Franklin “Pitch” Johnson, one of the fathers of U.S. venture capital and an early proponent of Russian investing, has withdrawn his personal support from Bioprocess Capital, a $116 million biotech fund created by Johnson’s Asset Management Co., with help from Russian bank Vneshekonombank (VEB).
Johnson says that he pulled out because, “They didn’t want to do anything I’d call venture capital.”
Bioprocess Capital was one of three partnerships to receive financing from the Russian government through an economic stimulus plan called the Russian Venture Co. (RVC). It collected $56.8 million from the agency.
The RVC was established in September 2006 to be a 49% stakeholder in funds established to invest in Russian technology startups and was designed to mimic a stimulus program in Israel known as “Yozma” several decades ago. The Russian government committed $500 million to the program in 2006, then upped its commitment to $1.2 billion in 2007. Johnson had a hand in shaping the program.
A separate venture fund that won backing from the RVC last year is still raising funds. The partnership between Russian bank VTB and Draper Fisher Jurvetson launched in October 2007 and is currently making investments from its first fund.
However, many investors lately have reconsidered their commitments to Russia. The country’s stock market is down about 43% since the beginning of the year, due primarily to the drop in oil and natural gas commodity prices. The country also sustained bad press for its response to Georgia’s incursion into South Ossetia in August. But neither factor was an influence in Johnson’s decision to pull out of the Bioprocess Capital fund, he says.
“As the fund finally shaped up, with VEB in control, venture capital for startups and young companies was not high on the agenda, and investments in existing companies would be the primary activity,” Johnson says. “While we Westerners were listed as ‘experts’ in the application [to receive funds from the RVC], our venture skills are not being utilized, and I don’t expect any further involvement.”
They didn’t want to do anything I’d call venture capital.
Franklin “Pitch” Johnson
Bioprocess is still a going concern.
Johnson was an influential force in Russia’s development of a venture industry and had talked about the benefits of VC in the country as early as 1990. That year, Johnson gave a talk about entrepreneurship to the Leningrad City Council. Johnson recalls that sitting in the audience that day was City Councilman Vladimir Putin, who is now prime minister of Russia.
This is not the first time a foreign venture firm has pulled out of its participation in the RVC program. Israeli VC firm Tamir Fishman last year pulled its support from Finance Trust, a joint venture that was targeting a $115 million fund. The joint venture had received a $37.8 million commitment from the government in 2007.
Fishman pulled back after Oleg Shvartsman, one of the Russian partners of Finance Trust, allegedly told a reporter that he used ties to government security officers to force private business owners to sell their companies below their market value. The resulting newspaper report reinforced the worst fears of foreign investors, namely that Russia was a lawless place to do business.
Fishman returned to Russia with a new partner in June 2008. It launched Tamir Fishman Russia as a $100 million fund with help from Central Invest Group, a Russian investment bank.
Johnson stresses that the people he worked with in Russia were “square guys and on the ‘up and up.’” —Alexander Haislip