• Russian politicians and tech leaders started coming to Silicon Valley more than a decade ago to build high-tech bridges but since the Crimea annexation in 2014, venture capital deal-making within the U.S. involving Russia has been declining.
• Still U.S.-based and global VC firms face issues with investments made over the past decade alongside Russian firms and individuals.
• Russia has been angling to make its own Silicon Valley with the Skolkovo Technopark outside Moscow, but now-ended relationships with tech investors and universities including MIT were important.

As the U.S. corporate world continues its withdrawal from Russia due to the invasion of Ukraine, a growing stigma against anything Russian is reverberating in Silicon Valley as tech start-ups and venture capital firms reassess their exposure and limit risks.

DoorDash and GrubHub recently cancelled deals with now-shut U.S. food delivery start-ups launched by Russian founders. The Massachusetts Institute of Technology pulled out of a multi-year partnership with Moscow's Skolkovo Institute of Science and Technology, while Index Ventures halted further deals in the country.

For Silicon Valley, the issues with Russian business run to the heart of immigrant founder-led culture and a global world of institutional investors that in recent years sought more access to top VC ideas.

"There can be a stigma toward founders from Russia coming over to the U.S. and Russian-speaking entrepreneurs," said Julian Zegelman, a general partner in Los Angeles at Step Ahead Capital, former investment banker and lawyer whose family left Russia when he was a child. "We hope it's not a witch hunt," he said.

As a tech investor, Zegelman made the decision in 2014 at the time of the Crimea annexation not to accept Kremlin-type limited partners or to co-invest in start-ups with Russian government grants or money. "Even before the war in Ukraine, having a Russian passport has been a definite liability in tech circles," he said.

For major U.S. tech platforms that have been operating in Russia, a delicate balance now needs to be struck if they choose to remain, and based on the belief that the flow of accurate information to the Russian public is a greater good than the economic pain internet firms can inflict on the regime by cutting off services. For VCs and start-ups, unwinding ties with Russian-connected capital is complex if not impossible in practice. Tracing money and assets of oligarchs can be hard to track down.

It's well known that several VC firms had money from Russia, but nobody wanted to talk about it, Zegelman said. Among those he named are Fort Ross Ventures, which has Russian ties through language, culture, and capital. There are additional Sand Hill Road-anchored firms that have invested in cybersecurity, robotics, mobile app, data analytics and SaaS start-ups that have links to Russian investors in their funds.

Fort Ross Ventures, founded in 2015 by former Sberbank chief digital officer Victor Orlovski, and named after a Russian fortress north of San Francisco, is reportedly evaluating what measures to put in place to prevent any compliance issues, with Orlovski recently telling Bloomberg, "If an investor becomes toxic, we will immediately isolate them from the other pool of investors."

The growth stage venture fund was backed by Russian bank Sberbank, which is now on the U.S. government sanctions list, but raised its newest fund without Russian capital.

Silicon Valley relationships, sanctions, seizures

More than a decade ago, the former Soviet Union sought to build a Silicon Valley ecosystem and U.S.-Russian relations were on a more optimistic path. In early 2012, the Russian Venture Company opened a Boston representative office of the Russian state-owned fund of funds Russian Venture Capital II LP.  RVC-USA hosted a launch event in Boston, where CEO Alex Tillman promoted bilateral investment opportunities and its sponsorship of the MassChallenge start-up and incubator program, which saw 36 applicants from Russia in 2012 out a record 1,237 from 35 countries.

As part of this outreach at the start of the prior decade, the Russian venture fund made investments in three U.S. VC firms, including tech investors Trident Capital Fund VII, DCM VI, and Institutional Venture Partners XIII.

A spokesperson from DCM said Russian Venture Capital was a one-time LP that invested approximately one percent of total commitments of its 2010 vintage fund 12 years ago. "As with any fund we raise, our legal team conducts ongoing due diligence on our LPs as part of the standard KYC procedures. As it pertains to RVC, we are engaged with our legal counsel regarding all the steps necessary for compliance with the applicable sanctions currently in place," the DCM spokesperson said.

There is a lack of clarity from the federal government in how firms should decide what they should do, according to several legal experts, aside from the ethical issues and inability to predict moves Russia might make in response. The VCs will have to answer to their LP investors for money lost in any businesses that remain in Moscow if those business are no longer viable as investments.  

"Assets held by foreign entities in Russia are subject to be frozen or seized. Russia can pretty much do what it wants as rule of law is lacking in Russia," said Howard Krongard, former inspector general of the U.S. Department of State, an international lawyer and venture capitalist.   

Global law firm Nixon Peabody is getting inquiries from clients about whether they can use a force majeure clause to get out of business contracts involving Russia. It often depends on the language of the contract and the situation. "Before the pandemic, more than 50% of supply contracts that I have seen had force majeure clauses, but now more attention is being paid to this issue and it's closer to 80%," said Carolyn Nussbaum, partner with the firm's complex disputes practice.  

She also noted that with a lack of clarity around sanctions, some foreign businesses in Russia may have no sanctions risk but still want to exit the market. Some company executives can be concerned about whether sanctions might apply in the future, she added.   

Deal money from Russia has been declining

While Russian investors have continued to pursue start-up deals globally, deal-making in U.S. firms involving Russian money has been declining in total dollar value raised in recent years. In 2021, 57 Russian venture investment deals totaling $2.3 billion were made in the U.S., down from a 2016 peak of $6.4 billion in deals. Meanwhile, 18 U.S. VC deals and $272 million in investment were made in Russia in 2021, from a peak in 2012 with 41 deals adding up to $426 million, according to PitchBook data.

