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Crisis  Pressure  within  Industry  as  measured  by  Venture  Barometer    December  2,  2014,  Moscow.    Prostor  Capital  announced  the  results  of  the  research  of  Venture  Barometer  Russia  2014  carried  out  under  the  initiative  of  the  Data  Insight  research  company.    The  “Venture  Barometer”  targets  at  detection  of  the  key  trends  on  the  Russian  venture  market  alongside  with  traditional  assessment  of  its  quantitative  indices,  and  analysis  of  basic  factors,  influencing  the  industry  and  its  participants,  including  the  overall  political  and  economic  situation  in  the  country.    In  the  course  of  analysis  via  online  questionnaire,  near  50  players  on  Russian  venture  market  were  interrogated,  among  them  -­‐  investors,  managing  directors,  business  angels.    How  and  why  do  the  strategies  of  venture  players  undergo  modification,  in  what  way  does  the  quality  of  innovative  project  change,  what  are  the  principal    barriers  for  the  market  development?  These  and  numerous  other  questions  got  into  the  focus  of  Barometer's  attention.  Based  on  the  respondents'  opinions,  the  spheres  cardinal  for  understanding  the  market  situation  were  identified.  These  include:  

• Crisis  influence  • Barriers  • Role  of  the  state  • Fund  rising    • Projects  and  niches  • Development  forecasts  

 Crisis  influence  and  circumstances  

• Negative:  of  those  having  their  personal  view  on  this  issue,  87%  expect  the  2014-­‐2015  market  either  to  shrink  or  to  remain  at  present  level.  At  that  the  market  is  most  likely  to  reduce  not  only  in  the  investment  volume,  but  also  in  the  number  of  players:  according  to  59%  of  respondents,  part  of    players  will  leave  the  market.  In  order  to  “keep  afloat”,  the  existing  investors  will  reduce  volumes  of  the  additional  investments  in  problem  assets,  –    such  is  the  view  of  every  second  respondent.  Besides,  the  amount  of  investments  in  projects  will  decrease  as  well  (38,6%),  whereas  the  terms  of  proceeds  will,  on  the  contrary,  extend  (68%).  

 • Neutral:  the  key  factor  agreed  upon  by  the  two  thirds  of  experts  is  that  due  to  the  crisis  of  2015  the  

market  role  of  the  state  will  be  more  significant.  It  will  result  from  the  growing  number  of  state  budget-­‐based  funds  or  those  based  with  state  participation;  besides,  the  influence  of  the  already-­‐existent  funds  will  grow.  

 • Rather  positive:  almost  half  of  experts  (48%,  which  makes  the  major  part  of  all  responses!)  are  sure  

that  the  crisis  influence  will  last  for  less  than  two  years,  which  we  consider  to  be  a  fairly  optimistic  forecast.  Projects  competition  will  increase  (according  to  57%  of  respondents),  but  in  the  long  run  it  will  lead  to  quality  enhancement  of  the  projects  per  se.    

Barriers.  Among  the  factors  rendering  serious  influence  on  Russian  venture  market  and  deterring  its  growth  (besides  the  crisis)  the  majority  of  experts  (93%)  see  the  absence  of  strategic  investors,  and  the  situation  is  unlikely  to  change  very  soon  (only  34%  of  experts  believes  that  their  number  will  increase).  This  factor  considerably  outweighed  the  political  crisis  and  economic  sanctions  (61%).  The  third  place  among  “demotivators”  was  shared  between  low  general  level  of  investment  efficiency  (54,5%)  and  unavailability  of  western  capital  for  Russian  funds  (half  of  respondents).    The  above  said  is  a  quite  predictable  result  proving  the  hypothesis  that  the  key  problems  of  the  market  do  not  directly  correlate  with  the  crisis,  but  are,  rather,  only  enhanced  by  its  influence.  

