December 3, 2002 1 © 2002 RUSSOFT. All Rights Reserved ITC Regional Business Roundtable December 3,...

December 3, 2002 1

© 2002 RUSSOFT. All Rights Reserved

ITC Regional Business RoundtableITC Regional Business Roundtable December 3, 2002Vilnius, Lithuania

Valentin Makarov,President, RUSSOFT, Russia

Russian IT: Russian IT:

oopportunities forpportunities for

Venture CapitalVenture Capital

www.russoft.org

http://www.nvk2000.ru/infocom/eng/

Vilnius, December 3, 20022


ITC Regional Business Roundtable

Agenda

IT Markets and Outsourcing Russian Capabilities in Software

Development RUSSOFT – National Software

Development Association Venture Capital in Russia IT - Opportunities for VC Conclusions




Introduction to the Russian IT Market

Double-digit growth across all segments for 4 consecutives years

Hardware ($5 bln, of which 90% is imported) represents 80% of the total IT market, with local companies dominating in final assembly PCs ($1.6bln) - one of the largest and fastest growing

segments Telecom hardware ($2.2bln) - growth is coming from mobile

and data (100% growth)

Software ($300M) is dominated by import (70%), with system software growing and applications outweighing other software types

IT services ($760M) is fast growing, second biggest domestic IT industry

Primer export IT industry ($220M) - offshore programming, with growth rate of 30-40%

Ernst&Young, September 2002




Situation Today: IT Industry

Starting in 2000 and continuing in 2001, the down hill plunge for many ICT companies has been dramatic

Digital Planet 2002 (based on IDC Research), published by the World Information Technology and Services Alliance (WITSA)

We are seeing a compression in the information technology industry unprecedented in the history of the industry. A shakeout of second and third tier players: in 2001 about 400 applications software companies close their

doors about 700 software companies issue warnings and

earnings shortfalls and this is continuing

ZDNet (UK), April 11, 2002




Offshore IT Outsourcing – Still a Viable Option?

Offshore outsourcing as percent of IT budgets

2000 12%

2003 28%

Number of offshore IT workers worldwide

2002 360,000

2005 More than 1 million

Forrester Research, January 2002




IT Forecast as Seen in November 2002

In October 2002 - 95% of US CIOs expect growth in IT budgets in 2003, versus 54% in June 2002. Maximum expectations (35%) for 2Q03

Morgan Stanley CIO Survey Series: Release 3.7 October 11, 2002

IT services will increase at a healthy rate of 12.4% to exceed $626 billion worldwide in 2006Worldwide IT Services Industry Forecast and Analysis, 2001-

2006, IDC, May 2002

IT outsourcing annual growth: North America – 18%, worldwide – 20%

Meta Group, September 2002

Word of caution: Each projection over the past 18 months so far has been revised further out and lower




Agenda



Development Association Venture Capital in Russia Russian IT - Opportunities for VC Conclusions




Strategic advantages of the Russian Software Development Industry

Strong in-depth educational system

Profound scientific knowledge “Genetic memory” of handling

complicated R&D projects during the Cold War

Inherent creativity and ability for engineering innovations

Adherence to the Agile Programming approaches and to modern QA standards

Open-mindedness




Russia: Total R&D Personnel

892963

279

1053

787

337

0

200

400

600

800

1000

1200

tho

usa

nd

s

Japan USA UK Russia China India

Numbers for 1995-97, depending on country

World Bank, UNESCO




IT Workforce Potential in Russia

Within the last seven years, 1.3 million people graduated from Russian universities with the skills to work in the IT industry, an average of about 186K per year (India – 60K, China – 50K, NASSCOM) . Only 70,000 actually work in IT companies in Russia

Microsoft Research

Over 100,000 specialists in physics, mathematics, informatics and computer engineering annually graduate from Russian universities and institutes

Forbes Magazine




Russia - Top Source of IT Expertise

“Russian computer-science students differ from their counterparts in the West, many here say, because the Russian education system places much more emphasis on basic mathematics and science.”

“… Such mathematical training provides Russian computer programmers with more flexibility in crafting computer software.”

“Russian Universities Educate World's Top Student Programmers”, U.S., The Chronicle of Higher Education, October 20, 2000,

http://www.chronicle.com




Russia - Top Source of IT Expertise

Annual ACM International Collegiate Programming Contest

2000World Champions : St. Petersburg State UniversitySilver Medal: St. Petersburg Institute of Fine Mechanics and Optics Among winners: Moscow State University, Novosibirsk State University

2001World Champions: St. Petersburg State UniversityBronze Medal: St. Petersburg Institute of Fine Mechanics and OpticsAmong winners: Moscow State University, Ural State University, Southern Ural State University

