Another Chance Lost For Russia

Yotaphone: Another Chance Lost for Russia?

Russian technological prowess is immense. But the country’s ability to sell its bright ideas — like the world’s first light-bulb for instance — is dire. Is Yotaphone heading for the same commercial oblivion?

by John Varnom

Although the history of science and technology, not to mention the West in general, very much suggest otherwise, it was actually the Russians who invented the first light-bulb. They followed up with the first transistor, the first digital computer in Europe and the first working laser. And then? Russia’s global presence in this last and most particularly ubiquitous piece of modern technology now stands at just one per cent of an upwards of US$3 trillion marketplace. And here’s a big question: is the country about to squander yet another opportunity to co-rule the world, albeit in the nicest possible way?

The device, the opportunity, the invention, the game-changer is the Yotaphone, which, as tradition demands, comes complete with its own visionary and somewhat madcap creator, Vlad Martynov. Yotaphone’s revolutionary combination of e-ink and cellular technology, with its always-on, battery-lite usability, won best of show in Las Vegas 2013, best of Mobile World Congress two years running in Barcelona 2013 and 2014 and carried off the Lion d’Or at Cannes 2014 in the face of stiff opposition from a few names you might have heard of: Samsung, Microsoft, Google and Apple, whose own Steve Wozniak said of the show-stopper from nowhere (equals Russia), ‘I want one. As soon as it’s out, I want one.’ In December 2014, Yotaphone 2 enjoyed a brilliant launch in London’s artfully low-key, astutely high-tech Brick Lane. So what happened? As Yota’s key marketing consultant, Virgin’s first and only company-wide creative director, tamer of the Sex Pistols, Vlad Martynov’s Chief Disruption Officer and inside witness to the whole imbroglio, I’m the man to spill the beans.

It wasn’t that Yota failed to meet its creators’ sales projections. Or that it didn’t eventually provide a handsome profit for its original investors. Or plain bad luck, although there was plenty of that. Sadly, the crucial problems that beset Yota were all too human and all too typical; a failure of nerve and belief back home: the investors’ misguided expectations that YotaPhone would meet its ROI overnight — impossible for a hi-tech product — decimated both courage and confidence; an inability to see the global perspective and grasp the global possibilities; state-owned company involvement: although at the highest levels there may have been the best intentions for Yotaphone and an embrace of its potential, the government-appointed functionaries below fought to be associated with success in the glory days but blamed others the moment any challenges arose.

The bureaucrats from Rostec, the vast thirteen-fingered high-tech Russian state holding company — eight fingers in defence and five in other places — which held a 25% stake in Yota Devices, made the company difficult to run, hindered its decision-making, passed the buck back and forth and withheld crucial help. And there is always one such super-jobsworth actually on the board, who typically cares little about the business or the product. In Yotaphone’s case, there were two: Rostec’s and then, in 2014, a second, recruited by the investors themselves, who turned out to be far more damaging than anything the state could manage. Then came the Chinese, who might have looked like the cavalry but turned out to be just another set of Indians, and mean ones.

But let’s deal with the bad luck first. No matter how brilliant YotaPhone might have looked, or how many international plaudits it received, at the end of the day it was always going to need funding: sources close to COO Lau Geckler explained that the original funding from private Russian sources had been capped at US$50 million, enough for a proof-of-concept first version, and the market-ready Yotaphone 2, the sleek handset that had swept all before it. But management calculations — which proved to be extremely accurate — suggested that the cash would run out by July 2015, just three months after the London launch. So finding new investment had been the company’s top priority from the moment Yotaphone 2 saw the light of day at the second Barcelona.

Given the phone’s reception, this shouldn’t have been difficult. And indeed, there was substantial investor interest from the outset, particularly from the US, the UK and Canada, which was very good news for the company’s value. Set up for $50 million, 90% in the hands of its original investors and 10% with management, it was now attracting up to US$150 million — plus Yotaphone 3 development cash — for around 60% of the equity, a serious revaluation. Of course there were conditions: though thoroughly impressed with the prototype, investors needed to see that Yota could not only develop product but launch it. Which, starting in December 2014, it proceeded to do, in London, Milan, Moscow, Dubai, Hong Kong, Berlin and Beijing. In the process, COO Geckler, together with CEO Vlad Martynov, who had spent a full year handling these discussions, came very close to sealing a deal.

