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Russia builds a Valley; PE invests

June 1, 2010

Have you head of Skolkovo, Russia? No? Apparently it is somewhere near Moscow and according to the Russian government, it is the future home of Russia’s Silicon Valley. Not buying it? Well, they’re serious, they even have the spiffy concept designs to prove it

Still not buying it? Well US PE firm Siguler Guff sure is, to the tune of $250 million.

Now, far be it for me to question the wisdom of a PE firm, but let’s just say that right now I’m kinda happy I don’t have any money with SG (although with $8.5B in assets, SG probably doesn’t care much about my happiness.)

In my line of work I get to hear about on various Silicon Valley, Silicon Alley and Silicon-anywhere-but-Cali plans, proposals and ponderings from around the world. They tell you how their particular geography is at an inflection point and is ready to burst on the technology scene.

How successful will they be?

Well, let me put it this way, right now, I could probably name a half-dozen initiatives, endeavors, concept papers, public-private-partnerships and working groups all dedicated to building the next Silicon Valley.

But how many Silicon Valleys can you name?

(You probably said one. If you said two and referred to Israel, you get part marks. If you were also thinking Bangalore, that is less about technology development as it is about services development, but I’ll give you part marks as well.)

The common mistake a lot of these aspiring Silicon Valleys make is thinking that they have (or can attract) talented engineers and all they need to do is add venture capital and their Valley will bloom.

The actual sum of engineers + capital however tends to be technologies and applications that engineers love, but that have little appeal elsewhere.

The genius behind Silicon Valley is not that it understands technology, or that it understands capital, but rather that it understands markets. Silicon Valley succeeds when it knows what IT innovation the market demands and then provides for it. Innovative companies are not made in a secluded campus (as I understand Skolkovo is), backed by easy money (no comment), and protected from the chaos of the market. They succeed when they are thrown head-first in the turbulent waters of customer demand and are forced to create in order to survive.

Silicon Valley, California is not the only place where innovation exists, far from it. But it is one of the few places that truly understands how to engage in markets. Israel and Bangalore certainly understand this, which is why all of their indigenous companies have a “global from day one” attitude and actively pursue global markets over domestic ones.

Unless Skolkovo and similar places also learn that skill, their bright engineers and willing capital will no doubt have a pleasant time on their pleasant campuses, but will have little new to say in the world of innovation.

Postscript:

Are there other forces at work? A Reuters story explains:

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.

What does it take to have strategic interests remove some high entry barriers to access some of the more established and lucrative industries?

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