The Startup Reset, Part II: Russian Styx
On February 24th everything changed. But as grim as it may sound, the Russian war on Ukraine seems to be helping western startups. A flight to safety has boosted valuations while thousands of tech workers flee Russia for opportunities in the west.
In January, when I wrote the first instalment in an article series about a looming correction in tech valuations, I believed I would by now be able to some degree disseminate the fallout. But Russia’s invasion of Ukraine changed everything. As it is too early to predict any tech valuations, I will pause the article series to reflect on my brief encounter with Russian startups and academia.
Visiting Lectureship
In the spring of 2020, in the midst of the global Covid epidemic, I remotely delivered a lecture at ITMO University, the St. Petersburg based university renowned for its record in programming world titles. The lecture was about scaling Russian tech startups globally, a thought that has since then been made impossible by the unthinkable aggression of Putin’s regime.
I was interested in the lectureship because of two reasons; a) I was keen to hire leading programmers to my portfolio startups and b) I wanted to understand how Russia was so strong in algorithmic programming.
Of course, I was also then concerned over the politics around it, Finns have deep suspicions about everything Russian. I screened the university through my connections and found to my relief that the head of the faculty where I would lecture was a protege of Anatoly Chubais, the relative liberal in Putin’s regime who fled the country last month.
Up to 70,000 tech workers have already fled Russia and 100,000 more could leave the country this month.
Individual Condemnation, Collective Support
Also, the head of faculty has openly condemned the war against Ukraine and seems to have deleted all of the mentions of ITMO in his LinkedIn profile as well as on Facebook. Probably as a protest against the rector union support for the war. Or then he has quit outright, as did his colleague in Moscow.
That wouldn’t come as a surprise as Russia’s tech entrepreneurs are currently fleeing the country en masse. A Russian tech trade group expects that up to 70,000 tech workers have already fled Russia and that 100,000 more could leave the country this month.
While these numbers sound huge, I would tend to believe them. Long before the latest sanctions, tech entrepreneurs in Russia have been afraid that due to inherent political hurdles their startups couldn’t reach the scale they dreamed of. If a startup succeeded, it ran the risk of being confiscated. Since the annexation of Crimea and the 2020 Minsk protests, the goal for tech founders have increasingly been to reach outside of Russia.
Tech employees may see that data dumps as a more efficient way to rebel against the Kremlin than public protest, which may result in 15 years in prison.
Tech Protest
The distress of the tech founders increased gradually, even before the invasion. I was contacted by a handful of Russian tech founders who wanted me to help move their businesses outside of Russia. As the war started to escalate, I was even contacted by an entrepreneur at the Belarus Hi-Tech Park, to which I have no connections. Some founders said they had sanctioned oligarchs on their captables and wanted to find a way to get rid of them.
While others are finding a way to get out, some are staying in Russia leaking sensitive data. Employees at search engine Yandex and internet security firm Kaspersky, who hire their employees largely from ITMO, may see data dumps as a more efficient way to rebel against the Kremlin than public protest, which may result in 15 years in prison. At Yandex, one employee has leaked data on Russian security agents.
While lecturing at ITMO, I understood that Russian tech entrepreneurs, especially those from St. Petersburg, were generally western-friendly and likely anti-Putin. They are not afraid to call the Russian invasion an “ugly war” or hope that “Ukraine will stay safe.”
Western-Friendly Tech?
Still, some signs of traditional Russian strongman politics showed up here and there. This came especially to light when the administration didn’t agree with my grading. I was about to fail a student who missed most of the classes and performed unsatisfactory in the exams. The administration said that the student typically performed well but was stymied by his day job and low proficiency in english.
As former Soviet violinists defecting were the disgrace of the politburo, Gennady Korotkevich leaving would probably do the same for Putin’s Kremlin.
But what did I learn about Russian programming? Why do they always win the top prizes at the programming Worlds?
I don’t have a clear answer to this, but given the experience from ITMO I don’t believe that it is because the overall standard of Russian tech schooling would be higher. Rather, I believe that it is because Russian universities focus on the actual techniques how to win a programming tournament. Western universities focus on training students to solve problems in the market.
This became evident during my lecture as students worked on their own startups. None of the startups had a path to scale. It is this disconnection between mathematical skills and market understanding that was most present at ITMO. While the systems at ITMO lacked western standards, I was impressed by some of the students and faculty. Still, the entrepreneurship department in its entirety reminded of a startup itself, even a Potemkin village to some degree.
Following the lecture, ITMO asked me to participate in a published interview. Sensing it being a public relations item, I instead asked for a fireside chat with the head of faculty around issues in the Russian startup ecosystem. It never happened.
Rock Star Programmers
Gennady Korotkevich, the most decorated programmer in the world, may currently be finishing off his PhD at ITMO. But it is highly unlikely that he could freely join any of the world’s leading technology firms.
The best of the best are probably of national interest to the Kremlin, national treasures, and thus beyond self-determined choice. As defecting violinist Viktoria Mullova, who fled through Finland in 1983, was once the big disgrace for the Soviet politburo, Korotkevich leaving would probably do the same for Putin’s Kremlin.
Russian tech entrepreneurs are now facing their Styx, the river in Greek mythology that separates life and death. They need to cross something they haven’t ordered, even if they stay. ITMO is planning to build a new tech campus just south of St. Petersburg, but would there be enough students to fill it?
East vs. West
At the same time, western startups are recovering from a valuation correction that started before the Russian invasion. Then, the U.S. outlook was increasingly bleak with rates rising and bubbles popping. While valuations have been supported by a temporary flight-to-safety, western startups and venture capital will at some point have to face their self-inflicted consequences.
For now, the geopolitical factors are driving valuations at tech startups. It isn’t immediately clear what will happen and when, or if, the political tensions will ease.
Tesla, which also benefits from high oil prices, is up 50 percent since the start of the war in Ukraine, or 500 billion dollars in market value. Doordash, which bought Finnish delivery startup Wolt, is up 45 percent since lows last month.
At the same time, China, which is siding with Russia in the Ukrainian conflict, is seeing western funding quickly repatriated. Asian startup funding collapsed 31 percent in the first three months of this year. At the same time, Tiger Global, the fund that helped birth western investments in Chinese startups, saw a 34 percent plunge in the same period.
That’s in stark contrast with western startups, where median startup multiples are unchanged in the first three months, while flows into venture capital funds continue to hit new records. Insight Partners announced a breathtaking $20 billion fund one day after the Russian invasion.
There’s still too much money in venture capital chasing too few opportunities and the issue around Kremlin funding in the ecosystem still remains unsolved. For now, the geopolitical factors are driving valuations at tech startups. It isn’t immediately clear what will happen and when, or if, the political tensions will ease.
This is the second instalment in a series of three articles about the collapsing startup landscape. The final article will be about how the venture funding landscape may be affected post-crash.
Dr. Jonas Dromberg has researched venture capital funding flows at IE Business School in Madrid. He founded Revalence Ventures after having invested in startups with an exit ratio three times the industry average. He has lectured about venture capital and scaleups.
