Feature stories | Finance, business

Russiaís VC market: funds in love with advanced project stages, and angels have to cut corners

18 Dec '15
In Russiaís venture capital market, VC funds continue to balk at highly risky seed stage projects, while angel investors buy into an increased number of projects with a reduced amount of money.

These are the key findings RMG Partners, a subsidiary of Rye, Man & Gor Securities, Russiaís oldest investment brokerage, and its partner analysts made during their in-depth research into this countryís VC market, covering January through November 2015. These and other features were presented by RMG Partnersí Arseniy Dabbakh at a roundtable during the sizable Innovation Ecosystems forum held on December 10 in Sochi, in Russiaís South.

According to the analysts, private capital continues to reign in Russiaís VC investment landscape. Over the past 11 months, private venture funds injected in excess of $170m in the market. The funds grew in numbers, too, from 166 back in 2012 to 245 in 2015.

Expansion and start-up stage projects were found to be most attractive. Investors pumped into these about $100m and $50m, respectively. Many small- and mid-cap investors tended to bring in their limited resources to form syndications.

As if challenging the overall trend, between January and November seed stage developers outshone growth stage ones in winning the hearts of investors, by a slight margin though ($25m vs. $20m). Above and beyond that, the seed stage involves increased risks and is therefore a sore point for many investors.

Investor exits shrank in the last 11 months, as the study shows. In 2014, exits totaled 10 and 14 for private and public funds, respectively; this year, only eight and seven were announced, respectively.

The analysts indicated certain growth in the number of angel investor led transactions. In this reporting period, projects joined by angel investors outnumbered those supported by private-public partnerships (PPPs) and government grantors.

There was another tendency, however, which was taking shape in parallel: while boosted in numbers, angel investments shriveled in money terms ($57m). Overall, the share of angel investor involvement in projects supported in the reporting period was a far cry from that in the U.S., for example, with American business angels accounting for as much as 8% of the total investments reported.

The analysts underscored a noteworthy trend that is sweeping across the international VC market today: the number of projects backed by corporate investors grew to 51%. These included deals by the VC investment arms of the global tech leaders, such as Google, Intel, Qualcomm, Cisco and others. In Russia, the time of corporates has yet to come.

In a joint effort between RMG Partners and Jíson & Partners, an international IT and Digital Media management consultancy covering Russia and the former Soviet Union, IT and telecom projects were found to once again account for the lionís share of venture investments in the reporting period (85.7% in the number of deals and 97.4% in money terms).

Within this broad market, e-commerce focused projects beat all the rest by virtually a landslide (32.9%).

Other IT market segments investors found rewarding to buy into included the Internet, fintech, mobile, robotics, information security, and clouds.

Mr. Dabbakh quoted experts from Jíson as forecasting that cloud tech, mobile solutions and the Internet of things would form the global Top-3 of the technologies of a near future (63%, 61% and 57%, respectively).

Compared to a boom in IT and telecom, industrial and biotechnologies were way below the radars of most investors in the reporting period. Both segments put together accounted for a marginal 7.1% in the total number of transactions clinched and a barely visible 1.4% in money terms.

That said, the analysts found yet another tendency that may slightly alter the current status quo in investor preferences in favor of non-IT segments. Mr. Dabbakh cited RVC, Russiaís fund of funds for innovation, as asserting that 50% of new VC funds that sprang up in the past few years preferred investing in manufacturing industries in the reporting period, with only 17% of these following suit and choosing IT.
Oleg Kouzbit, managing editor: ďIím glad you join us here and take The Bridge walk for Marchmontís weekly review of the Russian regionsí innovative present and future. Stay close and youíll find out more of how Russia is bridging the existing gap between its researchers and businesses.Ē
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