May 28, 2010 / 4:01 PM / 9 years ago

Kremlin wins first deal for Russian Silicon Valley

* Russian technology hub wins $250 mln investment

* “Silicon Valley” project part of plan to diversify economy

MOSCOW, May 28 (Reuters) - Russia’s “Silicon Valley” has won its first $250 million investment from a U.S. private equity group this week as the Kremlin pushes ahead with a key project to diversify the economy away from oil and gas.

Top U.S. venture funds, their combined $25 billion capital sought by Russia as it attempts to build high tech industries from scratch, met Russia’s President Dmitry Medvedev and leading firms to examine the country’s nano-industries and meet Russian minds to invest in.

Plans for a Russian high-tech preserve in Skolkovo, a Moscow suburb, are the Kremlin’s pet project as it wants to steer foreign investor interest away from oil and gas, where strategic interests make for high entry barriers, toward new technology.

For a story on Skolkovo, see [ID:nLDE63S1ZB].

“We are heating the coal of the government and the president,” said Drew Guff, managing director at Siguler Guff with $8.5 billion under management.

“We are investing in the technological development of business in Skolkovo,” he said. The investment will go into digital infrastructure and IT services to allow other innovative businesses to grow faster in Russia.

Guff said it was the largest investment by Siguler Guff, which has been investing in Russia for over a decade now.

Russia inherited a rich scientific base from the Soviet military industrial complex but foreign investment to leverage it — such as offshore programming centres, run by Intel (INTL.O) and Boeing (BA.N) for more than a decade — is rare.

Some venture funds said Skolkovo would not necessarily help ease this shortage.

“You can’t force innovation into a building you create,” Don Wood, managing director at a $6 billion venture fund Draper Fisher Jurvetson, said after funds met Medvedev this week.

“My advice to President Medvedev was that for entrepreneurship to flourish in this country the government needs to get out of the way,” Wood told Reuters.

Medvedev told funds that “in Russia, many processes have prospects only if they are dealt with by the head of state.”

“That’s the way our society functions,” Medvedev said. “It’s not very good, but that’s the way it is for now.”

CRITICAL MASS

Although imposed from the top, the idea of Skolkovo could trigger growth of new businesses.

“You’ve got to start somewhere, before you can have a big impact,” said Esther Dyson, a member of the advisory board of Russia’s Yandex and IBS Group.

“If you spread anything too thin nothing happens. If you get a critical mass - that’s when things start to happen. It’s the right idea to put it in one place,” she said.

Foreign investors have long urged Moscow to make life easier for small and medium-size businesses if it wants to garner their investment. Corruption and red tape are serious concerns.

Mark Iwanowski, partner at Trident Capital, a venture fund investing in internet, cleantech and software, said better political ties between Moscow and Washington could help Russia’s drive for new technology.

“Now, we finally seem to have two presidents who get along,” he said as U.S. President Barak Obama invited Medvedev to visit California’s Silicon Valley after a June summit.

Wood says he would advise Medvedev to avoid visiting only the giants of the industry.

“He can go see Cisco (CSCO.O) and Google (GOOG.O) but what he needs to see to get the feel are companies with eight employees, with 20-year-olds,” Wood said. “Because that’s how you start.” (Editing by David Cowell)

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