2002World Champions: Shanghai JiaoTong University, ChinaAmong winners: Saratov State University (European Champions), Moscow State University, St. Petersburg Institute of Fine Mechanics and Optics, Novosibirsk State University, Petrozavodsk State University, Orel State Technical University

http://acm.baylor.edu/acmicpc/finals/default.htm




0

20

40

60

80

100

120

140

2000 2003

$bln

In the World

Asia-Pacific

050

100150200250300350400450500

2000 2003

$mln

Russia

Dynamics of Software Development Outsourcing Market

In Russia: increase 277%, CAGR 56%

Source: Market-Visio/EDC

In the World: increase 65%, CAGR 18%

Asia-Pacific: increase 94%, CAGR 24%

Source: Dataquest




Dynamics of the Russian Software Export

475

300

194

12682

55403025

050

100150200250300350400450500

1995 1996 1997 1998 1999 2000 2001 2002 2003

$, mln

Source Market-Visio/EDC, November 2000 г.




Different geographic markets offer different advantages

© Copyright 2002 Pittiglio Rabin Todd &McGrath 8004MV / 10/09/2002

India Ireland Russia Singapore Israel China

Labor cost A D A C D ACultural Fit. B A B B A BInfrastructure (including tax&legal)

A A B A A C

Skills and Training A B A+ B A BIntellectual Property Protection

B A C A A D

Political stability C A B A D BProcess maturity A+ A B B A C

Overall +4 +3 +2 +2 -1 -3




Agenda







National Software Developers Association (RUSSOFT)

More than 50 companies from major IT regions of Russia and Byelorussia

More than 6,000 highly qualified developers (of about 30,000 in total involved in export production)

Export turnover around $150M (of approximately $350M in total forecasted for 2002)

Cover all spheres of IT competence Customers in the U.S. and Canada,

Far East, and all parts of Europe




RUSSOFT Mission

Create a highly competitive and internationally recognized sector of the Russian economy and to deliver exceptional solutions of high value to our customers




Goals of RUSSOFT

Promote existing export capabilities of the Russian software development industry in the International IT markets

Attract investments and increase commercial strength of the industry in the major markets

Introduce and implement internationally accepted project management and quality assurance systems throughout the industry

Lobby the Government for promotion of the export software industry, creation of a favorable and stable legal environment, strong educational system and advanced infrastructure




RUSSOFT Major Activities (1) Participating in the Russian Pavilion at the

Comdex-Nordic (January 2002, Sweden) Participating in the Russian Pavilion at the

OutsourceWorld London (April 2002, London) Co-organizing the First US-Russia IT

Roundtable (May 2002, Moscow) Co-organizing the Software Outsourcing

Summit (June 2002, St Petersburg) Signing of Agreement with Ministry of

Communications and Informatization of Russia (October 2002, Moscow)

Co-organizating the First Russian-German IT Symposium (October 2002, Moscow)

Signing of a MoU between RUSSOFT and BITKOM (Germany)

First Russian IT Season (road-show) in the USA (November 2002, New York)




RUSSOFT Major Activities (2)

Admission to the Asian ICT Organization (AICTO) (November 2002)

Launching a large project with Ministry of Industry, Science and Technology, UNDP and UNIDO on the CMM and ISO 9001/2000 QA standard implementation in Russian companies (2002-2003)

Co-organizing the Second US-Russia ICT Roundtable (November 21, San Jose)

Organizing the Russian National Pavilion at the Comdex-Scandinavia (January 2003, Sweden, 100 sq m)

Organizing the RUSSOFT National Pavilion at CeBIT (March 2003, Germany, 100 sq m)

Organizing the Second Russian IT Season in the US (April 2003)

Co-organizing the Third Software Outsourcing Summit (June 2003, Russia)




Conclusions A new competitive and forward-looking branch

of the Russian Industry has been formed in Russia in the last 3-4 years – a real engine for the New Economy

RUSSOFT has appeared in the marketplace as the acknowledged leader – “voice” of the new highly potential industry

Recognizing the added value of Russian resources in Software Development will be a strategic benefit to International IT businesses when recession turnaround is underway

Combined with the current political and economic stabilization in Russia, advantages of Russian developers and RUSSOFT activity will bring Russia to a leading position in the global software development market




RUSSOFT – business partnership and

cooperation bridge between the Worldwide customers and Russian providers of

HiTech products and services in software development

www.russoft.org

RUSSOFT –Business Partnership and Cooperation Bridge




Agenda







VC in Russia 30 Venture Capital Funds (primarily

with EBRD participation) $1,5B invested in 250 enterprises in

Russia within 10 years (less than 5% of direct investments in Hi Tech)

Areas of Investments:- 27% - food industry- 25% - telecom and IT- 9% - Medicines and

Pharmaceuticals History- 1997 – Russian Venture Capital

Association was created- 2000 – First Venture Fair took place- 2000 – Venture Investment Fund was

created by the Ministry of Industry, Science and Technology




Undeveloped infrastructure, lack of the State Support to the VC Industry

Lack of National Capital in the VC Industry

Low liquidity of Venture Investments due to undeveloped Fund Markets

High risks for investments due to lack of stimulating mechanisms for new ventures and for investors

