Over the past three years, the development of the classic venture capital market in Russia has been determined by the growth of the economy as a whole. The market size did not exceed $150 million, and the number of transactions was at the level of 200. The share of venture investments in Russia in relation to GDP is significantly lower than the world average at all stages of the venture cycle. Thus, at the Seed/Round A stage, the Russian market lags behind by eight times, and at later stages (B/C/D) by 47 times. Russia holds a 1.5% share of the global venture capital market in terms of the number of projects funded, which corresponds to only 0.1% in dollar terms.
Unlike other markets, Russia has a very low share of late-stage investments, while a third of early-stage investments are provided by government-backed venture funds. If corporate venture funds are becoming the main driver of growth in the world, in Russia a reverse trend has emerged and the “share” of corporate funds among venture transactions is slowly decreasing. If in 2012 they accounted for about 13% of transactions, then in 2016 this figure decreased to 9%.
The market for venture capital exits in Russia also still leaves much to be desired. According to various estimates, the volume of exits from projects in 2016 amounted to $50-60 million, with $30 million coming from the sale of mobile game developer Pixonic to Mail.ru Group. Most “successful” exits are write-offs or so-called distressed sales (urgent sales to pay off debt), which greatly distorts the statistics. Today, successful funds are starting to look either at foreign companies or prepare Russian startups for sale to a foreign investor.
In this situation, can classic venture investments stimulate the development of the digital economy? We see several opportunities and prerequisites for the revival of the market. One of the most interesting is the Initial Coin Offering (ICO) phenomenon, which can significantly change the vector of development of the digital economy in Russia and bring blockchain technologies into the everyday lives of citizens.
ICO vs. venture
It is difficult to underestimate the size of the growing crypto-economy and the opportunities it creates. Over the past year, the market capitalization of the largest seven cryptocurrencies has increased more than eightfold, exceeding $100 billion. Currently, there are more than 800 cryptocurrencies in the world, nine of which have a capitalization of more than $1 billion. The volume of the ICO market is showing galloping growth - specialized ICOs are already appearing funds, and classic venture players are actively investing in blockchain, investing about $232 million in projects based on this technology in the second quarter of 2017 alone.
Of course, the ICO market, like the blockchain technology itself, is quite young, and the number of offers on it still prevails over quality. But the crypto market has serious fundamental reasons for growth that should not be discounted. It does not incur significant transaction costs, unlike the classic foreign exchange market. Its volume now amounts to about 2% of the value of all mined gold in the world, and the number of cryptocurrency wallets ranges from 6-12 million. Given the high profitability of digital assets and the transparency of blockchain operations, in the future more and more people will store money in cryptocurrencies and carry out transactions in them payments.
The ICO market is fueling the growth of the crypto-economy and is gradually becoming an effective mechanism for financing projects on the blockchain, providing competition to the classical venture market, which is still small but very effective in the early stages.
Over the past year, the global ICO market has raised more than $1 billion. In June and July 2017, the volume of funds raised through ICOs exceeded the global investment volume of early-stage venture capital funds. Professional investors are actively entering the crypto market, starting to set the rules of the game and determine the development of the industry. In this regard, the first unicorns began to appear on the cryptocurrency market. For example, crypto broker Coinbase was valued at $1.6 billion. In August of this year, it managed to raise $100 million from such venerable venture funds as IVP, Greylock and Battery Ventures.
If you look at the distribution of crypto investments by sector, then projects aimed at creating blockchain infrastructure and using this technology in fintech still prevail. Fintech will most likely be the first industry to switch to financing primarily through ICOs in the coming year. As the cryptocurrency market matures, the ICO industry will extend its mandate to more industries that are in demand in the development of the digital economy.
The volume of the Russian ICO market at the end of 2017 will exceed the volume of closed transactions carried out by classic venture funds. Thus, during the five largest ICOs with Russian roots alone, $190 million was raised this year - this is already more than the result of the entire Russian venture market in 2016 (MobileGo - $53 million, Russian Mining Center - $43 million, SONM - $42 million , BlackMoon Cpypto - $30 million, KICKICO - $21 million).
We can already state the fact that blockchain-based projects receive a much larger amount of funding than the rest of the venture market. Unfortunately, so far 99% of projects are located outside of Russia.
What's next
In the coming years, key centers of the crypto-economy will be formed in the world, which will concentrate the majority of operations and assets in this market, giving a significant impetus to their own digital economy through the introduction of blockchain technologies. The speed of change in the industry right now is amazing. Each country is trying to find the most effective model for regulating operations with cryptocurrencies, including ICOs. For example, Japan, from April 1, 2017, allowed cryptocurrency exchanges to operate on its territory and exempted exchange transactions with cryptocurrencies from taxes.
Singapore not only legalized cryptocurrency platforms, but also formed a fairly liberal position on regulating the issue and sale of digital currencies. Many countries, such as the USA, Switzerland, Estonia, are developing increasingly clear rules of the game, on the basis of which projects will be able to conduct ICOs. Changes happen every day. In essence, we are witnessing a global competitive war between jurisdictions. Russia could take a leading position in this fight by offering effective crypto tools and a regulatory ecosystem, but for this we need to act extremely quickly.
Article based on materials from the upcoming collection on the digital economy, prepared by the Skolkovo Foundation.
