, $20-, maybe $30 billion. Aside from this, M&A activity is high here for large international strategic players that are interested in buying our tech companies and fully integrating themselves into our business. Some of the most powerful, though, are in the oil and gas sector: Weatherford, Emerson, Schlumberger, Honeywell/UOP, and other market leaders.
Is the Russian venture capital market unique compared to the global market?
The Russian venture capital market looks better than most have become accustomed to thinking. It’s fairly well developed, considering the fact that it was practically non-existent in the 2000s. There are definitely success stories, even during periods of crisis – for example, when a South African investor recently spent more than $1 billion to purchase stake in Avito. There’s also the example of Yandex, which Baring Vostok successfully invested in at one point. The company’s market capitalization now surpasses $10 billion. Investors see these success stories, which is why both local and global funds are active on the Russian market. This level of activity has fallen somewhat due to geopolitical factors, but there’s activity all the same.
Overall though, this situation is common for venture capital investments in the more popular IT segment, while things are only beginning to take off in venture capital for the Russian industrial sector. There are now a lot of good offers, interesting teams, and strong tech companies, but there aren’t a lot of funds that have tasted success and are prepared to develop an entirely young market. This has its plus sides though; it’s now possible to take advantage of this situation without any competition.
Is Phystech Ventures considered a major market player?
We’ll say this: Phystech Ventures is a notable player even though the fund manages just over $50 million, which is not much by Western standards. We’re an active investor in the energy sector, and there are only another five funds that invest in the industry with us, making it a fairly small circle.
How do you, as well as the companies that partner with you in deals, ultimately make money?
The main players in business are always the people who start the companies. They hold the largest amount of shares in the company, meaning a fund can’t hold controlling stake. We invest in a company by acquiring shares. Then the company typically holds several funding (investing) rounds, and we are able to invest even more money if necessary, which is how a company’s market capitalization grows. The company Uber, for example, held several rounds of investments and reached an overall capitalization of $80 billion. In the U.S., prior to holding an IPO and selling shares, a company has up to ten funding rounds. In Russia, this figure is only two or three. Overall, a venture capital fund makes money during the IPO; it sells its stake in the ‘successful’ company for more than it paid when it initially invested in the ‘dark horse.’ Meanwhile, the company’s founders make money in different ways. They can when the company is sold or through dividends.
is how much China invested in 2015 to develop infrastructure for renewable energy sources, the largest amount ever invested in energy
As the head of a venture capital fund, what skill would you consider to be most important for this position?
For a venture capitalist, it’s critical to be able to set up and maintain a network of contacts – industry experts and opinion leaders, potential partners and portfolio company buyers, investors for a company’s next round… This is one way for new projects to come along, which is why if you have better contacts, your deals will be more successful and of a higher quality.
How do you help a portfolio company develop?
In an ideal world, the company being invested in would not actually need any help; you’d sit back, and the company would send over reports detailing how great everything is and how much growth there has been. But this is an extremely rare situation. This is why the fund helps its own portfolio develop. We understand what has to be done for a company with strong technologies, a good team, and an interesting product to grow a hundredfold over a ten-year period. Of course the founders of a company know more about a certain technology and its market, but we know the managerial mechanisms and business practices, and we have the financial resources and other tools to become a sort of catalyst for the company’s rapid growth.
For industrial startups, it’s really important for their first steps in the industry to be major ones, which is why we help generate leads, i.e., potential clients. We also help hire experienced managers who are able to sell in the industry. Sometimes the creators of a technology don’t have enough business know-how to predict all of the possible development opportunities that lie before a company, so in this case, we help fine-tune their strategies. We’re interested in investing in companies in which we can something more than just investments.
What has been your biggest success in the business?
Well, my favourite example is an angel investment I made in the company RRT, which in my opinion does a great job at promoting the idea that Russian developers are capable of creating technologies that are able to compete in the global marketplace successfully. RRT develops and licenses new technologies in the field of light naphtha isomerization. The company raised more than $8 million in venture capital investments over a total of four rounds, and its valuation has grown more than 500-fold. Three investors and one of the founders exited the company successfully, each earning millions of dollars. In 2015, the American giant KBR became interested in the company’s PRIS technology, and PRIS is now being implemented all over the world under the KBR brand.
Some of the most interesting cases aren’t necessarily the successful ones, but the problematic ones where you need to solve a serious problem that is stopping a company from growing
But still, some of the most interesting cases aren’t necessarily the successful ones, but the problematic ones where you need to solve a serious problem that is stopping a company from growing. This is where the main function of ‘smart money’ lies. Overall, only 30% of any venture capital fund’s portfolio is comprised of successful investments, and this is normal. They make up for the unsuccessful projects.
What mistakes do venture capital funds make, and why are investors investing in them less and less?
An investor is not able to think like an entrepreneur. One of our fund’s investors, himself a very successful tech entrepreneur, once told me about how he invested in different projects, but didn’t ‘kill off’ the bad portfolio companies on time. He believed that they were digging themselves out of their hole, and he continued financing them. This was a mistake. There can be a ton of reasons as to why a project isn’t successful, but we shouldn’t focus only on this. We need to also focus on the projects that have real potential, and we should help them grow.
The new fund Phystech Ventures II, which you created together with RVC, works with universities that focus on technology, such as the Moscow Institute of Physics and Technology (MIPT). What about other universities that aren’t so tech focused and can be the middlemen between technology and economics, between science and production?
At the fund, we work with a dozen or so different universities in Russia and abroad, but I’m ready to look at projects from the Moscow Institute of Electronics and Mathematics (MIEM HSE) as well. In Russia, there’s a certain gap between a scientific invention and its implementation, and that’s a fact. Overall, I’m optimistic about the HSE-MIEM partnership due to its potential for creating new tech startups. We have a company in our portfolio that is the result of a joint business created by an HSE graduate and an MIPT professor. Honestly though, we’re not big fans of investing in students. A student should focus on school, not business, even though a lot of students are obsessed with the idea of the modern startup. Really, the founders of successful tech companies are oftentimes people over 40 with a lot of experience. And this is where another problem arises – the more experience someone has, the less energy they have. But now we’re getting into the subject of philosophy.