The long view on global software economies... innovation and being a catalyst for change

From South America and Mexico to innovation in Israel, France and the UK, I now take you on my travels to the northern part of the Scandinavia peninsula located at the northwest corner of Europe (home of the Vikings, drop-dead beautiful scenery and spell-binding Northern Lights) to the great and ancient cities of Russia. As in other places I visited, each region has its own strengths and opportunities — but the momentum is building here for new technologies, products, and markets. My role is to encourage a conversation about local economic development — sharing best practices and paying attention to how innovation is taking place around the world. Our ultimate goal is to team up with local partners — governments, the investment community, academics, entrepreneurs, and startups — to spur innovation, jobs, and growth.

Scandinavia — Going Where Wireless Goes

The Nordic region includes some of the world's most advanced IT nations and can rightfully claim to be an important high-tech cluster — witness Nokia and Ericsson. It has all of the prerequisites in place: a strong industrial platform, demanding multinational customers, progressive use of IT in the public and private sectors, an advanced infrastructure and increasingly higher levels of entrepreneurial activity. While many wireless startups are in development, there are relatively few venture firms. There is a general sense in this region that they will face some tough challenges ahead; they must stimulate investment in new opportunities and new industries to go where the wireless market is now headed — India and China.

I met with five VC firms, including 6th AP Fund (the largest VCs in Sweden, responsible for $14 billion in indirect and direct investments), IT Provider, Brainheart, and Investor. They are all working to accelerate the growth of Nordic early-stage and expansion-stage technology companies. Most are part of another organization I met with that will play a key role in this expansion, the Nordic Venture Network. This is a private organization of the 12 leading Technology Venture Capital firms in the Nordic region. The Chairman of Nordic Venture Network is former Swedish Prime Minister and former Special Envoy of the Secretary-General of the United Nations to the Balkans, Mr. Carl Bildt.

NVN focuses on building strategic relationship between its members and international financial and industrial players.

My key takeaway:

The VC industry in Sweden and other Nordic countries is strong, particularly in wireless, telecom and biotech. Swedish consumers are sophisticated and demanding of modern conveniences (they brought us IKEA) and a great quality of life. In fact, to maintain that lifestyle, they are aggressively attacking the bioscience and health/medical areas, creating biotech breakthroughs, advanced software, and of course, those lifestyle conveniences we all carry everywhere. Only caveat here, as I mentioned in the beginning, they need to closely track and stay up with the emerging markets in China and India.

Russia — Weighing the Opportunities and the Risks

The Russian economy is clearly unique among emerging markets. It ranks as one of the world’s top exporters of oil, natural gas, and steel, with its $119.6 billion trade surplus, behind only Germany, according to Fortune Magazine. However, in the software area, it lacks an export market and faces some critical challenges. Namely, it has little enforcement of intellectual property laws, making the economics of starting a business a real concern.

Before my trip, I touched base with Esther Dyson, an investor in Russian and Eastern European startups and editor at large at CNET Networks, among other things, to gain her perspective. “One thing that the Russian market requires,” she commented, “Is a more demanding customer base. They need to become better buyers and users. They have all the necessary technical skills, but they don’t have the business experience to apply the technology as well as they should. There is some foreign investment and the market is growing fast, but much of that is fueled by oil profits as opposed to the huge foreign investments you’re seeing in China and India."

While in Russia last April, I met with Nikolay Lebedev, CEO of Transas in St. Petersburg, a maker of sophisticated navigational systems from high-end private boats up to the world’s largest super tankers. We also toured the Russian Space Agency, Mission Control Center in Korolev — Houston’s counterpart. Clearly, a lot of happening in Russia and since the early '90s and Glasnost, we’re getting to see it, experience it and participate in it.

Visiting the Kremlin ─ situated in the heart of the capital city with its monumental walls and towers, golden-domed cathedrals and ancient palaces ─ is quite the spectacle. I was especially intrigued by the medieval armor and chain mail designed to protect the rider and horse. The Russians developed a more efficient way of constructing more protective chain mail ─ bringing to mind a parallel efficiency in their programming techniques used for building algorithms today.

Here’s to Russia’s Cultural Hero

Instrumental to Microsoft Russia’s growth, Olga Dergunova was its 13th employee and is now Chairman of Microsoft Russia. Today, we have Microsoft representatives in all major regional centers in Russia, Ukraine, and Kazakhstan. Olga is clearly a cultural hero in Russia as well as Europe. The Wall Street Journal Europe has twice listed her as among the most successful and influential businesswomen on the continent. This week, she’ll be speaking at a conference held by The Economist Magazine in Moscow on “The Business Outlook for Russia to 2010.” The program introduction sums up the area best:

“Growth is good: but are expectations too high? … For many, if not most, corporations, the defining growth market in Europe right now is Russia. The economy is strong, retail sales are healthy, unemployment is falling and the stock market is surging to new highs. Yet the picture is not all rosy. Rising spending commitments (designed partly for political purposes) may yet put a brake on growth….”

Given that, one thing is clear: Russia has caught everyone’s attention. Here in California, the second U.S.-Russia Technology Symposium at Stanford University took place in February — attracting dozens of senior scientists, government officials, VCs and corporate executives to discuss ways to encourage equity capital and new consumer markets between the countries. Esther Dyson spoke about global capital and technology flows, while Microsoft’s Kyril Faenov, a native of Russia, who now heads up our High Performance Computing Initiative, participated on an innovation panel.

My key takeaway:

There’s incredible talent in Russia, and opportunity. The country has a virtually 99 percent literacy rate and shares many of the same attitudes about technology that we do. Take cell phone penetration. Three years ago, it was at 10 percent; in two years, it is predicted to reach nearly 100 percent.

Compared to the U.S., the VC community in Russia and throughout Europe tends to be less tolerant of risk. Germany has only a handful of local seed-capital VCs — such as Maz Level One. But European VCs such as Wellington and Technoventures are jumping in to invest in both Germany as well as global markets. As a result, governments are quickly seeing that investments at the seed level can have great upside in terms of jobs and economic growth. Europe presents a number of large established markets; however, the borders between the markets and language and legislation differences make investing in startups a little more challenging. But the potential for innovation is definitely there. In Russia, I saw it on faces of high-school kids building simulation software as a part of their school projects. It’s not unlike what happens here. Just another reminder that from Moscow, to Stockholm, to London, to Tel Aviv, innovation is happening everywhere. And wherever that takes place, we think we can play a key role.

We want to be a catalyst for change — helping to create strong local software economies, jobs, growth, and innovation. We do think big at Microsoft. And that’s precisely the kind of thinking that innovation requires.

Travels with Dan'l Part I

Travels with Dan'l Part II