(IIDF) collected statistics on all venture transactions on the Russian market for 2016 and the first half of 2017. The data obtained clearly shows who in Russia is currently investing in startups and in which areas they are investing most actively. We made an infographic based on the numbers - it will help aspiring entrepreneurs understand who they can turn to for money for their business.
We divided all investors into five types:
Accelerators
Private investors
(can invest individually, in syndicates or through specialized crowdinvesting platforms)
Private foundations
State funds
Companies
(corporate investments of both companies themselves and funds created with their participation)
The greatest activity during the period under review was demonstrated by accelerators (primarily IIDF) and business angels - 119 and 104 transactions, respectively. Private funds concluded 80 deals, and corporate investors - 66. Funds and accelerators with government participation financed 24 startups. Another six investments were made by foreign government funds. However, in terms of project financing volumes, the picture is diametrically opposite.
Companies and funds affiliated with them (about 27.8 billion rubles) and private funds (19 billion) spent the most money on the Russian venture market. They are followed by private investors (6.6 billion) and accelerators (about 1.1 billion). This is explained simply: accelerators and private investors usually invest small amounts in the early stages of startup development, while funds and corporations invest at later stages and with larger checks. Last on the list are state funds that invested only 724 million rubles. The small amount of government funding is explained by the fact that most government funds - such as the Bortnik Fund - invest money in science-intensive projects in the form of grants, without expecting a return on investment.
What we thought
When calculating the volume of financing for venture projects, transactions whose amounts were not disclosed were not taken into account. At the same time, we considered all investments in Russian startups, including those from foreign funds and investors. For example, the calculations included transactions involving the American accelerator 500 Startups and the Chinese Internet giant Alibaba - it invested $15 million in the Russian startup Way Ray (develops augmented reality technologies for car navigation - Inc.).
The volume of money in the corporate segment was also affected by several large transactions for the purchase of already successful Internet projects: for example, the purchase by the Mail.Ru Group holding of the food delivery service Delivery Club for 5.8 billion rubles.
The patient is most likely alive Interviewed Inc. investors agree that there is some “life” in the Russian market. However, the direction of Russian venture capital remains unclear.
Statistics and comments from market participants show that sentiment is still rather pessimistic. Thus, the MoneyTree study (conducted annually by PwC) showed that the total size of the Russian high-risk investment market in 2016 decreased by 29% - from $232.6 million to $165.2 million, and the number of transactions concluded increased very slightly - from 180 to 184 At the same time, transactions whose size was less than $50 thousand were not taken into account - they are reflected in the IIDF statistics. It is “angel” deals that now make up the bulk of all activity in the venture capital market.
According to the annual Venture Barometer survey, the optimism of Russian investors decreased in 2016. As part of the study, respondents were asked how the number of transactions in Russia will increase by 2022. In 2016, significant growth was predicted by 34% of Russian investors (in 2015 there were 40%), and a slight increase - by 43% (in 2015 - 13%). On the other hand, in 2015, 25% of respondents expected a “significant decrease” in the number of transactions, and in 2016 only 6% shared this opinion.
iTech Capital fund partner:
Feelings from the market now are ambivalent. On the one hand, there seem to be deals, some kind of “movement” is happening... But all this is reminiscent of Brownian movement - there is no single vector and no understanding of where all this is heading.
Inc. I learned from representatives of the Russian venture market what they consider to be the trends of this year and a half.
Trend #1: First-time investors
According to Alexey Solovyov from iTech Capital, recently more and more deals on the market are being concluded by those who came to the venture industry for the first time. These are, as a rule, wealthy people and their family offices, who now directly invest in startups. In a survey of Russian investors by Venture Barometer (Soloviev does it annually), 56% of respondents named this one of the trends of the past year.
The liquidity crisis pushed people with free money to look for new investment strategies, explains Vitaly Polekhin, head of the National Association of Business Angels. According to him, over the past year, many medium-sized entrepreneurs and top managers of corporations have joined the “angels.” They have already tried traditional investment instruments (deposits and the stock market) - now it’s the turn of startups.
IIDF data also illustrates the activity of “new” investors. One of them, Alexander Rumyantsev, used to be involved in the stock market, and about a year ago he began investing in startups. Now he is the most active business angel in Russia (he has already invested in 30 projects). “Russian venture capital is still young and is at the stage in which the stock market was 15 years ago,” says Rumyantsev. In his opinion, most investors are still afraid to take risks and play by rules that have not yet been formed.
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The market also owes the emergence of new investors to crowdinvesting platforms - they allow everyone to try venture investments with little risk. “This is how those who have not done this at all before come to the market, but are ready to try, starting with small checks,” says Konstantin Shabalin, CEO of the crowdinvesting platform StartTrack.
According to the Russian Angel Monitor study, the club investment segment actively began to develop in 2015 - then, in particular, the Skolkovo Business School Investors Club, the VentureClub association, and the StartTrack platform appeared. The number of transactions concluded through these structures is growing at a rate of 30-40% per year, and their volume, according to Shabalin’s forecast, by the end of 2017 could reach 2.5-3 billion rubles.
It is very important for the market that such novice investors do not make gross mistakes - for example, do not invest money at inflated estimates, says Alexey Tuknov, investment director of the Maxfield Capital fund. According to him, a startup should not be overvalued initially - so that the capital invested in it in the early stages of development will bring a sufficient return on investment.
33% of Venture Barometer respondents also believe that the increase in the number of wealthy people investing in venture funds is one of the trends of 2016.
