russian venture capital market overview 4q2013
DESCRIPTION
We are pleased to present the new issue of Russian Venture Capital Market Overview, produced in partnership with East-West Digital News, offering a detailed analysis of Russia's VC market in 4Q 2013 and featuring the main trends of 2013. Our aim in this report is to help make the Russian VC market more transparent and understandable, and thereby contribute to its growth.TRANSCRIPT
Russian Venture Capital
Market Overview 4Q 2013 and Annual Summary
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Contents
2
Welcome...........................................................................................................................
About Rye, Man & Gor Securities .......................................................................................
About East-West Digital News ...........................................................................................
Russia’s venture capital market: the 2-minute tour ............................................................
Trends on the VC market …………....................................................................................
VC market overview...........................................................................................................
Exits and large deals .........................................................................................................
VC market structure .........................................................................................................
Biotech .............................................................................................................................
Industrial tech ...................................................................................................................
Software / Internet – B2B .................................................................................................
Software / Internet – B2C ................................................................................................
Methodology ....................................................................................................................
Contact information .........................................................................................................
3
4
5
6
7
8
9
10
15
16
17
18
19
20
•
3
Dear friends,
We are pleased to present this new issue of the Russian Venture Capital
Market Overview by RMG Securities, prepared in partnership with East-West
Digital News, offering a detailed analysis of Russia’s VC market in 4Q2013
and a summary of trends last year.
Although the amount of venture capital invested fell sharply year-on-year in
2013, the cloud did not come without a silver lining. Venture investors have
become more prudent in choosing portfolio projects; state-backed support
programs for early-stage technology companies are in full swing; and exits
have become more frequent, with the absolute value of exit deals in 2013
beating the figure for 2012. Last but not least, co-investment and syndicated
investing are gradually becoming more popular among venture capitalists on
the Russian market.
However, the VC market could not fail to be affected by overall stagnation of
Russia’s economy last year, making it harder to cure some of its chronic ills,
which include absolute dominance of IT to the detriment of biotech and
industrial tech, lack of foreign involvement and a low number of corporate
venture funds.
Our aim in these Reports is to help make the Russian VC market more
transparent and understandable, and thereby contribute to its growth. In this
issue we are particularly pleased to welcome East-West Digital News as our
new partner in achieving these objectives.
Arseniy Dabbakh
Director, Corporate Finance
Rye, Man & Gor Securities
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About Rye, Man & Gor Securities
Rye, Man and Gor Securities (RMG) is an independent Russian
investment company. RMG has been on the market for 20 years, in
which time it has earned an excellent reputation among both clients
and peers as a reliable partner.
RMG provides a wide range of services to Russian and foreign clients
in the venture capital market, including:
– search for promising target assets;
– capital raising through public or private offerings;
– search for strategic investors and M&A deal support;
– venture project support, including strategy development and
measures to increase capital-raising potential;
– advisory on deal structuring and financing, deal processing,
negotiations, and due diligence of target companies.
Rye, Man & Gor Securities is a member of the National Alternative
Investment Management Association (NAIMA). NAIMA is a non-profit
partnership representing alternative investment firms and service
providers committed to the growth of long-term capital in Russia. Its
major targets are:
– raising awareness of the alternative investment sector among
asset allocators, regulators and entrepreneurs;
– creating a more favorable legal environment for direct
investments;
– promoting Russian private equity and venture capital in the global
limited partner/general partner community and setting
professional standards for further development of this market.
4
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About East-West Digital News
When I arrived in Russia five years ago to work in a
Western venture fund, the local market was just
nascent. Twenty funds at most, including Russian
ones and a handful of foreign investors, were active.
Skolkovo was just a field on the outskirts of Moscow
(the project was announced in late 2009), and I can
remember just one startup incubator in Moscow.
Since then the industry has seen some dramatic
developments. Startups, funds, technoparks,
incubators, accelerators of all kinds have been
springing up like mushrooms – not only in Moscow,
but also in a range of important cities such as Kazan,
St. Petersburg, Nizhny Novgorod, Novosibirsk and
further on to Russia's Far East.