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State  participation.  The  research  shows  unequivocally:  in  2014  the  role  of  the  state  increased  (73%)  and  will  continue  increasing  still  further  in  2015  (61%).  Experts  share  the  view  that  today  the  state  actively  participates  in  venture  investments,  though  they,  nonetheless,  noted  that  the  state's  efforts  could  be  channeled  a  bit  differently.  What  is  to  be  done,  is  to  cut  taxes  (54,4%),  cutback  on  direct  investments  in  startups,  while    investing  infrastructure  instead  (43,4%),  and  also  to    act  in  compliance  with  “funds  funding”  model  (32%).  Quite  many  (32%)  think  that  the  state  can  also  function  as  a  strategist;  to  succeed  in  this  role,  it  should  shape  a  sort  of    “order  for  startups”  which  could  be  incorporated  into  the  managerial  system  at  its  different  levels.          Despite  the  fact  that    most  respondents  note  the  ever  more  growing  role  of  the  state  on  venture  market,  as  few  as  4%  of  them  believe  that  the  state    acts  sufficiently  enough  in  this  field  and  nothing  should  be  changed.  At  that,  the  dissatisfaction  is  caused  not  so  much  by  the  very  fact  of  the  state's  participation  in  the  industry  as  by  the  vector  of  its  efforts  application.    Money  for  funds.  Under  the  crisis,  the  market  of  potential  fund  investors  (LP)  has  disappeared  almost  entirely  –  this  is  the  opinion  of  almost  half  of  respondents  (48%).  Two  thirds  of  them  indicated  that  it  has  become  more  problematic  to  attract  new  investors  to  funds;    half  of  respondents    think  that  taking    such  decisions  has  become  more  time-­‐consuming.  Against  such  seemingly  dismal  background,  investors  demonstrate  enviable  optimism:  over  half  of  them  mobilized  and  are  going  to  mobilize  funds  in  2014-­‐2015.  Expectedly,    the  number  of  respondents  figuring  on  money  from  existent  investors  is  twice  as  big  as  the  number  of  those  who  hope  for  new    investors.    In  other  words,  the  need  in  money  increases,  but  opportunities  for  its  acquisition  shrink.    Money  for  projects.  The  number  of  projects  in  search  for  money  has  undoubtedly  grown  (as  considered  by  60%  of  respondents).  Tough  economic  circumstances  make  the  projects  not  only  apply  for  external  support  but  also  enhance  their  own  efficiency.  These  project  are  more  ripe  for  investment  (27,5%)  and  at  that,  “more  compliant”  (27,5%).  However,  investors  are  nor  over-­‐impressed  by  this.  Cutting  risks,      they  toughened  their  requirements  to  both  new  and  already-­‐invested  projects  in  2014  (63%)  and  activated  their  interference  in  projects'  progress  after  obtaining  the  share    (43%).  And  this  strategy  yields  its  fruit:  almost  half  of  respondents  (45%)  say  that  the  projects  invested  in  2014  are  more  efficient  than  the  previous  ones.    This  may  serve  as  an  extra  argument  in  favor  of  the  forecast  on  quality  enhancement  of  the  projects  under  crisis  -­‐  the  hungry  one  runs  faster  and  accounts,  first  and  foremost,  only  on  oneself.  As  a  result,  the  quality  of  the  new  projects  grows  while  the  quality  of  the  “old”  (already  invested)  ones  drops.    Priority  niches.  Today,  the  niches  most  perspective  for  investment  are  Big  Data  (29%)  and  financial  technologies  (28%).  They  are  followed  by  the  Internet  of  things  (23%)  and  mobile  technologies  in  wide  extent  (21%),  whereas  the  list  of  “outsiders”  or  most  unpromising    niches  is  headed,  with  great  breakaway,  by  e-­‐commerce  (65%),  sequentially  followed  by  social  nets  (22%),  online  travel  (20%)  and  media  projects  (17%).    It  is  noteworthy,  that  investors'  “disappointment”  in  particular  niches  has    different  grounds.  If  for  e-­‐commerce  and  online  travel  it  is  low  marginality,  for  social  nets  it  is,  mostly,  the  absence  of  vacant  niches.  In  this,  the  present-­‐day  preferences  of  investors  seem  to  be,  rather,  the  “fashion  tribute”  than  the  rational  choice  determined  by  efficient  economy:  over  recent  years  in  these  segments  only  a  few  public  deals  were  made.    Geographically  speaking,  Russia  remains  the  priority  market  for  investment  (66%),  though,  at  the  same  time,  other  countries  are  considered  as  well  –    above  all,  Israel  (52%)  and  USA  (43%).  Projects  in  BRIC  countries  (beyond  Russia)  give  grounds  to  lesser  optimism  (36%),  whereas  Kazakhstan,  Belarus,  Ukraine  etc.  

