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Friday, May 27, 2022

Silicon Valley companies try to divest from Russian money

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(Bloomberg) — At first glance, Fort Ross Ventures looks like a typical venture capital firm. About seven years ago it was created in Silicon Valley with a focus on financing young companies. The founders named it after the first Russian settlement in the US, a nod to their heritage and one of the company’s biggest backers, Moscow-based Sberbank PJSC.

Today, Russia is waging a people’s war against Ukraine, and Sberbank faces crippling sanctions from Western nations. Other investors whose money is tied up in Fort Ross Ventures are naturally “very concerned,” said Victor Orlovski, the firm’s founder and pension partner.

Investors “call and ask, ‘Victor, what do we do?'” Orlovski. “My answer is simple: If an investor becomes toxic, we will immediately isolate them from the group.”

In recent weeks, global companies have rushed out of Russian holdings and are ceasing operations in the region. But for venture firms that have accepted funds from Russian investors, disengagement from the country is a more thorny imperative. The rubles may be part of a much larger fund, and in some cases these may already have been committed to startups. And since many family wealth managers for Russia’s wealthy are based abroad, it’s not immediately obvious to determine which cash came from which oligarch. Also, many venture capitalists are not required to disclose who their investors are, making it hard to tell which investors and startups are awash in Russian money.

In addition to handing out cash to ventures, Russian investors last year also poured $9 billion directly into startups through 232 deals, the vast majority of them outside Russia, according to data compiled by research firm PitchBook. It totals triple the amount Russian investors spent in 2020.

The recipients of that money may now feel a bit uneasy about being exposed to the country. Since the outbreak of the war, some startups and venture capital firms are rejecting deals with investors and companies linked to Russia. Meanwhile, in the opaque world of startups and venture capital, previously unrevealed ties now appear problematic.

When we talk about Russian investments in technology, “I assume there are several out there,” by Jeffrey Stein of the financial crime investigation service Deep Discovery. For a long time, the rule has been that if a Russian investor “isn’t on the sanctions list, business as usual,” he said.

Some links between Russian investors and US companies date back to the early Obama administration, during a more harmonious time for relations between the two superpowers. Before that, in Obama’s first term, the DCM company in Silicon Valley accepted the answer from Russian Venture Capital, then there was the Russian Venture Company in Moscow. Around the same time, Bay Area-based venture firm IVP also received an investment from Russian Venture Capital.

Now, The Russian Venture Company is subject to the strictest form of US sanctions. A DCM spokesman declined to comment. An IVP spokesman said the Russian firm invested in two of its funds, both times committing less than 1% of the fund’s total capital. He also said that IVP is consulting with attorneys on how to comply with all applicable sanctions and applications.

To avoid financial and reputational risks should a business partner end up on a sanctioned list, some venture capital firms now steer clear of Russian money, even when they’re not required to. “As far as Russia is concerned, we are taking steps beyond simply complying with all international sanctions,” Index Ventures, with officials in London and California, said in a recent statement. “Therefore, we commit not to make any investment in Russia until further notice.” The firm also said it would not hire any Russian investors and would support portfolio companies trying to cut ties with the country.

Even investing together with a Russian investor has become a red flag. Index Ventures said it would not invest alongside any group or individual with ties to the Kremlin. And in late February, a Russian investor was asked to back out of an undisclosed seed investment run by London-based Hoxton Ventures in a British startup, Hoxton partner Hussein Kanji said.

Individual startups have also been affected by changing international standards. Israeli battery startup StoreDot Ltd. and New York-based transportation platform Via Transportation Inc. have seized cash from funds backed by Roman Abramovich, a Russian oligarch who has now been sanctioned in the UK. Representatives for StoreDot and Via declined comment. Earlier this month, New York delivery startup Buyk, partly owned by Sberbank, furloughed its chief executive, along with 900 employees. Moscow’s limits on fund transfers prohibited Buyk’s Russian founders, who had been financing the company until its next funding, from transferring cash out of the country to the company.

The morality of venture capital financing can be complex. Technology investment firms and startups often believe their first duty is to build big businesses, using whatever funds are available, even though private funding hasn’t been hard to come by in recent years. Patricia Cloherty, who pioneered post-Soviet Western investment in Russian companies through her roles at the US Russia Investment Fund and Delta Private Equity Partners, said venture firms generally obeyed the letter of the law, but no more. Now, of course, obeying the law could become more complicated as sanctions proliferate.

“Most venture companies love anybody with money,” he said. “Independence of the National Seas”.

original note:

Silicon Valley tries to disassociate itself from Russian money (1)

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