Trend No. 2: “Flight of investment”
While “angels” and novice investors are becoming more active in the market, large, commercial funds, on the contrary, are investing more carefully and are increasingly investing in foreign projects.
The local market in Russia is quite limited, and in order for the fund to achieve the planned return of 20-25% per annum, the portfolio needs to have one, or better yet, two “unicorns” - companies whose valuation exceeds $1 billion. These in Russia can be counted on the fingers of one hand , notes managing partner of Inventure Partners Anton Inshutin. In the best case, the fund will be able to sell the company for $50 million, and if very lucky - for $100 million. That is, in order to show a 10-fold return on the initial investment, the fund must “enter” the project at a valuation of $5-10 million - in fact, this The company's first money, not rounds B and above, explains the investor. It is for this reason that many funds investing at mature stages began to actively look for foreign projects to invest money, he points out.
Anton Intushin
iTech Capital fund partner:
“We, for example, look at the European market - there is no closed “gentlemen’s club” of investors (unlike the USA - Inc.) who share the most interesting deals among themselves,” says Inshutin. “And geographically, Europe is more convenient than the United States in terms of constant communication with the company’s founders.”
In addition to Inventure, the funds Runa Capital, Almaz Capital, Flint, Target and others began to actively invest abroad (including opening branches). Maxfield Capital, which was initially created to invest in Russian projects and promote them on the global market, also became interested in foreign investments. As the managing partner of this fund, Alexander Turkot, explained, the number of interesting domestic startups turned out to be lower than expected. Therefore, Maxfield Capital turned its attention to the USA, Israel and the UK - countries where the fund's partners have expertise.
Director for work with portfolio companies of the IIDF, Sergei Negodyaev, also believes that the “flight of investment” may be due to the immaturity of Russian startups. “With the advancement of technology, the internet and the venture capital ecosystem, launching a startup has never been easier,” he says. “But growing a business to the point where it meets the requirements of venture capital funds requires just as much time and effort as before.” Over the past year, according to Negodyaev, the number of companies that “died” without waiting for the next round of financing has increased significantly - in the venture capital industry this period in the development of a startup is called the “valley of death.”
The managing partner of the Impulse VC fund agrees with him, who believes that there are few talented founders and startups in Russia, and those who exist often move abroad and start their own business there.
Kirill Belov
Managing partner of the Impulse VC fund:
Since there is a lack of experienced company founders and good startups in Russia, angels and all other investors are looking at foreign markets. Funds have also switched to investing in other countries. There are many Russian-speaking project founders scattered around the world, and the flow of projects from these guys is very good in quality and quantity.
Trend #3: Lack of Buyers
Investors are also deterred from financing Russian companies by poor exit prospects. Back in 2015, 83% of participants in the Venture Barometer survey named the lack of strategic buyers as the main problem for the development of venture capital in Russia. In 2016, 69% of Russian investors said the same; more respondents (72%) were only concerned about the political crisis and Western sanctions against Russia.
The vast majority of new funds that entered the market in 2016 are venture funds, among which the share of funds with state participation is still no more than 15% (versus 30% in 2015). At the same time, the distribution of industry preferences of existing venture funds has not changed significantly: almost two-thirds of the funds are focused on the ICT sector, which is confirmed by the statistics of investments of venture funds in 2016 - more than 80% of investments, both in volume and number, were made in the sector ICT. One can also note the persistence of regional imbalances in the distribution of venture investments - over 90% of the volume of investments of venture funds is directed to companies located in the Central Federal District.
Now, perhaps, it is premature to say that the Russian venture market has overcome all the consequences of economic and political instability - the last time after the crisis of 2008-2009. it took the market two years to regain lost ground and reach pre-crisis levels. And it’s also impossible to talk about long-term stability and predictable certainty in the economy and politics.
However, even under these conditions, the Russian venture capital market traditionally demonstrates enviable resilience. In 2015, we could observe a significant decline in the VC capital market - almost $0.5 billion, which was caused primarily by the impact of the devaluation of the national currency, due to the fact that the capital of funds denominated in rubles accounted for more than a third in 2014 in the venture capital sector. But in the first half of 2016 alone - using stock exchange terminology - the decline was partially recouped: $36 million entered the market due to the emergence of new players, including private ones. According to preliminary data for the first half of 2016, the total capital of all venture funds operating in Russia amounted to $4.1 billion. The VC capital market has demonstrated enviable flexibility and vitality, especially against the backdrop of the PE capital market, which dropped by 2.0% over the previous year. 4 billion dollars and continuing to lose ground in 2016 - here, in addition to the devaluation already mentioned above, the forced withdrawal from the foreign capital market also played a role (Fig. 1).
The role of the state in the venture capital market
A feature of the Russian venture investment market is the active involvement of the state in the formation and development of the venture ecosystem. Whether this is good or bad is a rhetorical question, but one cannot fail to note that the state promotes infrastructure development and saturates the market with money in those segments in which it is interested, but where private investment is not yet ready. More than a quarter of the volume of the Russian venture capital market belongs to funds with participation of state capital (Fig. 2, 3).
