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Development of Small Innovative
Companies in Sarovto Serve the Russian Market
Vladimir I.Zhigalov *
All-Russian Scientific-Research Institute of Experimental Physics
This paper discusses practical experience amassed mainly since 1996
in the development of small innovative companies in the city of
Sarov (formerly Arzamas-16). The city is the site of an important
research and production center, the Russian Federal Nuclear
Center—All-Russian Scientific-Research Institute of
Experimental Physics (VNIIEF), which employs 18,000 people. Also
located in Sarov is the Avangard Electromechanical Plant, employing
about 3,500 people.
There is a rather high concentration of scientific and technical
potential in the city, which provides favorable conditions for the
development of innovation-oriented business. In terms of its
potential, VNIIEF is comparable to a complex of several dozen
research institutes with a fairly wide range of specialties. This
facilitates the development of innovative business on many fronts,
ensuring broad commercial diversification.
To provide incentive for the development of small companies, the
enterprise VNIIEF-Conversion was established in 1996 on the basis
of a joint decision by the Russian Minister for Atomic Energy and
the Gover-nor of Nizhny Novgorod Oblast. The founders of the
enterprise were VNIIEF, the Russian Ministry of Atomic Energy
(Minatom), and the governments of Nizhny Novgorod Oblast and the
city of Sarov. In the years since its establishment,
VNIIEF-Conversion has functioned as a business incubator, working
with various partners to form small companies in different spheres
of activity using attracted investments.
* Translated from the Russian by Kelly Robbins.
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In the following text, the basic activities of the aforementioned
enterprises are described briefly, including their specializations in
the innovation area and the opportunities on which they have attempted
to capitalize.
Employing about 120 people, Titan is a company that develops new
approaches to the processing of metals and alloys. By studying the
physical and chemical properties of metals and modeling the various
technological processes involved, the company is attempting to create
items with preestablished mechanical durability characteristics. The
items are treated over different temperature and pressure ranges using
vacuum technologies. The most significant results are being obtained
in work with phase shift materials. About 10 patents have been
obtained for research results in this area. Very interesting results
have also been obtained in research on titanium alloys, materials that
are currently promising not only for aviation but also for the
automobile, chemical, and medical industries. The company has recently
begun serial production of a number of products made from titanium and
aluminum alloys. Small contracts have been signed with a number of
Western European countries. In addition, the company's design
group is working on original designs for road-building equipment on
orders from the Russian Federation Road Foundation and is
participating in various competitions and trade shows in this area.
Sarov Cellular Communications is a company that is developing and
introducing mobile communications technologies in the Nizhny Novgorod
area. In 1997 it completed a project to provide a cellular phone
network for about 1,000 subscribers in Sarov. With its business
developing in a profitable and favorably predictable manner, the
company is trying to develop capabilities for manufacturing mobile
communications equipment.
VNIIEF-Conversion Industry is a company that specializes in
introducing new technologies in the construction industry. Its main
“test site” is the southern part of Nizhny Novgorod
Oblast. This particular company initiated and developed a number of
new production facilities, including an asphalt plant and a mixtures
plant, both of which are equipped to comply with environmental
protection regulations and ensure high production standards. The
enterprise is profitable and has good characteristics for further
growth.
The Rehabilitation Center is an enterprise that concentrates its
activities in a number of areas associated with the development of
medical technologies. The main area involves the development of
prophylactic and diagnostic tools, such as telemedicine. Development
of efficient modern tools for medical diagnostic consultations is one
of the company's most interesting problems. In collaboration with
U.S. and Italian specialists, the firm is considering plans to
establish a telemedicine center in Sarov under its auspices. In 2001
the enterprise opened a laparoscopy
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center that performs laparoscopic surgeries in cooperation with
Central Medical Facility-50 of the city of Sarov.
The Ecological Technopark is an enterprise that is developing
resource-conserving technologies connected with environmental
protection and accident prevention and cleanup. The focus of the
company's activities in this area is currently a project on wood
processing. The technological process of the enterprise, on the one
hand, is waste-free and, on the other, guarantees that the products
manufactured will be of high quality for the consumer. The enterprise
is currently completing the investment stage, and by the end of the
year, actual production will be under way at projected capacity. In
addition, the enterprise manufactures small batches of specialized
vehicles to order. In particular, it produced a special emergency
squad vehicle based on the “Gazelle” to serve the
needs of the Russian Ministry for Emergency Situations. The technopark
is also preparing to produce vehicles to collect and purify sulfur
hexafluoride gas, which is used as an insulator in high-voltage
switches.
Imperial is a company that was founded jointly with the local church
authorities to make wine.
HydroApparatus is an enterprise specializing in the production of new
types of equipment for use at electric power plants, with its
customers including Unified Energy Systems of Russia, among others.
HydroApparatus has launched the small-scale production of hydraulic
drives for electric switches.
