The economic conflict between Russia and the United States has resulted in negative consequences for Silicon Valley.

• Since the annexation of Crimea in 2014, the number of Russian politicians and tech leaders visiting Silicon Valley has decreased, resulting in a decline in venture capital deal-making involving Russia within the U.S.
• Russian firms and individuals, along with U.S.-based and global VC firms, encounter challenges with investments made in the past decade.
• The Skolkovo Technopark outside Moscow has been Russia's attempt to establish its own Silicon Valley, but its relationships with tech investors and universities, including MIT, were crucial.

As the U.S. corporate world retreats from Russia due to the invasion of Ukraine, a growing stigma against anything Russian is spreading in Silicon Valley as tech start-ups and venture capital firms reevaluate their exposure and minimize risks. DoorDash and GrubHub have recently cancelled deals with U.S. food delivery start-ups founded by Russian entrepreneurs. Additionally, the Massachusetts Institute of Technology has ended a multi-year partnership with Moscow's Skolkovo Institute of Science and Technology, and Index Ventures has halted further investments in the country.

The problems with Russian business in Silicon Valley stem from the immigrant founder-led culture and the global world of institutional investors seeking greater access to top VC ideas.

Russian founders and entrepreneurs may face a stigma when coming to the U.S., according to Julian Zegelman, a general partner at Step Ahead Capital in Los Angeles, who is a former investment banker and lawyer whose family left Russia when he was a child. He hopes it's not a witch hunt.

In 2014, Zegelman, a tech investor, decided not to invest in start-ups with Russian government grants or money, or to accept Kremlin-type limited partners, due to the annexation of Crimea. He stated that having a Russian passport was a liability in tech circles even before the war in Ukraine. For major U.S. tech platforms operating in Russia, a delicate balance must be struck if they choose to remain. The belief is that providing accurate information to the Russian public is more important than the economic pain that internet firms can inflict on the regime by cutting off services. Unwinding ties with Russian-connected capital is complex for VCs and start-ups, as tracing the money and assets of oligarchs can be difficult.

Several VC firms with Russian ties have invested in cybersecurity, robotics, mobile app, data analytics, and SaaS start-ups, but nobody wanted to discuss it, Zegelman said.

Fort Ross Ventures, founded in 2015 by former Sberbank chief digital officer Victor Orlovski, is reportedly assessing ways to avoid compliance issues, with Orlovski recently stating to Bloomberg, "If an investor becomes toxic, we will immediately separate them from the other pool of investors."

The venture fund, which was previously backed by Russian bank Sberbank, raised its newest fund without any Russian capital.

Silicon Valley relationships, sanctions, seizures

Over a decade ago, the former Soviet Union aimed to establish a Silicon Valley ecosystem and U.S.-Russian relations were on a more hopeful trajectory. 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 highlighted bilateral investment opportunities and its sponsorship of the MassChallenge start-up and incubator program, which attracted 36 applicants from Russia in 2012, out of a record 1,237 from 35 countries.

In the early 2010s, a Russian venture fund invested in three US VC firms, including tech investors Trident Capital Fund VII, DCM VI, and Institutional Venture Partners XIII.

The DCM spokesperson stated that their legal team conducts ongoing due diligence on all LPs, including Russian Venture Capital, as part of the standard KYC procedures. They are currently working with their legal counsel to ensure compliance with the applicable sanctions currently in place.

Several legal experts have pointed out that the federal government lacks clarity on how firms should proceed, aside from ethical concerns and the unpredictability of Russia's response. As a result, VCs will be held accountable to their LP investors for any losses incurred in businesses that remain in Moscow if they are no longer viable as investments.

Foreign assets in Russia can be frozen or seized, as Russia has limited rule of law, according to Howard Krongard, a former inspector general of the U.S. Department of State, an international lawyer, and venture capitalist.

Nixon Peabody, a global law firm, is receiving inquiries from clients regarding the use of a force majeure clause in business contracts involving Russia. The applicability of this clause depends on the language of the contract and the specific circumstances. According to Carolyn Nussbaum, partner with the firm's complex disputes practice, before the pandemic, more than 50% of supply contracts she had seen contained force majeure clauses. However, with increased attention being paid to this issue, the percentage has risen to around 80%.

