Gap between St Petersburg and Moscow narrowing – but funding still miles away

St Petersburg

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When Pavel Durov was dismissed as CEO of VKontakte, the social media platform he had founded in 2006, last summer, Saint Petersburg’s tech community lamented the loss of its most enigmatic character, at the helm of its most successful brand.

But there’s far more to the city than Durov, who chose exile on the Caribbean island of St Kitts over Russia, which he complained was “incompatible with internet business”, or VK, whose 71 million daily users and 280 million registered accounts make it the most popular Russophone social media. Russia’s second city has all the foundations to become a key player in the tech world. Its problems, however, lie 400 miles southeast, in Moscow.

Mikhael Pogrebnyak has spent over a decade developing software in Russia, the E.U. and U.S. Since 2011 he has led Kuznech, a a visual search solution that for several years has been listed among Russia’s top startups – despite being headquartered in California’s Sunnyvale.

Pogrebnyak doesn’t necessarily believe in the “dreamland” of San Francisco many of his compatriot entrepreneurs are sold – “I know that’s bullsh*t,” he adds. But finding investment in Saint Petersburg “sounds today like a fairytale for kids…in 99% of cases it’s impossible.”

Russia has suffered an exodus of tech stars, not only like the debonair Durov but angels and other investors, as Russia has endured the double ignominy of a crashing currency and international sanctions.

That aside, Saint Petersburg has suffered in the shadow of its larger capital city across the East European Plain – whose startup scene has flourished in recent years. “In terms of the startup ecosystem more than 90% of VC funds, angels and other incubators are located in Moscow,” says Pogrebnyak. “Also, the way of doing business in Moscow is more energetic than in Saint Petersburg.”

Once upon a time it would take over nine hours to get from one city to the other. Today, however, a journey between Moscow and Saint Petersburg lasts under four hours on the high-speed Sapsan electric train, whose WiFi-equipped carriages have made day trips, costing under $25 return, not just possible but enjoyable.

That, and several other factors, suggest that the economic distance between Saint Petersburg and Moscow, too, is soon to close.

Saint Petersburg was founded in 1703 by Peter the Great as Russia’s imperial capital, a title it held until the Bolshevik Revolution switched the seat of power to Moscow. Despite the latter’s dominance throughout the 20th century, Saint Petersburg – known to locals as ‘Piter’ – has plenty to offer would-be tech professionals.

The city, famed as “Russia’s Versailles”, is a looker – and its canal-lined streets are lit up by a host of cultural icons, such as the magnificent Hermitage Museum and Mikhailovsky Theater. In total Saint Petersburg boasts 200 museums and 2,000 libraries – and hundreds of respected restaurants, cafes and lively bars.

As its imperial status suggests, the city is not lacking in high-end educational centers either. The St Petersburg State Institute of Technology, Peter the Great Polytechnic and the ITMO University are just a few leading tech-related institutions. The latter has won the ACM International Collegiate Programming Contest, sponsored by IBM, a record six times. St Petersburg State University has won a second-ranking three times.

Plenty of technology brands have taken advantage of that talent pool. From the 1990s firms from IBM and Motorola to Google have established development centers in Saint Petersburg, as have leading domestic firms Yandex and EPAM., which has become one of Russia’s top investors, DataArt and Reksoft (from which e-commerce provider Ozon was spun out) all came from Saint Petersburg in the 1990s. Later came VKontakte (of which, last September, acquired a 48% stake) and, in 2013, Oktogo,  one of the city’s fastest-growing web ventures, offering over 4,000 hotels domestically, and over 250,000 worldwide, since its 2009 foundation. Thus far it has raised $31 million across five funding rounds, from seven investors including Mangrove Capital and ABRT Venture Fund.

Oktogo CEO Marina Kolesnik claims that cash for young companies was present in Saint Petersburg – which she calls “St Pete” – before 2014. After then, however, “capital became very limited for all Russian businesses,” she says. “Smart investors usually understand that having a lower cost basis if anything is an advantage.”

That, in St. Pete, is far easier than in Moscow. According to Numbeo rent prices in St Petersburg are almost 70% lower than in Moscow, while the former is also significantly cheaper in terms of consumer and restaurant prices. “You could always get a better and more loyal technical talent for a reasonable amount of money – some 30-40% discount to Moscow,” adds Kolesnik.

Times are tough, though – and a promising scene that included incubator Ingria, which hosts 80 companies, and coworking spaces like Work Smart, and the seemingly ubiquitous pay-as-you-work Tsiferblat, has been slowed in its tracks.

Paperwork is still a tough issue in St Petersburg, and one of the many reasons – alongside Russia’s strained political relations with its western neighbors – that venture capital is hard to come by. Pogrebnyak says that most local companies structure deals within American or British frameworks, because the Russian model is so lacking.

There are, however, bright spots on the horizon. The ruble is, slowly, climbing back to normality, while relations between Russia and the U.S./E.U. is crawling back to cordiality – albeit amid a volley of vitriol from all sides on issues such as Syria and Ukraine.

Besides – when it comes to Russia, argues Kolesnik, “you have to look at Russia as a whole, not on a city-by-city basis. Russia currently has very little capital available for investing – most international investors are afraid to invest – economic situations coupled with the geo-political does not give investors much confidence.

“Russian investors are looking to diversify away from their concentrated Russian assets and are mostly investing outside of Russia these days,” she adds.

It is possible to run a business in Saint Petersburg, adds Pogrebnyak – “in terms of human stuff (culture, cost), it’s a good place.”

But right now, things aren’t rosy for Russia’s frozen ‘Northern Capital’. “From my point of view you can run a business here,” adds Pogrebnyak. “You will earn money for yourself and your team – not a big deal. But if you want to scale your business model, it’s the wrong place to attempt.”