The Testing Laboratory is a project aimed at developing special
services for the testing and repair of equipment and sensors that
monitor water and heat usage. In connection with the growing
importance of resource conservation in Russia in recent years, a great
deal of monitoring and control equipment has begun to be installed.
Such equipment requires constant testing and maintenance. The
implementation of this project will meet the needs for such types of
services in southern Nizhny Novgorod Oblast and a number of adjoining
regions.
RosBioProduct is an enterprise that is attempting to develop a unique
tagging technology to meet the needs of the food industry. The company
is currently in the stage of attracting investments for the project,
so its products are not yet on the market.
AirUnion was established jointly with the Kazan Aviation Institute. It
specializes in developing light aircraft. To date, the company has
produced two series of delta-wing vehicles used in the tourism
industry and in agriculture. Some of these machines have already been
sold. In addition, the company is developing a small two-seat plane
with a very short running distance before takeoff. Prospects for
introducing such aircraft on the Russian market appear rather
promising. Sarov has an airport, which provides a unique kind of test
site for testing and demonstrating such aircraft.
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Brilliants of Sarov is an enterprise that manufactures and sells
jewelry under the auspices of a factory that processes diamonds and
other precious stones.
AST is a transportation company operating in Russia and
internationally.
VNIIEF-Energy is a company that develops and installs energy-saving
technologies. Specifically, these include special systems for
facilitating multirate operating modes for various users.
VNIIEF-Conversion Business Center is an enterprise specializing in the
trading of petroleum products.
The Center for Gas Mixtures is a company that manufactures,
transports, and stores special highly pure gas mixtures, in
particular, for laser applications. This enterprise employs
specialists from the VNIIEF laser division. Besides making highly pure
gases, the company has also begun producing special tanks that ensure
the stability of the gas mixtures during transportation and storage.
VNIIEF-Conversion serves as an incubator for all the aforementioned
companies. It should be noted that each project is of an individual
nature, with its own particular characteristics, drawbacks, and
competitive advantages, and each one is at its own specific
developmental stage.
Summary information on all of the above-mentioned companies is
presented in Table 1.
Now I would like to discuss the history of VNIIEF-Conversion and its
current operations. VNIIEF-Conversion is an open-stock company that
operates as a commercial organization. If there is a real demand for
an incubator in a region, such an organization may exist only in a
commercial form if no governmental or municipal grants (reliable
financial support) are provided. This implies that consultations would
have to be on a paid basis, as would assistance to emerging companies
in compiling business plans and searching for funding sources. Such an
organization might pursue other commercial activities simultaneously,
to support its own balance of payments. Certainly some startup capital
is required at the beginning of operations. This is provided by the
stockholders as a contribution to the organization's initial
capitalization. Actually there are several ways in which such an
organization can maintain its self-sustaining status, including
paid consultations on business plan development. As a
rule, payment is made during the project implementation
stage, that is, the services are provided on credit over a
set period of time.
paid legal consultations. Typically, emerging companies
employing 10 to 30 people cannot afford to keep a lawyer
on staff, though they do encounter needs for legal
services in the course of their operations. As a rule, all
legal services to these companies are rendered by the
legal group
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TABLE 1 Small Innovative Companies in Sarov
Name
Market
Competitive Advantages
Difficulties
Status
Sarov Cellular Communications
Stable, regional
Developed service infrastructure
Limited nature of market
Past break-even point; now profitable
Titan
Nizhny Novgorod region, all Russia
Highly qualified specialists available
Profound market research required for correct strategy
Past investment stage; sales near to break-even
Industry
Regional and highly competitive
Highly qualified specialists available
Limited nature of market
Past break-even point; now profitable
Rehabilitation Center
Regional
Unique technologies
Solvency of the market
Embraces two projects: one is past investment stage and near break-even; the second is in the investment stage (telemedicine).
Ecological Technopark
Regional, with sales potential
New technology with good consumer qualities
Production arrangements and staffing
Past investment but not yet at break-even
Imperial
Russia
Strong competitive positions (a strong partner)
Correct product assortment policy required
Past investment and in first sales
HydroApparatus
Russia, China
Unique technology
Strong competitors, niched market
In investment stage connected with production start-up
Testing Laboratory
Regional
Licenses obtained, experienced personnel
Need to expand range of services
Investment stage; first sales expected in March 2002
RosBioProduct
Russia
Possibility to preserve technology
Uncertainty in volume of orders
Investment stage
AirUnion
Russia, International
Experienced partner
Insufficient knowledge of market
Near break-even; more investment required to develop several areas of activity
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TABLE 1 (continued)
Name
Market
Competitive Advantages
Difficulties
Status
Brilliants of Sarov
Russia
Reliable partner: ABP
Sales and distribution system required
Investment stage
AST
Russia, International
Good base
Insufficient number of vehicles to fulfill lucrative orders
Break-even
VNIIEF-Energy
Russia
Unique technology
Insufficient commercialization of technology
Investment stage
VNIIEF-Conversion Business Center
Regional
Experienced personnel
Expansion required, lack of investments
Recoupment
Center for Gas Mixtures
Russia
Unique and reliable technologies
Sales expansion and special market research required
Investment stage; initial sales
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of VNIIEF-Conversion based on a special agreement stipulating prices
not higher than those of other organizations.