Some foreign businesses in Russia may not face sanctions risks, but still want to leave the market due to unclear sanctions, according to her. She also pointed out that company executives may be concerned about the possibility of future sanctions.

Deal money from Russia has been declining

Despite Russian investors continuing to invest in start-ups worldwide, the total dollar value of U.S. deals involving Russian money has been declining 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.

Index Ventures, a global VC firm with offices in London and San Francisco, has ceased making investments in Russia and will not be accepting Russian investors.

Some Russian start-ups have relocated their headquarters to the U.S. years after their founding.

In 2021, Index Ventures invested $50 million in August and $250 million in October in software and data start-up ClickHouse, which has a founding team from Russia. The unicorn valued at $2 billion was co-invested in by Benchmark, First Mark Capital, Coatue Management, and Nasdaq-listed Russian search engine. However, trading of Russian firms on NYSE and Nasdaq has been halted.

Clickhouse, which was spun out of Yandex in September 2021, is now a Delaware corporation with its headquarters in Portola Valley, California, and its European base in Amsterdam. The office was initially located in Moscow before being moved to Amsterdam. Index invested in the spin-off business.

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

In the country, several Western firms, including Index Ventures, have small teams, such as software developers, and many software teams are now considering relocating and evaluating the security risks involved.

In 2021, ride-hailing startup inDriver received a $150 million infusion from venture firms Bond Capital, Insight Venture Partners, and General Catalyst, resulting in a $1.2 billion valuation. The company is now based in Mountain View, California, according to its website.

Neither General Catalyst nor Insight Venture Partners responded to a request for comment, while Bond Capital did not provide a comment.

Silicon Valley is actively responding to the war in Ukraine by supporting portfolio companies and employees through various initiatives. For instance, Silicon Valley Bank is taking action by matching employee contributions for humanitarian relief and donating up to $400,000 to organizations providing food, shelter, and medical supplies.

The crisis is large due to the estimated presence of over one million tech professionals in Ukraine, Belarus, and Russia.

Nick Davidov, a partner in Davidovs VC, stated that 14 of his portfolio companies have at least one developer in Russia, and all are shutting down their presence there. The staff are relocating to countries where a visa is not necessary for entry for those holding a Russian passport, such as Mexico, Uruguay, Argentina, Dubai, and Turkey.

Russian start-up founders caught in the middle

Davidov has invested in Marina Domracheva, a Russian-born entrepreneur who moved to New York City in 2020 and founded 3D Predict, a high-tech dental aligner company. 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.

She aims to generate $4.7 million in revenue in the U.S. market in 2022. In the first quarter of this year, 3D Predict secured $1.5 million in funding from Davidovs VC, One Way Ventures in Boston, and XTX Ventures in London, in addition to the $3.8 million seed round they raised from these investors in March 2021.

Russian-born founders of two New York-based start-ups in the quick delivery food space, Fridge No More and Buyk, 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 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.

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

Since 1998, Russia has been striving to establish its own Silicon Valley with the Skolkovo Technopark outside Moscow. However, with MIT cutting ties and tech investors withdrawing their support, these efforts may now prove even more challenging.

Despite a decrease in the number of venture deals in Russia from 82 in 2017 to 37 in 2021, the average deal size has increased from $3.2 million to $15.2 million, according to Preqin, a London-based alternative assets tracker.

The planned opening of a tech-focused campus, American University Kiev, with Arizona State University has been put on hold due to collateral damage. However, Roman Sheremeta, an economics professor at Case Western Reserve University and founding rector of the Kiev school focused on engineering and digital technology, stated that they still plan to open and help Ukraine rebuild.

Draper Venture Network founder Tim Draper, an early investor 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, admitted that Russia's top-down control-based socialist system makes it challenging for a business like venture capital to thrive. The team was able to fund about six companies before VTB took back their commitment to DFJ VTB Aurora and dissolved the partnership.