Industry agenda
In addition, the influence of the state can also be traced in the formation of the industry investment agenda: while the vast majority of private venture funds are focused on the ICT sector, then funds with state participation for the most part give preference to the sector of real or mixed technologies. This position “exposes” the state in the role of an industry regulator - it contributes to the formation of demand for projects in related technological industries such as the Internet of Things, the field of big data, electronics, and new materials. In the future, this will ensure the correction of sectoral investment imbalances away from the ICT sector.
For example, the medicine and biotechnology sector has recently become increasingly attractive to investors. This area attracts interest due to long-term consumer demand and large market capacity. The largest portfolio of funds investing in biotechnology was formed with the participation of RVC.
This year, for example, several notable transactions in the biotech sector have already been concluded on the Russian venture market: the Seed Fund in the field of living systems created by KSI Ventures and the RVC Seed Investment Fund directed the construction of an apparatus for the correction of insomnia "SONYA" and the project "Brain Beat" for the development of a non-invasive glucometer. And the biomedical company Viriom raised 300 million rubles. for the further development and promotion of a domestic innovative drug for the treatment of patients with HIV infection. The investors were the Skolkovo Foundation, which provided half of the investment in the form of a grant, the foreign venture fund Torrey Pines Investment and the ChemRar company.
However, the ICT sector remains the most attractive from the point of view of funds. A low entry threshold and a high rate of “return” undoubtedly have been and will be more interesting to investors than the prospects of serious investments in projects that require a long process of bringing a real product to the market. To be fair, we note: no one expects that industries in the real sector will lead the list of aggregate investment preferences of market players in the foreseeable future. However, the trend towards correcting the disproportionate preponderance of the ICT sector is already evident very clearly. This, in addition to the activity of the state investment and institutional sectors in this direction, is also explained by the fact that investors are persistently trying to find new growth points (Fig. 4, 5).
As already mentioned, the echoes of the crisis still introduce an element of instability into the Russian economy, so investors are in no hurry to “open their wallets.” A decline in purchasing power and a poorly forecasted market situation are not the best allies in the search for portfolio companies. The presence of predictable and long-term consumer demand is a very important factor for investors. The crisis, without a doubt, made adjustments to the investment strategy of the funds: on the one hand, investors and companies began to take a more sober approach to assessing the value of businesses, which made it possible to significantly reduce the cost of entry into the project, and on the other hand, the current market conditions require a more careful approach to selection companies into the portfolio, since not every company that is ready to show dynamic growth in conditions of “economic prosperity” is able to survive in turbulent times. The bar for qualitative assessment of projects seeking investment is rising (Fig. 6, 7).
Regional projects and investments
There is money in the market, but nowhere to invest - this is the mood of venture capital industry experts today. From the technical side, there are no major complaints about the projects - the level of scientific training of domestic specialists has always been at its best. But the business component is lame. The layer of serial entrepreneurs is relatively thin.
The current regional distribution of investments speaks very eloquently of another disproportion characteristic of the Russian venture market: over 90% of the volume of investments of venture funds goes to companies located in the Central Federal District (Fig. 8, 9).
And if we talk about what needs to be done to develop venture investment in the regions, then special attention in this situation should be paid to the orientation of entrepreneurs to enter global markets - even with promising developments, companies often do not see a market outside of Russia. And this is the best case scenario: they can build a development strategy based on regional boundaries, and such “ambitions” are not the best ally when trying to attract a venture investor. The development of infrastructure and the removal of unnecessary administrative barriers must be accompanied by the establishment of international scientific and technical cooperation, the active involvement of institutions, big business and industry.
Forming a “critical mass” of technology entrepreneurs aimed at developing a competitive, rapidly growing and globally oriented business, and most importantly, having the appropriate competencies and mentality, is a long-term task. However, the current situation allows us to look into the future with confident optimism, which is probably the most important quality of entrepreneurs and venture investors.
At the request of Inc. The Internet Initiatives Development Fund (IIDF) collected statistics on all transactions in the IT and Internet segment on the Russian market for 2016 and the first half of 2017. The data obtained clearly shows who in Russia is currently investing in startups and in which areas they are investing most actively. We made an infographic based on the numbers - it will help aspiring entrepreneurs understand who they can turn to for money for their business.
Infographics: how the venture capital market works in Russia follow the link
The greatest activity during the period under review was demonstrated by accelerators (primarily IIDF) and business angels (private investors) - 102 transactions each. Private funds entered into 99 transactions, here we also took into account transactions of the IIDF, in which the fund acts as an investor at later stages than the seed stage. Companies and corporate funds completed 66 transactions, including partial or full purchases of companies by strategists. Funds and accelerators with government participation financed 23 startups.
However, in terms of project financing volumes, the picture is diametrically opposite. Companies and funds affiliated with them (about 20.9 billion rubles) and private funds (20 billion) spent the most money on the Russian venture market. They are followed by private investors (3.2 billion) and accelerators (about 323 million). This is explained simply: accelerators and private investors usually invest small amounts in the early stages of startup development, while funds and corporations invest at later stages and with larger checks. State funds invested only 724 million rubles. The small amount of government funding is explained by the fact that most government funds - such as the Bortnik Fund - invest money in science-intensive projects in the form of grants, without expecting a return on investment.
Over the past year and a half, investors have most often financed various solutions for automation and simplification of doing business - from electronic document management to corporate medical care. More than 100 transactions were completed in this area. Investors are also interested in projects in the field of e-commerce (food and grocery delivery, car sharing and other services paid online or through applications) - about 80 transactions. Other areas lag significantly behind. Thus, startups related to medicine concluded 17 deals, projects in the field of “Internet of Things” - 21, companies working with advertising technologies - 26. Investors remain interested in the field of financial technologies (20 investments) and in educational projects - 18 were financed companies.