As an illustration, more than one thousand projects
from all over Russia compete every year at BIT,
Russia's largest startup contest, compared with
seventy when the contest was created in 2003 and
two hundred in 2009.
In 2010-2012, the volumes of Russia's venture
became significant, approaching one billion dollars –
far behind those of China and India, but the
magnitude was comparable to that of the US market
in segments like e-commerce.
The recent decrease in total investment volume is
perhaps a sign of maturation, as witnessed by
investors' growing interest in later stage investments
and the multiplication of exits.
Yet this market is just starting to know itself. There
are just a few analytical reports of varying quality on
this topic, while coverage by international venture
databases its still far from exhaustivity. As a result,
Russia still looks almost like terra incognita in the
eyes of global investors.
At East-West Digital News, we found that RMG's
coverage of this market was the most complete and
accurate among available sources. This is why we
have decided to support this initiative, in line with our
mission of informing the global business community
objectively and reliably of developments in Russia's
innovative industries.
May this groundbreaking effort contribute to improve
investment efficiency and the level of mutual trust
and transparency for the global business community.
May it also contribute to developing business ties
between two worlds that are sometimes tempted to
turn away from each other.
5
Adrien Henni
Editor-in-Chief
East-West Digital News
East-West Digital News is the first international information company dedicated to Russian digital
industries. Its website EWDN.COM provides news, market data, business analysis and updates pertaining
to the Internet, e-commerce, mobile and telecom markets, software and hardware innovation, as well as to
the related investment activity and institutional environment. The company also provides in-depth industry
reports on these topics. A consulting branch, East-West Digital Consulting, provides international players
with assistance for business development in Russia and advises Russian companies on their international
strategies.
Dear readers,
Russia’s venture capital
market: the 2-minute tour
6
Seed
Startup
Growth
Expansion
Total
Deal count VC invested, $M
Average deal
value, $M
Investor
structure
229
261
59
87
0.25
0.33
72
74
110
197
1.5
2.7
24
20
129
184
5.4
9.2
17
9
107
264
5.3
29.3
342
364
405
732
1.2
2.0
Private investors
Public funds
Corporate
PPP
Business angels
Direction of change
2013
2012
Count
10
10 Exits 223
175 Value, $M
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Trends on the VC market
7
• After the 2012 boom, investors in the Russian VC market have become
more cautious in choosing projects for their portfolios. In general, venture
investors in Russia are becoming more experienced, professional and
prudent.
• The state is stepping back in favour of private venture funds. State funding is
mainly focused on early-stage biotech and industrial tech projects.
• Exits from successful projects have become more frequent, although exits
by private funds are still not numerous. The total value of exit deals in 2013
was higher than in 2012, thanks to several large transactions.
• Total venture capital invested in 2013 fell by 31% year-on-year as the
venture euphoria of 2012 ended and the overall economic conditions in
Russia worsened.
• Russia’s VC remains IT-oriented. Biotech and industrial tech projects
accounted for less than 20% of total capital invested in 2013, matching the
share in 2012.
• Interest of Western venture funds in Russian companies remains low and
restricted to a few e-commerce projects. The main reasons for this are lack
of information about the Russian venture market, weak business contacts
and an unfavourable investment climate. The poor investment climate
remains one of the biggest issues hindering growth of Russia’s economy.
Among the positive trends are an increase in the number of syndicated deals, which is indicative of a more
mature market where players are ready to share both profits and risks, and a move towards fund
specialization, with more VC funds willing to find an attractive niche to invest in rather than “play roulette”.
Some negative trends include the scarcity of capital available for investing: some of the Established
institutional investor types are absent from the Russian market, while local high net worth individuals still
prefer to invest by themselves instead of entrusting professionals with this task.