But here, geopolitics intervened: Crimea, the Ukraine, and the resultant sanctions. What looked like Russian adventurism put a serious dent in Western investors’ enthusiasm, whilst a falling euro to dollar rate bounced profitability when bills were paid in the latter and returns came in the former. That’s where the bad luck came in, as journalists suddenly stopped asking about YotaPhone 2: all they were interested in was how the company could survive sanctions. Yota’s public line was that sanctions wouldn’t be a problem — sort of right, but sort of wrong. Sanctions didn’t affect business directly, but they affected it indirectly, and in two ways: firstly, increasing geo-political tension significantly cooled investor interest in any business coming from the Yota direction and secondly, if sanctions did get tougher or wider, that might prove to be a real issue for the future. And when the Malaysian Boeing came down, it was absolutely game over for the big western and particularly the American funds.

Critically, there would now be no cash to develop Yotaphone 3 in 2015. And in a matter of months, with its initial funding exhausted, the company would be facing a serious liquidity crisis. If there was ever a time for strong management, with the ability to think on its feet, it was now. But it is here that all the bad luck excuses run out. Here would be the point at which a bureaucratic, risk-averse typically Russian management would catastrophically fail. In this respect, it is fair to say that Vlad Martynov is either not a typical Russian, or a new kind of typical Russian.

He would need to be, given the brutal shock that vanished Western funding delivered. Within days, the company’s business models, even its very prospects, were on the scrapheap. Six years of highly directed creativity, commitment and emotional energy were suddenly pointing in precisely the wrong direction. It was a paradigm shift. In January 2015, with the West ruled out, Martynov had to start from scratch. He had to look east, which could only mean China: reaching out to new sets of investors, making connections, endlessly networking, endless face-time — essential for any Chinese agreement — whilst simultaneously introducing both rigourous crisis management to keep the business in funds and alive and re-inventing Yotaphone’s future.

But what might well have been forecast at the time as the beginning of the end — and has nothing at all to do with politics — actually came in December 2014, right after the London Brick Lane launch, when Yota’s global reputation, and global promise, were probably at their height. That was the second bureaucrat, sourced by the Russian private investors themselves, who had not only invested money in Yota, but also their time and energy and honesty in a relationship that was essentially very personal. But now they appointed a fund manager, Ykaterina Lapshina, who became their mouthpiece, where before, and throughout all of Yota’s history, it had been intimacy: they had been actively involved in the every part of the process.

In a string of highly damaging initiatives, this incomprehensible, even toxic, recruitment blunder kick-started a serious escalation the blame game. Lapshina used every single opportunity to cast Yotaphone, Yota Devices management and the business in a negative light and to deconstruct or damage its infrastructure. The company had painstakingly built a team of executives with international experience, and she wanted to fire them all. She also decided to sack the passably unique ex-Nokia Finnish development team and stop spending money on IP rights. At which point Lau Geckler quit.

Extraordinarily, the new fund manager, rather than protecting investements, pressed hard for the company to be summarily closed down, and the $50 million seed capital simply written off, despite a lifeline that Martynov and Geckler presented to the board: a funding deal with Rex Global a high-tech Chinese company.

Remarkably, Rex Global were willing to accept a $150 million valuation and buy just under 70% of the equity. Ten days before signature, Lapshina convinced the Russian fund owners to fire Martynov, on the basis that the business was going nowhere, that there was, in any case, no deal and that actually, Vlad had simply been lying. Even as the Chinese negotiations were continuing, she was still suggesting to shareholders that the company should be closed and that any communication channels between either of us and the investors should be cut off. And if investors did call directly, there was, according to one board-level participant, hysterics, the manipulation of both the situation and the facts, the misleading of shareholders about the real business circumstances, the exaggeration of every single drawback, deliberate falsification and deliberate deceit

Even when the deal had been signed (for which M Lapshina claimed the responsibility), she allowed the Chinese to welsh on the funding of Yotaphone 3 as the deal had specified they must, to revisit the supply chain, the specification and the whole look and feel of phone, and thus add a year to YP3’s development and launch. Typical Russian management, then, despite her relative youth, a bureaucrat, with neither the taste nor the aptitude for decisive action, nor, as records seem to indicate, any previous experience of high-tech business whatever.

There is a more general point here. Sadly, the Russian investors’ catastrophic new hire also typifies — clinical insanity apart, perhaps — a new young Russian elite, which, just like the old one, is risk averse, pro-state, pro-authority, with a heart and soul of pure nomenklatura perma-frost, all of which was so entrenched in the USSR of old and which, despite glitzy Western trappings, is alive and well in the new Russia, That’s why the activities of one bona-fide possessor of such a mindset have attracted such a detailed description here.