What we thought
When calculating the volume of financing for venture projects, transactions whose amounts were not disclosed were not taken into account. At the same time, we considered all investments in Russian startups, including those from foreign funds and investors. For example, the calculations included transactions involving the American accelerator 500 Startups and the Chinese Internet giant Alibaba - it invested $15 million in the Russian startup Way Ray (develops augmented reality technologies for car navigation - Inc.).
The volume of money in the corporate segment was also affected by several large transactions for the purchase of already successful Internet projects: for example, the purchase by the Mail.Ru Group holding of the food delivery service Delivery Club for 5.8 billion rubles.
The patient is probably alive
Interviewees Inc. investors agree that there is some “life” in the Russian market. However, the direction of Russian venture capital remains unclear.
Statistics and comments from market participants show that sentiment is still rather pessimistic. Thus, the MoneyTree study (conducted annually by PwC) showed that the total size of the Russian high-risk investment market in 2016 decreased by 29% - from $232.6 million to $165.2 million, and the number of transactions concluded increased very slightly - from 180 to 184 At the same time, transactions whose size was less than $50 thousand were not taken into account - they are reflected in the IIDF statistics. It is “angel” deals that now make up the bulk of all activity in the venture capital market.
According to the annual Venture Barometer survey, the optimism of Russian investors decreased in 2016. As part of the study, respondents were asked how the number of transactions in Russia will increase by 2022. In 2016, significant growth was predicted by 34% of Russian investors (in 2015 there were 40%), and a slight increase - by 43% (in 2015 - 13%). On the other hand, in 2015, 25% of respondents expected a “significant decrease” in the number of transactions, and in 2016 only 6% shared this opinion.
Alexey Solovyov, partner of the iTech Capital fund:
Feelings from the market now are ambivalent. On the one hand, there seem to be deals, some kind of “movement” is happening... But all this is reminiscent of Brownian movement - there is no single vector and no understanding of where all this is heading.
nc. I learned from representatives of the Russian venture market what they consider to be the trends of this year and a half.
Trend #1: First-time investors
According to Alexey Solovyov from iTech Capital, recently more and more deals on the market are being concluded by those who came to the venture industry for the first time. These are, as a rule, wealthy people and their family offices, who now directly invest in startups. In a survey of Russian investors by Venture Barometer (Soloviev does it annually), 56% of respondents named this one of the trends of the past year. The liquidity crisis pushed people with free money to look for new investment strategies, explains Vitaly Polekhin, head of the National Association of Business Angels. According to him, over the past year, many medium-sized entrepreneurs and top managers of corporations have joined the “angels.” They have already tried traditional investment instruments (deposits and the stock market) - now it’s the turn of startups.
IIDF data also illustrates the activity of “new” investors. One of them, Alexander Rumyantsev, used to be involved in the stock market, and about a year ago he began investing in startups. Now he is the most active business angel in Russia (he has already invested in 30 projects).
“Russian venture capital is still young and is at the stage in which the stock market was 15 years ago,” says Rumyantsev.
In his opinion, most investors are still afraid to take risks and play by rules that have not yet been formed.
The market also owes the emergence of new investors to crowdinvesting platforms - they allow everyone to try venture investments with little risk.
“This is how those who have not done this at all before come to the market, but are ready to try, starting with small checks,” says Konstantin Shabalin, CEO of the crowdinvesting platform StartTrack.
According to the Russian Angel Monitor study, the club investment segment actively began to develop in 2015 - then, in particular, the investor club of the Skolkovo business school, crowdinvesting platforms VentureClub and StartTrack appeared. The number of transactions concluded through these structures is growing at a rate of 30-40% per year, and their volume, according to Shabalin’s forecast, by the end of 2017 could reach 2.5-3 billion rubles.
It is very important for the market that such novice investors do not make gross mistakes - for example, do not invest money at inflated estimates, says Alexey Tuknov, investment director of the Maxfield Capital fund. According to him, a startup should not be overvalued initially - so that the capital invested in it in the early stages of development will bring a sufficient return on investment.
33% of Venture Barometer respondents also believe that the increase in the number of wealthy people investing in venture funds is one of the trends of 2016.
Trend No. 2: “Flight of investment”
While “angels” and novice investors are becoming more active in the market, large, commercial funds, on the contrary, are investing more carefully and are increasingly investing in foreign projects.
The local market in Russia is quite limited, and in order for the fund to achieve the planned return of 20-25% per annum, the portfolio needs to have one, or better yet, two “unicorns” - companies whose valuation exceeds $1 billion. These in Russia can be counted on the fingers of one hands, notes managing partner of Inventure Partners Anton Inshutin. In the best case, the fund will be able to sell the company for $50 million, and if very lucky - for $100 million. That is, in order to show a 10-fold return on the initial investment, the fund must “enter” the project at a valuation of $5-10 million - in fact This is the company’s first money, and not rounds B and above, the investor explains. It is for this reason that many funds investing at mature stages began to actively look for foreign projects to invest money, he points out.