Alexey Solovyov, Managing director at Prostor Capital
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VC market overview
98 167 335 132 149 87 71 99
60
55
50
10
52 83
88
101
90 86
97
72
53
99
128
0
20
40
60
80
100
120
140
0
50
100
150
200
250
300
350
400
450
1Q2012 2Q2012 3Q2012 4Q2012 1Q2013 2Q2013 3Q2013 4Q2013
Russia’s VC deal flow
Exits
Base market
Deal count
8
Warm end to a year of cooling
Source: RMG
US$ million, excl. deals closed
Source: RMG
I think 2014 would be an even smaller year. The trend of consolidation
and decrease in the overall number of venture funds (but an increase in
the number of mature ones) would continue. The deals which would be
happening would be larger. Also, Russia’s internal consumption of
Russia-made high-tech would continue to grow, driven by various
reasons – including military and governmental spending and incentives
– that would perhaps influence the funding patterns.
Serguei Beloussov, venture investor, CEO at Acronis
After the slowdown of investment activity in mid-2013, 4Q turned out to be the most successful quarter of
the year in terms of both VC invested and deal count. Russian venture companies received $99M of
financing in 126 deals, and two exits were worth a further $88M in total.
As expected, total capital invested declined y-o-y in 2013 from $907M in 2012 to $622M, i.e. by 31%.
Nevertheless, there were some causes for celebration. The total amount of exits increased both in absolute
terms ($223M compared with $175M in 2012) and relative to market size.
732 399
175
223
0
200
400
600
800
1000
2012 2013
VC invested
Base market Exits
US$ million
Source: RMG
We believe that, to a large extent, the 2012 boom reflected activity by
inexperienced and incautious investors. The correction in 2013 was
associated with an improvement of investment quality.
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Exits and large deals
Two exits were completed in 4Q 2013. Kinopoisk.ru,
a website dedicated to cinema, was acquired by
Yandex from the French strategic investor Allociné,
which held a 40% stake, and from Russian founders
for a total of $80M. We note that Allociné had
previously bought its stake from Yuri Milner’s DST
Group in 2009 for a price that implied total valuation
of only $3-5M. Elsewhere, a syndicate consisting of
Addventure, Phenomen Ventures and Guard Capital
funds acquired Delivery Club, an IT platform for
more than 100 delivery firms, from its founders for
$8M.
Other large transactions included an SPO on NYSE
by Luxoft, the IT outsourcing subsidiary of IBS
Holding, which raised $95M. Luxoft cannot be
considered a venture project due to its size and
business model, so this placement was not included
by us in the total amount of VC invested in Russia,
but it sets an example to Russian IT startups of what
a successful local IT company can achieve.
A $20M round closed by Dauria Aerospace, a
satellite developer, with Ilya Golubovich’s I2BF fund
is particularly inspiring, since it shows that
international funds can made inroads in Russia
beyond the IT sector, in sectors that have previously
depended almost entirely on state financing
9
Company name Business description Investor Exiting
stakeholder
Deal value,
$ million Sector
Exits
Kinopoisk Thematic website dedicated to
cinema Yandex
Allociné,
founders 80
Software/
Internet , B2C
Delivery Club Platform for delivery agencies Addventure, Phenomen
Ventures, Guard Capital Founders 8
Software/
Internet , B2B
Large deals
Luxoft IT outsourcer SPO on NYSE 95 Other IT
Dauria Aerospace Space satellite developer I2BF Global Ventures 20 Promtekh
Source: RMG
4Q 2013 results
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42
22
28
15
61
21
98
1Q 2Q 3Q 4QSource: RMG
76
13
72
10
49
26
64
25
72
51
93
126
2013
98
88 85
93
2012
1Q
2Q
3Q
4Q
VC investors were better disposed towards late-
stage projects in 2013, with 41 deals at the growth
and expansion stages last year compared to 29 in
2012, while the number of early-stage deals
declined from 335 to 301.
Investor interest in more mature projects is
understandable: risks are not as high as at the seed
or startup stages, the business model has most
likely already proved to be successful, and the
company is generating, or is close to generating,
positive cash flows. Meanwhile, the lack of early-
stage financing remains an issue for the Russian
venture industry, despite efforts by state
development institutions.
Venture capital is increasingly interested in late stages
VC market structure: stages
10
20 24
9 17
72 74
229 261
364 342
Deal count by quarters Investor enthusiasm for the Russian VC market
cooled at the beginning of 2013, but the total
number of deals closed in the year as a whole was
only 6% less than in 2012. The market appears to
have reached its lows in summer 2013, and we
expect results in 2014 to be better than in 2012.
