Clare Nuttall in Almaty -
While European venture capitalists agonise over how to build their own Silicon Valley, Kazakhstan's National Innovation Fund has a more modest - and realistic - vision: to promote innovation and the transfer of technology in Kazakhstan.
With an economy dominated by natural resources, diversification has been a key aim of the government for several years. With this objective, the National Innovation Fund (NIF) was set up in 2003. It was brought under the umbrella of the Kazyna sustainable development fund (now merged into Samruk-Kazyna), when Kazyna was set up in 2006.
"Kazakhstan has plenty of natural resources and in order not to be dependent on these, we are trying to establish a sustainable economy based on new technologies and processing of raw materials," NIF deputy chairman, Timur Umurzakov, tells bne. "The NIF's major activity is to facilitate innovation and to establish new high-tech and science-intensive enterprises."
Creating a high-tech industry in Kazakhstan is particularly challenging since it has no real history in this area. The cutting edge research during the Soviet era was carried out in Moscow, Kyiv, the Urals and other centres far from Kazakhstan. "During the Soviet Union, Kazakhstan used to be a source of raw materials. There were few processing planters here, although Kazakhstan was quite good in the metallurgy and biotechnology industries," explains Umurzakov. The lean years after independence, when university research departments were starved of funding, didn't help matters.
Today, the NIF receives an annual allocation of funds from the national budget through Kazyna. Its current capitalisation is KZT32bn (€166m), and this money is used in a range of directions to encourage the high-tech sector - direct investments into local companies, investments into Kazakh and international venture funds, and initiatives to encourage the transfer of technology from universities.
Six local VC funds have already been set up with cornerstone investments from the NIF. These funds were founded by a variety of local companies including financial services firms Turan Alem Securities, Centras Securities and Almaty Business Group, IT companies Glotur and Logycom, and the Lancaster Group - a Kazakhstan-focused holding company. All of the six funds are $20m in size and received investments of $9.8m from the NIF.
As well as making direct investments into companies - which must be no more than 49% of equity and $5m per project - and investing in local VC funds, the NIF also invests into foreign companies and funds. It also has stakes of between 3% and 6% in venture capital funds based in the US, Israel, Germany and Malaysia. "Our stakes in financial terms are not large, but our contacts with them help us to understand which technologies are good and which can be applied to Kazakhstan," says Umurzakov. "Our major goal is to have access to the portfolios of foreign venture funds. For example, after we invested $10m into Wellington Partners III Technology Fund, we made quite a big investment into Safe ID Solutions, one of their portfolio companies. The NIF now owns 22% of Safe ID Solutions, and we are now planning to set up a joint venture between the company and a local partner to produce equipment for biometric passports in Kazakhstan." The NIF has also made direct investments into three Israeli companies.
Umurzakov considers that the merger of the NIF's parent organisation Kazyna with Samruk in 2008 could benefit the fund. "The merger will affect the NIF," he says. "Kazakhstan is becoming more of a 'state capitalism' country now that about 40% of GDP is under one huge holding - Samruk-Kazyna. I expect that our fund will not only cooperate more with the private sector, it will also help to increase efficiency within companies such as KazMunaiGas. We need to make our production and economy to consume less workforce, less resources, electricity per dollar of production. This is a huge field of activity."
The term "venture ecosystem" is a catchphrase often bandied about in Europe and the US. Here in Almaty, the NIF is working to promote contacts between entrepreneurs, researchers, businesses and potential investors. Its trimonthly "High Tech Friday Club" is an afternoon gathering for all the above to get together, report on their projects and exchange ideas. Working with Kazakhstan's biggest technical universities, the NIF has also launched competitions encouraging students and scientists to submit business plans. Last year, it ran a competition - based on an original idea from MIT - that trained up a handful of promising student teams, giving the winning team $50,000 to develop its idea into a business.
Umurzakov does, however, admit that more investment from the government is needed if Kazakhstan's universities are to become a fertile source of ideas and technology upon which to build new businesses. "This should not be only the innovation fund, but it's the responsibility of the Ministry of Education to increase the level of education, to send scientists for training, to send Kazakh students abroad to give them a better technological understanding. This is quite a big activity and it will take a lot of time. At present, we do not expect that Kazakh scientists will provide a lot of new high-developed ideas."
Given that it didn't start work until 2004 and venture capital investments generally take around five years to mature, it is early days to gauge the success of the NIF. But it does have one exit under its belt already - the sale of GIS Company (Geoscan), an Aktobe-based developer of technology for geophysical studies of bore holes. The NIF took a 25% stake in Geoscan in October 2005, and sold the company to the US' Weatherford International in February 2007, making a profit of KZT96m.
One of the venture capital funds that the NIF has backed is also close to producing its first exit - the sale of a cable television network in Pavlodar. The latter is a business play rather than anything new in technology terms, and even Geoscan took foreign technology and developed it in Kazakhstan. However, Umurzakov stresses this is in keeping with the aims of the NIF; its point is less to invent brand-new technologies - the Kazakh Google - than to make technology transfer into Kazakhstan more efficient.
"We have two modes of tech transfer. The first is to develop a domestic idea with local scientists, which has not been quite successful so far. Another way is to find a good solution from abroad and develop it here. Sometimes it is much easier not to develop something new, but to try and improve something existing and make it even better," says Umurzakov. "One of the biggest challenges in Kazakhstan is that our science is not very well developed and it is very difficult to implement a local idea. Sometimes they are not very competitive. It is much easier not to re-invent the wheel."
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