Anton Inshutin partner of the Inventure Partners fund
“We, for example, look at the European market - there is no closed “gentlemen’s club” of investors (unlike the USA - Inc.) who share the most interesting deals among themselves,” says Inshutin. “And geographically, Europe is more convenient than the United States in terms of constant communication with the company’s founders.”
In addition to Inventure, the funds Runa Capital, Almaz Capital, Flint, Target and others began to actively invest abroad (including opening branches). Maxfield Capital, which was initially created to invest in Russian projects and promote them on the global market, also became interested in foreign investments. As the managing partner of this fund, Alexander Turkot, explained, the number of interesting domestic startups turned out to be lower than expected. Therefore, Maxfield Capital turned its attention to the USA, Israel and the UK - countries where the fund's partners have expertise.
Director for work with portfolio companies of the IIDF, Sergei Negodyaev, also believes that the “flight of investment” may be due to the immaturity of Russian startups.
“With the advancement of technology, the internet and the venture capital ecosystem, launching a startup has never been easier,” he says. “But growing a business to the point where it meets the requirements of venture capital funds requires just as much time and effort as before.”
Over the past year, according to Negodyaev, the number of companies that “died” without waiting for the next round of financing has increased significantly - in the venture capital industry this period in the development of a startup is called the “valley of death.”
The managing partner of the Impulse VC fund agrees with him, who believes that there are few talented founders and startups in Russia, and those who exist often move abroad and start their own business there.
Kirill Belov Managing Partner of the Impulse VC Fund:
Since there is a lack of experienced company founders and good startups in Russia, angels and all other investors are looking at foreign markets. Funds have also switched to investing in other countries. There are many Russian-speaking project founders scattered around the world, and the flow of projects from these guys is very good in quality and quantity.
Trend #3: Lack of Buyers
Investors are also deterred from financing Russian companies by poor exit prospects. Back in 2015, 83% of participants in the Venture Barometer survey named the lack of strategic buyers as the main problem for the development of venture capital in Russia. In 2016, 69% of Russian investors said the same; more respondents (72%) were only concerned about the political crisis and Western sanctions against Russia.
“To make money on a project, you need to sell it to someone, and in Russia the buyers are traditionally two and a half companies - Yandex or Mail.Ru Group,” explains Inshutin from Inventure Partners.
Sometimes, according to him, Sberbank buys startups (in March 2015, it acquired a controlling portfolio of the advertising platform Segmento), but this is rather an exception to the rule.
Russian companies do not consider investing in startups as a way to solve their own problems (for example, improving financial performance, growing capitalization, capturing new markets), explains Negodyaev from IIDF.
However, sentiment on this parameter in the market is improving - largely due to the revival of large Russian players and funds in the M&A market. From IIDF data it follows that in a year and a half there were 16 exits directly on the Russian market.
Among the major “exits” of the last year and a half, the purchase of a stake in the chip manufacturer Mikron by the AFK Sistema fund from Rusnano stands out - for 4.8 billion rubles. The Kite Ventures, AddVenture funds and Qiwi co-founder Andrey Romanenko successfully exited the gaming company Pixonic - it was acquired by the Mail.Ru Group holding for 1.8 billion. And IIDF made an exit from the startup VisionLabs - as part of attracting investments from the Sistema VC fund in the amount of 350 million rubles.
Another problem of the Russian venture market is that large companies prefer to create in-house startups.
“Two years ago we brought Busfor (an online ticket sales service for intercity buses - Inc.) to Yandex, and at the beginning of 2017 he independently launched a competing service - Yandex.Bus,” says Inshutin from Inventure Partners .
Trend No. 4: “Corporate Interest”
However, Russian corporations (even those not directly involved in the Internet business) are increasingly interested in investing in technology projects - this trend can be seen in transaction statistics. According to the managing partner of Phystech Ventures, Pyotr Lukyanov, those who are now investing in Russian projects follow the logic of “enter on the downturn.”
Among the large investments, the purchase by the venture fund of AFK Sistema Sistema VC of a stake in the advertising company Segmento from Sberbank stands out. Over the past year and a half, Mail.Ru Group has closed deals to purchase Delivery Club, Pixonic and Geek Brains. Rostelecom and the CommIT Capital fund controlled by it also invested in various assets. The Gazprom Media fund also began investing in startups - in March 2017, it financed a Russian project for food delivery from Instamart supermarkets.
Alexey Tuknov from Maxfield Capital believes that large corporations are just beginning to compete with each other in the venture capital market. Some have only recently begun to create investment divisions, others have already created their own funds and are investing in projects that are promising for their main business.
After Russia entered the World Trade Platform, maintaining competitiveness has been a priority of domestic policy for many years. In order for the state to compete on the world stage, there is a need to create new technologies and products, high-tech goods and services. Venture capital funds are the main participants in the financing of innovative products. Consequently, maintaining and developing their activities is a necessary condition for enhancing innovation activity.
So, as it was already clarified earlier, a venture fund is an innovative company that invests in high-risk projects and makes a profit by selling their shares after the project is completed.