Global VC firm Index Ventures in London and San Francisco has halted further investments in Russia and will not be taking on Russian backers.

Some prominent start-ups founded in Russia years ago have since moved headquarters to the U.S.

In 2021, Index Ventures invested in software and data start-up ClickHouse, which has a founding team from Russia, injecting $50 million in August and $250 million in October. Co-investors in the unicorn valued at $2 billion included Benchmark, First Mark Capital, Coatue Management, as well as Nasdaq-listed Russian search engine Yandex, PitchBook data show. NYSE and Nasdaq have halted trading of Russian firms.

Clickhouse is now a Delaware corporation with its headquarters in Portola Valley, California, and its European base is in Amsterdam. ClickHouse was spun out of Yandex in September 2021, and when it started, the office was moved from Moscow to Amsterdam. Index invested in the spin-off business. 

"This is a very delicate time, how bad it might get, if there is an off ramp, can a level of stability be reached," said Paul Triolo, senior vice president and technology lead at global advisory firm Albright Stonebridge Group in Washington, D.C.  Triolo said he expects that investors will try to relocate their projects outside Russia to the Baltics or to Georgia, but it depends on the nature of the business and customer base. "I imagine that startups in Russia will keep their heads down and ride out the storm." 

Several Western firms, including Index Ventures, have small teams, such as software developers, in the country, and many software teams are now figuring out if they will relocate, and what security risks are involved.

In the second-largest VC deal of 2021 involving a Russian-founded firm, venture firms Bond Capital, Insight Venture Partners and General Catalyst backed ride-hailing startup inDriver, with $150 million infusion and a $1.2 billion valuation. The start-up is now based in Mountain View, California, according to its website.

General Catalyst and Insight Venture Partners declined to comment. Bond Capital did not respond to a request for comment.

Meanwhile, Silicon Valley is scrambling to deal with portfolio companies and employees impacted by the war in Ukraine. Silicon Valley Bank, for one, is matching employee contributions for humanitarian relief and donating up to $400,000 to organizations providing food, shelter and medical supplies.

With Ukraine, Belarus and Russia estimated to have more than one million tech professionals, the scope of the crisis is large.

Nick Davidov, a partner in Davidovs VC, said that 14 of his portfolio companies have at least one developer in Russia, and all are shutting down their presence there. Staff are moving to Mexico, Uruguay, Argentina, Dubai and Turkey, concentrating on countries where a visa is not required for entry for those holding a Russian passport, he said. 

Russian start-up founders caught in the middle

Among founders that Davidov has invested in are Marina Domracheva, who represents the quality of tech talent from Russia. The Russian-born entrepreneur who moved to New York City in 2020 is the founder and CEO of 3D Predict, a patented high-tech dental aligner. In 2020, her product received FDA clearance and she recently shifted operations for 3D printing from Moscow to California and launched her U.S. start-up two weeks before Covid lockdown. She said she's shutting her Moscow operation, and will only make aligners based on its remaining plastic supplies. She's recently relocated most of her core software team of 50 from Russia, to Dubai or to work remotely. Only a handful of employees are left in Moscow, mainly due to family reasons such as elderly parents, she said.

Now focusing on the U.S. market, she's aiming for revenue of $4.7 million in 2022. Early this year, 3D Predict raised $1.5 million from Davidovs VC, One Way Ventures in Boston and XTX Ventures in London on top of an earlier $3.8 million seed round from these investors in March 2021. 

Not so fortunate were Russian-born founders of two New York-based start-ups in the quick delivery food space: Fridge No More and Buyk.

DoorDash called off a deal to acquire Fridge No More since the war began, citing due diligence issues. Co-founder and serial New York and Moscow entrepreneur Anton Gladkoborodov shut the start-up immediately and laid off 600 employees. The start-up was generating $40 million but was burning cash competing with FreshDirect, Instacart and Amazon. It had been relying on San Francisco-based market leader DoorDash for bridge financing its operations as the deal was assessed. Those backers facing investment write-offs include Insight Partners, which led a $15.4 million Series A deal investment in March 2021 with Altair Capital, and angel investor Davidovs VC. Davidov said he is facing a write-off of $4.6 million from his personal investment.

A second Russian-backed rapid delivery app, Buyk, suspended operations in early March when sanctions and restrictions on money leaving Russia cut off its funding and a pending partnership with GrubHub was put on hold. The start-up had raised $46 million in 2021 from Fort Ross Ventures, CM Ventures and s16vc.

Since 1998, Russia has been angling to make its own Silicon Valley with the Skolkovo Technopark outside Moscow, but those efforts could prove far more challenging now that ties are being cut by MIT and tech investors.

In 2021, the number of venture deals inside Russia was 37, less than half the 82 in 2017, though the average deal size has increased from $3.2 million to $15.2 million during that time period, according to London-based alternative assets tracker Preqin.

The collateral damage has extended to a planned opening this month of a tech-focused campus, American University Kiev, with Arizona State University. It's now on hold. "We still plan to open and help Ukraine rebuild," said Roman Sheremeta, an economics professor at Case Western Reserve University and founding rector of the Kiev school focused on engineering and digital technology.

Tim Draper, founder of the Draper Venture Network, was one of the early investors in Russia in 2008 with DFJ VTB Aurora, a joint venture with Russia's VTB Bank, which is now on the U.S. government sanctions list. The team was able to fund about six companies before VTB took back their commitment to DFJ VTB Aurora and dissolved the partnership. "We had several false starts with Russia, and it seems that a business like venture capital that is built on trust is difficult for a top down control-based socialist country to adopt," Draper said.