The Russians are coming; at least, their innovations are

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Nov. 5, 2003 — Nanotechnology startup Optiva Inc., is not only a cash magnet, but it’s also a member of a new breed of technology company, where the brains and innovation are in Russia, but the company is headquartered in the United States, Europe or East Asia.

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“It is world-class technology. Remember that it was the Russian Soyuz that rescued the NASA space station crew,” points out Jean Charles Herpeux, chief executive of ACOL Technology, a Swiss/Russian manufacturer of high brightness light emitting diodes (HB-LEDs).

Typical Russian research spinoff technologies are fuel cells, sensors that work in extreme conditions, nanopowders and high-power compact microscopes. Examples include NT-MDT, a manufacturer of atomic force and scanning probe microscopes, and one-year-old Independent Power Technologies, a manufacturer of advanced fuel cell systems.

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Optiva’s founder is Pavel Lazarev, a sixty-something, gregarious Russian who has raised more than $40 million for his firm’s innovative and surprisingly simple thin-film technology. He’s the former head of MDT, an atomic force microscope company in Moscow.

Despite having a large number of patents and scientific papers to his name, Lazarev is an entrepreneur. Don’t call him a researcher. He uses phrases like, “the best founders are dead founders,” showing he understands the thinking of the venture capital crowd. Currently, Optiva’s shareholders are entertaining the first bids from interested buyers.

Esther Dyson, an early investor in Russian technology firms, says that Russia doesn’t really need VC money; it needs management savvy. People like Lazarev are rare.

That means that investors who wish to be successful have to take a hands-on approach. UK-based Flintstone PLC is trying the incubator model. It seeks chemical and surface technology deals that are close to being ripe for the market. It then gives the inventors shares in a new UK-based company, which takes over all the intellectual property.

It is a model that worked well for Flintstone’s founder Ian Woodcock’s first Russian deal. He ended up selling Sterilox Technologies Inc., a maker of nontoxic sterilizations systems to investors in 2000 for an undisclosed sum. Woodcok decided to repeat the process, forming Flintstone as the incubation vehicle.

Researchers are paid a salary and key members of the team move to the United Kingdom. But not everyone agrees that moving Russian scientists to Great Britain is the best method to build value in an early stage company.

“My issue with the Flintstone model is that it removes one of the major benefits of Russian tech — the relatively low cost,” said a Moscow-based private equity investor. “Employee and infrastructure prices are lower here than in the UK.”

It also adds more risk: homesickness, culture shock and the like.

Marie Trexler, who heads Intel Capital in Eastern Europe and Russia, agrees that it is better to keep R&D teams in Russia due to the savings to be achieved.

Even Flintstone might be reconsidering its model. “Getting visas and traveling to Moscow is not as difficult as it once was,” says David Chestnutt, Flintstone’s CEO. In addition, one of its portfolio firms, a company that had found a way to make super-rechargeable batteries, lost its Russian chief scientist when he suddenly resigned and returned to Russia.

The two companies in the Flintstone portfolio closest to profitability are Hardide and Keronite. Hardide’s key researcher was the leading expert in chemical vapor deposition technologies at the Institute of Physical Chemistry of the Russian Academy of Sciences, an important space research center in Russia.

Keronite is a startup developing a surface treatment to boost the hardness of aluminum and magnesium to the level of steel. Magnesium is a material cherished for its lightness and luxe look compared to plastic, but it is soft and susceptible to corrosion and wear.

Its process has actually been around for decades, but it took Russian perseverance and ingenuity, in the form of a Moscow State University researcher, Alexander Shatrov, to be able to run the process using a reasonable about of energy.

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