Low level of entrepreneurial culture, lack of marketing and sales skills

Problems of VC in Russia




Conception of State Support to VC

Conception was developed in 2002 by the Ministry of Industry, Science and Technology in 2002. It includes State support measures in the following areas:

- Infrastructure development

- Creation of favorable legal and economic environment

- Increasing liquidity of Investments




Conception of the VC Industry in Russia

Infrastructure development

Creation of a network of Incubators for SMEs

Training Program for entrepreneurs

Network of “coaching centers” for consulting and support to SMEs

Expanding of Venture Fairs on the Regional level

Informational and PR support to the creation of the investment infrastructure




Conception of the VC Industry in Russia

Creation of favorable legal and economic environment

Development of legislation related to regulation of SMEs and Investments. Strong deregulation.

Formation of a network of regional VC Funds (10 Funds within 5 years) with participation of the State owned Venture Investment Fund (“Fund of Funds”, created in March 2000)

Creation of a network of “seed money” Funds and “start-up Funds” with the State support




Conception of the VC Industry in

Russia Increasing liquidity of

Investments

Development of a network of Stock-exchange places for Hi-Tech companies

Creation of “virtual” e-Stock-exchange places for Hi-Tech businesses

Creation of a National Stock Index for Hi-Tech companies




Forth Russian Venture Fair, 2003

Perm, October 16-17, 2003 Organizers: Russian Venture

Capital Association (RAVI), Ministry of Industry, Science and Technology, Perm Regional Administration

SMEs from major Russian regions required investment: $0,1M-$5M Total investment required – appr. $120M ICT sector usually represent 20% of all

participants Presentation of local coaching centers




Agenda







Russian IT – Opportunities for VC

1. Mergers and Acquisitions in Outsourcing business

Example (2002): EPAM (280 developers in Minsk) ++Exteria (100 developers in Moscow) =

=EPAM Systems (400 developers in November 2002, selected # 290 on the Fast 500 technology companies in the USA and Canada (Forbes, October 16, 2002)





2. From Outsourcing to High-Tech Consulting

Example (project 2003): “Fort Ross US”, a US based specialized

management&marketing company supported by Development Center in Russia (400 developers)

Fort Ross Consortium (since 1999) includes 20 major software developing companies in St Petersburg with total number of developers around 1600





3. Development of new IT products for the Global market – major area for VC investments in Russia

Examples:

- EXIGEN

- Parallel Graphics

- Relativity Technology

- SPIRIT

- ABBYY

- Egar Technology

- ….




Example - SPIRIT: digital telephony & DSP software

Custom DSP software development

Custom DSP software development

Off-the-shelf DSP software products

Off-the-shelf DSP software products

• 100 people

• 40 DSP software products

• SPIRIT products used in 50 countries

• Biggest software provider for TI in Europe

• Samsung

• Hyundai

• Toshiba

• Panasonic

• Furuno

• JRC

• NEC

10 years of successful cooperation with

Japan, Korea, Taiwan

• Digital Telephony

• VoIP / FoIP

• Speech Processing

• Fax & Data Modems

• Internet Audio (MP3)

• GPS





4. Investments in the infrastructural tools

- IT-Incubators (VC enterprises providing capital and services to SMEs on the first stage of investments$1M capital needed on the average, $20.000 per SME per year – start-up money

- IT-Technoparks (IT development area)$10M-$20M capital needed on the

average




Investors in IT Russia

VC Funds- IFC (Egar

Technologies)

- Russian Technology Fund (Internet Incubator)

- EBRD (various)

- US-Russia Investment Fund (Egar Technologies)

- Mint Capital (ABBYY)

- EDventure Holdings

Strategic Investors- UCOS Telecom providers

- Megaphon

- Vimpelcom System integrators

- IBS

- LANIT

- R-Style




Agenda







Conclusions

Russian IT Industry is among the most fast growing in the World

Russian Software Development is on the eve of a fast local growth and International expansion

RUSSOFT is consolidating the IT Industry, facilitates and mediates access of the International VC to best Russian IT businesses

State VC support program will create favorable conditions for investments and prepare a solid basement for effective exits after 2005-2008

With growing Russian IT market – all the neighboring regions will grow correspondingly




Software Outsourcing Summit

June 25-28, 2003, St Petersburg Organizers: RUSSOFT and Fort Ross

Consortium with support of the Administration of St Petersburg

Plenary Session, Panels, Round Tables, Companies and Solutions Exhibition, Match-Making Area

More than 500 representatives from Russia and all over the world

Details at http://www.soft-outsourcing.com

We are looking forward to seeing you the next year,Year of the 300 Anniversary of Saint-Petersburg !!!

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