The activities of Russian venture funds are developing more and more actively from year to year, but in most cases, information about the number of transactions and their volumes is difficult to access and remains unknown to the market. Based on the analysis of the work of venture funds in the Russian Federation, the portal Firrma.ru with the participation of the Russian venture company OJSC RVC and the strategic partnership of PwC published a rating of the most active venture funds in Russia for 2012 - 2013. Companies for the rating were selected based on the criterion: only Russian funds that made more than two transactions in 2012-2013. “It was necessary to make an “inventory” of all functioning and high-quality funds, because no one has done this publicly yet,” says Dmitry Falaleev, head of Firrma.ru. “The rating is conditional. The only correct criterion is return on investment (ROI), but this indicator is funds , of course, is kept secret. Therefore, we emphasize that this is not a ranking of the “best” funds, but a list of the most active ones for the specified period.” Figure 2.7 shows the rating of 25 companies in the Russian venture industry market over the past two years. The rating was compiled on the basis of selected data on funds, from criteria such as the number of invested projects over the last two years, the number of organized exits, the average transaction amount and the volume of all invested funds.
The most active participant of all Russian funds was the Runa Capital fund. This fund is the only fund that was founded by a serial Russian entrepreneur (Sergei Belousov). The fund invests money in domestic projects. The results of the fund’s work are impressive: the manufacturer of household appliances Rolsen, which is a strong brand at the present stage, will appear on the market. Also, the world's largest platform, Parallels, for cloud services was created. Also, some of the most famous and successful projects financed by the Runa Capital venture fund are: LinguaLeo, Nginx, Jelastic. If the fund participates in financing the project, its share will range from 20-40%. The fund can provide investment funds in the amount of up to $10 million.
The ru-Net venture fund, which is also on the list of the most active funds in Russia, has already invested $80 million over the period of its activity and in the future is ready to invest about $100 million in interesting and successful projects. The fund has financed major projects such as Yandex and OZON, the popular food delivery network Deliveryhero.ru and the B2B invoicing service Tradeshift. If the fund participates in financing the project, its share will be from 30-35, the average rate of return of the fund is 45% per year.
The Kite Ventures fund is ready to invest slightly less than the ru-Net fund in successful projects. Any project that the fund likes can count on up to $10 million, and unlike other funds in Russia, the share of the Kite Ventures fund can range from 3% to 30%. Also, the fund has serious advantages compared to other participants: it provides all possible assistance to business development, uses all possible connections, and searches for partners.
Since 2008, another fund, Almaz Capital, has been operating, the volume of which is $72 million. The fund's share in the invested project can range from 10-50%.
RVC is a state fund of funds and development institute of the Russian Federation, one of the key instruments of the state in building a national innovation system. The company plays a system-forming role in the development of the venture capital market in Russia. This is a kind of coordinator of the process of innovative development, a meeting place for all participants in the innovation process: the state as the direct founder of RVC and as a regulator of the process of modernization of Russia, scientific sites (for example, Skolkovo), venture funds and the infrastructure of companies that serve the innovation sphere.
As practice shows, the RVC fund is very popular among small businesses. He looks for promising companies and finances mainly at the seed stage of development, so if a company has developed a business based on high-tech discoveries, then there is a high chance of receiving investment. The volume of the fund is 2 billion rubles, the period of work is not limited, and the share in the invested project can be up to 75%, but not more than 25 million rubles.
We can conclude that in Russia there is a sufficient number of funds and the potential to develop and improve the venture environment. The venture industry market is at the “maturing” stage, becoming more transparent and active. Objective criteria for measuring the fund's activities have appeared - the number of transactions, the volume of investments, the number of exits from companies. “The last year has been busy for Russia, many transactions have been made, many venture investors were able to increase their portfolio, and time will tell the profitability of transactions, on average 6 years,” noted Dmitry Chikhachev, general partner of the Runa Capital fund.
In addition to the most active funds in the Russian Federation considered, the positive dynamics of the emergence of new funds in the venture capital market attracts attention.
Rice. 2.8 - Number of venture funds in the period from 2007 to 2013.
The upward trend is obvious; in 2013, the number of funds increased by 11% compared to the previous year. But the number of liquidated funds, on the contrary, has decreased significantly. The emergence of new funds in 2012 exceeded all expectations, and if such a sharp increase is considered an outlier, then we can say that, in general, approximately the same number of funds have been emerging steadily since 2007.
From the point of view of analyzing industry preferences, it can be noted that venture investments continue to be concentrated in the field of IT technologies (Fig. 2.9).
Rice. 2.9 - Distribution of total investment volumes by industry
The IT technology sector accounts for the majority of investments and accounts for 88% of the total. Industrial equipment accounts for no more than 10% in the first half of 2013. In particular, corporate and private funds invest in the IT technology sector, and government agencies invest more than 80% in industry. The CEO of the venture fund Runa Capital believes that bio- and industrial technologies are a more risky area, unlike other types of activities, since development requires more time and the process of producing the product itself is more labor-intensive. Perhaps this fact influences the decision of investors to make investments and choose in favor of another area. Also, the IT technology sector at the present stage is more developed and interesting for developers; more good ideas arise as a result of the success of foreign companies.
Energy was the most attractive investment area for investors after financial services in 2012. But in the first half of 2013 it dropped sharply to its lowest point. This situation may have arisen due to the discovery of the Bovanenkovskoye oil and gas field on the Yamal Peninsula in 2012, and a large number of investments are associated with the development and installation of energy products.
The IT sector includes a wide range of services provided, the most attractive of which for investors is the area called eCommerce or electronic commerce.