VC deal count by stage
2012 2013
Seed
Startup
Growth
Expansion
Source: RMG
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30 11
116
48
140
90
204
98 30 33
70
22
31
60
24 17
10
10
23 12
0
50
100
150
200
250
300
2012 2013 2012 2013 2012 2013 2012 2013
Private funds Public Corporate PPP Business angels
VC market structure: stages
11
Investor activity by stage
VC invested, US$ million
Source: RMG
Amounts of capital invested declined at all stages
Seed Startup Growth Expansion
87
59
197
110
184
129
264
107
Although the number of venture rounds closed in
2013 went down at the early stages but up at the
late ones, the amounts of capital invested
decreased across all stages. The decline was
particularly severe for expansion-stage companies,
which received 48% less financing than a year ago.
0,33
2,7
9,2
2,0
0,26
1,5
5,4 6,3
1,2
Seed Startup Growth Expansion Total
2012 2013
Average deal value by stage
Source: RMG
29.3
US$ million
Reduced role of the state on the VC market,
especially at late stages, was a major trend in 2013.
In 2012, government institutions accounted for 20%
of late-stage financing, but the share in 2013 was
only 2%. Nevertheless, state financing remains
important for startup companies and the state
increased its share of all capital invested at the seed
stage from 34% to 56%.
Average deal value declined along with total
invested capital. The market average for a VC deal
in 2012 was $2M, but that figure was down to $1.2M
lat year.
The average deal value will continue to decrease
as the number of seed deals is and will be
growing faster than the amount of overall VC
invested.
Alexey Solovyov,
Managing director at Prostor Capital
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Biotech 16,5%
Industrial tech 3,6%
Software / Internet - B2B 11,6%
Software / Internet - B2C 39,8%
Other IT 28,5%
Biotech 0,2%
Software / Internet - B2B 9,3%
Software / Internet - B2C 90,2%
Other IT 0,3%
Biotech 32,0%
ICT 3,4% Industrial tech
28,4%
Other technologies 1,8%
Software / Internet - B2B
17,7%
Software / Internet - B2C
15,3%
Other IT 1,3%
Biotech 1,8%
ICT 8,4%
Industrial tech 0,2%
Software / Internet - B2B 30,3%
Software / Internet - B2C 59,3%
ICT 0,1%
Industrial tech 9,3%
Software / Internet - B2B 17,2%
Software / Internet - B2C 71,3%
Other IT 2,2%
VC market structure: investors
12
Internet is the preserve of private investors
The “division of labour” between private and public
investors, which is a distinguishing feature of the
Russian VC market, was reinforced in 2013.
On the private side, private venture funds and
corporates directed 90% and 69% of all their capital
to the IT sector, respectively, and our data suggest
that Russian business angels only invested in
Internet and IT in 2013 (deals by business angels
are the least transparent in the market and many of
them remain unannounced, but it is safe to assume
that such investors take little interest in non-IT
industries).
On the public side, technology-oriented projects are
mainly backed by the government agencies such as
Skolkovo, Russian Venture Company (RVC),
regional seed funds, etc. In 2013, 66% of all
investments made by such institutions went to the
industrial tech and biotech sectors.
Private funds
$247.6M
Public
$60.8M
PPP
$36.3M
Corporate
$37.0M
Business
angels
$23.6M
Source: RMG
VC invested by investor type and sector
IT and Internet will remain the most attractive and
financially receptive sector for investors due to its
immense growth potential and the number of free
unoccupied niches, especially in the B2C sphere.
Alexey Solovyov,
Managing director at Prostor Capital
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2 13
2 12
VC market structure: sectors
13
Source: RMG
Consumer Internet is the mainstay of the Russian venture environment
Biotech 6,4%
ICT 1,3%
Industrial tech 9,5%
Other technologies 0,3%
Software / Internet - B2B
17,5%
Software / Internet - B2C 61%
Other IT 4%
VC invested by sector
Last year brought no significant changes in the
sector structure of Russia’s VC market: IT
accounted for about 83% of total capital invested in
both 2012 and 2013. So IT remains the mainstay of
the Russian venture capital environment.
