Silicon Valley companies try to divest from Russian money

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 United States, a nod to their heritage and one of the company’s biggest backers, Moscow-based Sberbank PJSC.

Today, Russia is waging an unpopular war against Ukraine, and Sberbank faces crippling sanctions from Western nations. The other investors whose money is tied up in Fort Ross Ventures are, naturally, “very worried”, said Victor Orlovski, founder and managing partner of the firm.

The investors “They call and ask, ‘Victor, what do we do?’” Orlovsky said. “My answer is simple: If an investor becomes toxic, we will immediately isolate them from the group.”

In recent weeks, global companies have been quick to ditch 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, so it’s 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. That total is 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 theresaid Jeffrey Stein of the financial crime investigation service Deep Discovery. For a long time, the norm has been that if a Russian investor “is not on the sanctions list, everything continues as usual“, he pointed.

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. For example, in Obama’s first term, the Silicon Valley firm DCM accepted the backing of Russian Venture Capital, a Moscow-based offshoot of the Russian Venture Company. 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 spokeswoman declined to comment. An IVP spokeswoman said the Russian firm invested in two of its funds, both times committing less than 1% of the fund’s total capital. She also said that IVP is consulting with attorneys on how to comply with all applicable sanctions and regulations.

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 offices 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 withdraw from an undisclosed initial 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 to comment.

Earlier this month, New York delivery startup Buyk, part-owned by Sberbank, furloughed its CEO, 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 great 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 firms love anyone with money,” said. “Regardless of what nationality you are.”