But what of the cavalry? Hadn’t they ridden to the rescue? In May 2016, when the Hong Kong-based deal was finally signed, you might have thought so. Eighteen months later, after picking through a tangled web of Shakespearian character but Chinese manufacture, you would have realised the error of your ways. Firstly, Vlad Martynov was side-lined. Eventually sacked as CEO at the instigation of the Russian fund’s doom-monger, he was kept powerless by the Chinese, on the board but with no executive authority and, in due course, this high tech entrepreneur and serial innovator — stellar track record, twenty-plus years of diverse HT experience, senior global position in the Microsoft Seattle HQ, several successful high-tech international start-ups, well-known and well-respected in the global IT community — was replaced by new management with no entrepreneurial experience, no international experience, no IT or high tech experience, whose only real commercial skills had been acquired working for state-owned corporations operating principally in the coal mining business.

And Yota Phone 3 had been fully ready for a May 2016 launch. The Finnish developers were on board. The execs at head office had the experience. Yotaphone 3 sales channels were ready and waiting. Architecture design and specification were primed, all the manufacturing documentation was in place, as were comprehensive and signed agreements with suppliers and manufacturing partners. But then, at that very point, the Chinese, according to the story somewhat unusually put out by the Chinese, had, er . . . run out of money. Just for the moment, said an inscrutable spokesman, they were not quite going to be able to fund the project. What?

Time dragged on. Said Chun Wai Yeung, executive director at Chinese investors Rex Global: ‘With a goal to expand beyond our existing core business, Yota Devices is definitely a powerful vehicle for the group to set a foothold in the high-tech market.’ The International high-tech market, as per the contract. But Rex Global did no such thing. Instead, and not entirely in keeping with Mr Chun’s grandiloquent declaration, it kept Martynov on the sidelines, sacked the ex-Nokia Finnish developers, sacked the experienced head office execs, closed down the sales channels, ignored the architecture designs in favour of as-yet undeveloped Chinese versions, cast aside the manufacturing documentation and rescinded all contracts with suppliers, manufacturers, manufacturing partners and network providers. And whilst every other signatory to the deal who had money coming was paid as stipulated, Vlad Martynov was not.

According to an FT report in November 2016, Russian hopes of building a smart-phone to challenge US rivals such as the iPhone had been ‘dealt a blow’ after development of the dual-screen YotaPhone was moved to Shenzhen from Moscow and Finland. You’re not kidding. The next phone will be delayed until late 2017, will be aimed at a kind of low-cost, widget-conscious Chinese market and will be a joint venture between China Baoli Technologies, formerly Rex Global, and Coolpad, a well-known, and well known as lower-cost, Chinese smart-phone manufacturer, who will between them ‘develop a new version of the YotaPhone’.

Why lay off the whole painstakingly assembled R&D department, which knew Yotaphone backwards? Why terminate both the manufacturing supply contract and dismantle the coverage relationship with Vodaphone? Why license (may equal give away) crucial Yota intellectual properties — design, architecture, manufacturing specifications — to a budget outfit like Coolpad? Had it been the Chinese intention all along to strip Yota Devices of its most valuable assets and turn what could have been a global business into yet another parochial Chinese bootlegging party? Or was there something else? God, as the famous saying has it, moves in a mysterious way. Well, God ain’t got nothin’ on large sums of money. Speaking of which, why did the Russians permit it? With that dilution of the equity purchase, they had retained a substantial chunk of the business. Yet they were behaving just as if they had none at all. Very curious, very curious indeed.

In any event, that is where we find the cell-phone industry’s global darling of just two years ago: about to become another light bulb that somebody else managed to switch on, with the patents Yota developed — and still owns — either bought out or circumvented. And the process has already begun. Seen the recent Samsung ads? For the phone that’s ‘always on’? Someday soon, you may be sure, some techie nerd will be looking at a mainstream handset that does all the things that Yota 2 did and perhaps one or two that Yota 3 might have, and saying: ‘Hey, a two-screen phone. Really neat. Know who invented those, don’t you? The Russians. But they blew it.’

Let me leave you with one last thought. At the dawn of the space-race, when the Americans wanted to know precisely where their rockets had gone, whose computer architecture did they use in preference to their own? I suspect you can guess the answer to that one.

John Varnom

December 2 2016