However, there was some movement within the IT
sphere. Investors became more interested in B2B
solutions, which received 17.5% of VC invested
compared to 6.6% a year earlier. While B2C Internet
projects still form the core of Russia’s venture
environment, investors are starting to explore other
options to diversify their portfolios, as this sub-sector
is showing signs of capital saturation.
$732M
($907, including
exits)
$405M
($622, including
exits)
Biotech 3,8%
ICT 2%
Industrial tech 11%
Other technologies 0,6%
Software / Internet - B2B 6,6%
Software / Internet - B2C 66,3%
Other IT 9,8%
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Private funds Corporates Public PPP Business angels
VC market structure: rounds
14
Less in, more out
Seed
A
B
C+
Exit
VC investments by round
2012 2013
Most of the decline of VC amounts invested in 2013
was in B+ rounds. By contrast, round A saw y-o-y
growth.
Funds raised in exit deals went up in absolute terms
from $175M to $223M due to activity by corporate
investors, who accounted for 70% of all exit
proceeds. Corporates, both independently and
through corporate venture funds, took a more active
role in the VC market in general. Although there are
still only a few corporate venture funds in Russia,
several Russian companies have announced plans
to set up such funds, including Rostelecom, QIWI,
Rushydro etc.
65
62
430
175
175
53
83
246
23
223
Source: RMG
VC invested, US$ million
Last year, seed rounds were scarce in the market since there was hardly anyone to invest in them. Some
private funds had ceased to exist and others had completed their investment cycle. At the same time, the
market realized the need to accelerate seed-stage projects, and the forming of autonomous Internet
entrepreneurship ecosystems in the Russian regions has become an important trend. Regions outside
Moscow and St. Petersburg are becoming the new source of venture projects.
Kirill Varlamov, Director at Internet Initiatives Development Fund
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7,7 4,9
15 15
2012 2013
VC invested, $M
Deal count
Diagnostics & research 18,7%
Medical equipment
33.6%
Pharmaceuticals 47,7%
Biotech
15
Diagnostics & research 27,4%
Healthcare 16,4%
Medical equipment 10.7%
Pharmaceuticals 45,6% 2012
$28.1M
2013
$26.2M
4,6
0,0 1 0
2012 2013
3,0
8,8
6 7
2012 2013
12,8
12,5
11 7
2012 2013
Diagnostics & research Medical equipment
Healthcare Pharmaceuticals
No news is good news
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8,3
0,1
10
1
2012 2013
VC invested, $M Deal count
41,8
6,3
27
13
2012 2013
Green Tech 0,2%
Laser Tech 0,7%
Nanotech 13,4%
Power Supply Tech
17,7%
Robotics 1,4%
Satellites & Space 51,4%
Other Industrial Tech
15,1%
Industrial tech
16
Green Tech 10,3%
Laser Tech 2,3%
Nanotech 1,2%
Power Supply Tech
23,1%
Robotics 0,0% Satellites & Space
11,4%
Other Industrial Tech
51,7%
1,9 0,3
3
2
2012 2013
1,0
5,6 1
5
2012 2013
18,7
7,4
10 12
2012 2013
0,03 0,6
2
1
2012 2013
9,2
21,5 12
4
2012 2013
Clean tech Laser tech Nanotech
Power supply tech Robotics Satellites & space
Other industrial tech
2012
$80.9M 2013
$61.7M
Brownian motion
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Enterprise management software 36,0%
Marketing/Advertising 48,1%
Other business software 1,0%
Platform/Middleware 9,2%
Other B2B software 5,6%
Enterprise management software
24,2%
Marketing/Advertising 35,6%
Other business software 16,0%
Platform/Middleware 0,3%
Other B2B software 24,0%
Software / Internet – B2B
17
2012
$48.1M
2013
$61.9M
17,3 17,1
13
9
2012 2013
VC invested, $M Deal count
23,1 25,2
18
38
2012 2013
2,7
11,3
6
29
2012 2013
0,5 0,2
4
6
2012 2013
4,4
17,0 7
12
2012 2013
Enterprise management software Marketing / Advertising Other business software
Other B2B software Platform / Middleware
A welcome alternative to B2C
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Content Providers 10,3%
E-commerce 76,9%
Education 1,6%
Finance 2,1%
Gaming 0,4%
Search/Recommendations
4,6% Social Media
2,9%
Other B2C Internet services/software
1,2%
Content Providers 2,7%