consulting in accounting. A number of VNIIEF-Conversion
employees serve as auditors for some companies on a paid
basis.
overhead services on fulfillment of contracts with temporary
creative collectives
operations in the stock market
profits from shareholding in companies
On average, VNIIEF-Conversion has about 35 employees, while all the
companies embraced by the incubator employ about 500 people. The
experience of the incubator has shown that such an enterprise can be
self-sustaining.Table 2shows the
company's annual profits, which allow it to invest in a number of
other enterprises.
In 2000 an innovative technology center was established under the
auspices of VNIIEF-Conversion. Its main purpose is to develop funding
for investment projects using its own means and attracting funds from
other sources (international foundations, state financing). In
practice, it deals with developing commercial product prototypes that
may be offered for market evaluation. This refers to ideas that are
premature to be immediately put into production on any sort of scale,
as their potential consumer qualities must first be assessed. That is,
a working model must be created and the technology must be tested.
This is not a matter of conducting any sort of scientific research,
but rather of determining certain consumer qualities of the product
using well-known technical designs and processes for that purpose.
Working out all the details in this manner sometimes requires a sum on
the order of $50,000 to $200,000, but this money is at high risk of
producing no return. The fate of such a prototype could take one of
three paths. It might be licensed to another organization, investments
might be sought under the creating organization's business plan to
initiate production, or the prototype might not elicit any interest
whatsoever. This issue will be discussed in more detail in another
presentation.
It should be noted that several new independent companies are
operating and developing in Sarov, with their business being connected
in particular with developing software products (e.g., the company
STL, in
TABLE 2 Annual Profit Figures for VNIIEF-Conversion
Year
Profit (in rubles)
1997
2,192,000
1998
2,076,000
1999
3,142,000
2000
4,171,000
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the area of computer services), equipment for the oil and gas
industry, and so forth.
The experience of creating new enterprises has proven in practice the
importance of the formula Management + Market + Capital. An error in
one of the elements leads to a failure of the whole project. A
balanced approach should be taken in upgrading all components of this
system. All projects encounter essentially the same problems in their
developmental stages, but they must overcome them in accordance with
their specific situations. Otherwise, bankruptcy awaits them. In this
regard, an incubator plays an extremely significant role in enhancing
the viability of new companies in the following ways:
consulting at flexible rates
monitoring company activities
providing access to additional resources
The main difficulties new companies encounter and the typical mistakes
they make are as follows:
poor knowledge of the market in which they need to sell
their products
low consumer qualities of products and, as a result, low
competitiveness
insufficient funding due to errors in business planning
poor management
lack of access to suitable funding sources (lack of
collateral)
This point is illustrated using examples from the development
histories of several companies. The key role of the project manager
should be noted. Even if you have found funding and your product is
long-awaited at the market, there is still no guarantee of success.
“Bad” management will create a situation in which you do
not have enough money, the price of your product is unacceptably high,
and so on.
At present, Sarov Cellular Communications is a successfully developing
company that recouped investments made in it after three years of
operation. However, the early operations of the company were far from
problem-free. In fact, the company was saved by the systematic
independent monitoring of its activities by VNIIEF-Conversion.
This point is illustrated using the concept of net present value
(NPV). Figure 1 presents the expected and
actual net present value of the company.
An analysis conducted in the second half of the first year showed that
costs were actually continuing to rise, in contrast to what was
expected, namely that investments in the project would end and
expenses and in
~ enlarge ~
FIGURE 1 Expected and actual net present value of Sarov Cellular
Communications.
come would begin to balance out thanks to sales growth. An additional
loan was taken out at the bank to cover the unpredicted expenses. The
analysis showed the presence of excessive personnel, unduly high
salaries, and abnormal expenses for company operations (payments for
contracts, services, etc.). A financial manager was appointed for a
six-month term, and working jointly with VNIIEF-Conversion
specialists, he developed a detailed financial plan, implementation of
which was closely monitored. For example, salary costs were cut by
about one-third. Income exceeded expenditures, and the company paid
off the expensive loan and even returned all investments by the end of
its third year of operations. Notably, this is the only mobile
communications project in Russia with 100 percent Russian capital.
This is a practical example of “curing” the disease of
unacceptable management.
In general, difficulties in financial management are typical for small
companies headed by leaders with technical backgrounds. Even a company
like STL, which has such a strong partner/customer as Intel, sometimes
needs consultation on tax matters.
Another difficulty associated with the required market research and
financial planning arises when orders come on an irregular basis, even
if a company has a strong partner. One characteristic example is a
project involving the development of equipment for servicing
facilities using sulfur hexafluoride gas as an isolator. The strong
points of the project include the availability of personnel
specializing in gas purification and the