Rice. 2.10. - Distribution of investments in the IT sector
For example, the share of investments in e-commerce is 42%. This figure reached a record high of 82% in 2012 due to the two largest transactions. One of which was completed with the Internet service Avito.ru for $75 million, and the second with the currently well-known online store KupiVIP for $39 million. E-commerce in the modern world is the largest sector of the economy, and without The development of this industry is impossible to imagine in our lives. IT technology projects are favorites for entrepreneurs and investors because more and more attention is focused on them, they are exciting and quickly pay for themselves. In Fig. Figure 2.11 shows the average size of a venture deal for 2012-2013.
Rice. 2.11. - Average size of venture deal, million US dollars
The average transaction volume for the 2nd quarter of 2013 is $1.6 million, which is 4% less than in the first. Despite the drop in the transaction amount, it is still quite acceptable.
Rice. 2.12. - Volume of venture financing by type of investor, million US dollars
The most active investors in the 2nd quarter of 2013 were private venture funds, investing $44.9 million (51.5% of all venture investments) in 16 projects. Private funds, therefore, retained their leadership in these indicators, although both the volume and number of transactions decreased by almost half during the quarter: in the 1st quarter, private funds invested $88.5 million in 32 companies.
It should be noted that in the Russian venture market one can trace a certain industry specialization of investors. Thus, in the 2nd quarter, only private funds and business angels invested in e-commerce, and exclusively government funds invested in biological technologies. This “division of labor” can be associated with the low activity of private funds in the early stages of development of venture companies: venture projects in the fields of biomedical and industrial technologies are mainly at the seeding stage. In addition, IT for private foundations is an opportunity to make money on copies of successful Western projects, which does not exist in the biological and industrial fields.
A distinctive feature of the Russian venture market is the extremely low activity of corporate funds. In the 2nd quarter of 2013, they invested only 1.8% of the total investment in the venture market, and at the end of 2012 this figure was even less - 1.5%. For comparison, over the past 10 years, the share of corporate venture investments in the volume of the US venture capital market ranged from 6.8% to 9.1% in different years.
The Russian venture market showed good results not only in terms of investment volume, but also in terms of capitalization of venture funds. According to RAVI data, at the end of six months of 2013, 173 funds managed a total of $5,211 million.
Rice. 2.13. - Capitalization of Russian venture funds
The driving force behind the record growth in fund capitalization, which exceeded $1.3 billion in 2013, was the decapitalization of existing funds and the creation of new ones. This result was generally the opposite of the negative outcome of 2012 in key global markets.
Each year, the number of new funds during the period under review significantly exceeded the number of liquidations. At the same time, there is a downward trend in the average volume of a new fund.
Based on these data, we can conclude that the Russian market is still far from consolidating. Several management companies with strong investment histories continue to successfully raise new funds, but none have achieved significant market share. Over the coming years, larger players with a positive history, sound strategy and deep understanding of the market should emerge, attracting a significant share of funding and allowing the market to consolidate.
An analysis of the funds’ performance results shows that, in general, investment activity this year remains at a fairly high level, however, to achieve the 2012 indicators, additional efforts will be required, especially in terms of investments at the “venture” stages, the volumes of which so far only reach about a quarter of those achieved in previous period.
Rice. 2.14. - Distribution of investments by stages of company development
The main share of investments in monetary terms (about 86%) was directed to companies of “mature” stages, which are at the stage of expansion, restructuring and late stage. In turn, in terms of the number of investments made, almost 80% of companies received funding at the “venture” stages (which include seed and seed, as well as early stage).
Thus, by the end of the first half of the year, the volume of recorded investments at the “venture” stages is still approximately a quarter of the level achieved in 2012 ($397 million). In turn, the total volume of investments in companies at the stages of expansion, restructuring and late stage, taking into account the largest transaction in the telecommunications industry (for the size of which there are only expert estimates, which does not yet allow it to be included in the total list of recorded investments) reached about 50% of 2012 level.
Thanks to the efforts of the state, private business, RVC and other development institutions over the past few years, Russia has managed to solve the problem of creating an independently developing venture investment industry. The Russian venture market is growing both quantitatively and qualitatively. The country has formed the main elements of the venture investment ecosystem. But most importantly, the activity of private investors, including foreign ones, is noticeably increasing. At the same time, it is obvious that the young and fast-growing Russian venture investment market is still characterized by a number of disproportions - both stage-specific, associated with insufficient supply of capital at the seed and pre-seed stages of innovative projects, and sectoral: in most priority industries, except for the Internet, e-commerce and telecommunications, there is a lack of capital supply. There is also a problem of scale, characteristic not only of the venture capital industry, but also of the entire segment of the Russian knowledge economy: the share of innovative business (products and services) in the country’s total GDP is still relatively small. The development of the industry in the coming years will largely be determined by the effectiveness of the efforts undertaken by all participants in the Russian venture investment market.
As a state institution for the development of the venture industry of the Russian Federation and the national innovation system, RVC can help achieve the goal through the use of an effective set of financial and non-financial instruments. With the help of tools aimed at supporting technological entrepreneurship in the early stages of projects carried out in priority industry areas, as well as further involving Russian and international private capital in the Russian venture market, improving market infrastructure, facilitating the entry of Russian innovative businesses into the global market and its integration into international value chains.
The Russian venture investment industry is entering a new phase associated with the transition from the “launch” stage of the market to its harmonization and growth. RVC is optimistic about the prospects of the Russian venture capital market, the development of which will be carried out through close interaction and partnership of government authorities, development institutions and business representatives, including international ones.
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