E-commerce 55,4%
Education 8,2%
Finance 12,5%
Gaming 3,9%
Search/Recommendations 10,1%
Social Media 4,7%
Other B2C Internet services/software
2,6%
Software / Internet – B2C
18
49,8
6,5 16
10
2012 2013
VC invested, $M Deal count
Content providers
372,8 135,0
65 43
2012 2013
E-commerce
7,7
19,9
10
16
2012 2013
10,3 30,4
10 14
2012 2013
Education Finance
22,1 24,5
32 34
2012 2013
Search / Recommendations
14,1 11,4
23
14
2012 2013
6,0 6,3
11
16
2012 2013
Social media Others
2,1
9,6 3
6
2012 2013
Gaming
Diversifying from E-commerce
2012
$485M
2013
$243M
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Methodology
For the purposes of this report, ‘venture capital
investments’ stand for investments of up to $100M
in high-risk and potentially highly profitable
technological projects. Only VC investments in
companies whose operations are focused on the
Russian market were included in calculation of the
market size. Companies financed by Russia-based
investors, but oriented to foreign markets are not
included in the analysis.
Grant financing was included in the calculation of
market size as, although grants are non-repayable,
they are used to finance commercial VC projects
and thus represent an inflow to the VC economy.
An ‘exit’ stands for a deal in which at least one
investor exits a venture company’s capital.
For the purposes of this report, 4 stages of a VC
project development are distinguished:
1. Seed: the project exists only as an idea or
laboratory research.
2. Startup: a company is in the process of
organization or has conducted operations for
some time but sales have been minimal or zero.
3. Growth: launch of marketing and regular sales
of a new product..
4. Expansion: a company increases its sales,
market share, output etc.
We distinguish 7 sectors: Biotech; Industrial Tech;
Computer Tech and Equipment; Other Tech;
Software/Internet B2B; Software/Internet B2C;
Other IT. The first 4 sectors comprise the Tech
macrosector and the rest comprise the IT
macrosector.
These 7 sectors subdivide as follows.
Biotech: healthcare, pharmaceuticals, diagnostics
and medical equipment development.
Industrial tech: laser, energy, green, aerospace
technologies, robotics and other technologies
designed for industrial use.
Computer tech and equipment: telecommunications,
data storage, mobile technologies and computer
equipment.
Software/Internet B2B: applications and web
services whose clients are mostly businesses. The
sector includes enterprise management, marketing,
product development solutions etc.
Software/Internet B2C: applications and web
services whose clients are mostly individual
consumers, including e-commerce, content
providers, search and recommendation engines,
consumer finance solutions, educational services,
games, social networks etc.
19
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Contacts
We are very interested in the opinion of our readers, so if you are an investor,
a venture entrepreneur or otherwise interested in Russia’s venture capital
market, we will be most glad to receive your feedback and suggestions to help
us improve our reports.
Please send your feedback and suggestions to [email protected]
Report authors:
20
Arseniy Dabbakh
Director
Corporate Finance
Rye, Man & Gor Securities
+7 495 258 62 62
Boris Orlovetsky
Analyst
Corporate Finance
Rye, Man & Gor Securities
+7 495 258 62 62
21
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Gor Securities and its directors, employees, agents, affiliates or licensees may, from time to time, have long or short positions in, and
buy, sell, make a market or otherwise act as principal or as agents in transactions on securities or other financial instruments related to
companies mentioned in the Analytical Materials. The Analytical Materials may not be reproduced, redistributed or any other way used,
in whole or in part, without the written permission of Rye, Man and Gor Securities.
Cover image by Rodney Campbell under Creative Commons license.
Copyright © Rye, Man & Gor Securities, 2013
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