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are  not  at  all  attractive  for  investors  (9%).  Over  a  third  of  respondents  (34%)  consider  Russia  to  be  not  interesting  for  investment.    Thus,  despite  all  problems  inside  the  country  and  future  withdrawal  of  capital  to  other  regions,  Russia  still  remains  the  first-­‐priority  market  for  fund  investments    among  local  players.        Forecasts.  The  research  has  revealed  that  three  parameters  characterizing  the  market  dynamics,  i.  e.  amount  of  deals  in  terms  of  money,  number  of  deals  and  amount  of  resources  ready  for  investment  (mobilized  capital)  will  not  undergo  serious  changes  in  the  year  to  come.  Which  means  that  opinions  concerning  those  three  parameters'  diminishing,  remaining  unchanged  or  increasing,  are  split  almost  by  half.  It  signals  of  possible  growth  in  the  number  of  early-­‐stage  deals,  decrease  in  average  checks  on  later  stages,  -­‐  and  of  the  fact  that  a  part  of  venture  capital  will  be  placed  on  other  countries'  markets.    The  good  news  is  the  fact  that  within  coming  3-­‐5  years  almost  40%  of  all  respondents  forecast  considerable  market  growth,  and  43%  of  them  agree  that  the  growth  will  really  take  place,  though  being  inessential.  Thus,  over  80%  of  respondents  believe  that,  somehow  or  other,  the  market  will  grow.  This,  in  its  turn,  will  cause  competition  growth,  firstly  for  the  projects  (68,2%)  and  secondly,  for  mobilization  of  fund  means  from  LP  (50%).  Amazingly,  the  overwhelming  part  of  investors  (63,5%)  do  not  expect  competition  growth  for  strategic  investors.  Quite  possibly,  as  there  are  virtually  no  strategists  at  this  point  in  time,  and  their  number  is  not  expected  to  grow,  there  will  be  nobody  to  compete  for.      Commentary  from  Aleksei  Solovyov,  managing      director  of  Prostor  Capital:  “Barometer  has  not  overthrown  our  view  of  the  market  dynamics,  but  has  revealed  some  highly  essential  aspects  overlooked  previously.  In  my  view,  the  most  cardinal  ones  are  as  follows:  funds  continue  suffering  the  shortage  of  quality  projects.  The  unsatisfied  demand  is  exacerbated  by  low  investment  efficiency  and  virtual  absence  of  the  strategic  customers  market.  One  of  the  most  noticeable  consequences  of  this  situation  is    the  reorientation  of  many  players  onto  other  countries'  markets,  and    search  for  principally  new  niches  for  investment.  The  second  consequence  is  the  advancing  role  of  the  state  on  the  market,  against  the  background  of  the  fact  that  as  few  as  4%  of  respondents  consider  that  it  functions  sufficiently  and  nothing  has  to  be  changed.    Estimating  the  crisis  influence  on  the  general  level  of  entrepreneurship  in  our  country,  it  is  worthwhile  supposing  that  in  2-­‐3  years  we  will  have  a  balanced  supply/demand  market  on  which  the  leading  position  will  be  taken  by  the  projects  capable  of  gaining  profit  and  sustain  self-­‐repayment  since  their  very  foundation,  but  not  those  existing  from  round  to  round  on  investors'  money  in  vain  hope  of  the  company's  sale  to  non-­‐existent  strategists.“  Prostor  Capital  is  a  Russian  venture  fund  orienting  towards  high-­‐profit  investments  in  dynamically  developing  companies  on  IT  and  Internet  markets.  The  Fund  manages  $50mln.;  investments  are  carried  out  on  both  money  and  media  basis  (Media  for  Equity  model).    Prostor  Capital  is  focused  on  projects  at  the  stage  of  sustainable  growth  (round  A  and    higher)  having  a  ready  technological  product  and  a  fast  expanding  customer  /user  base.  These  are  companies  interested  in  external  investments  and  /or  proactive  promotion  in  the  media  for  advancement  on  a  new  level  of  development.  The  selection  priority  includes  IT  and  Internet  companies  on  the  B2C  market.  The  target  segments  are:  new  finance  and  Internet  technologies,  digital  medicine,  electronic  commerce.  At  this  point  in  time,  the  Fund  portfolio  includes  14  companies,  among  them  Dnevnik,  Umisoft,  Softrust,  Platiza,  CPAExchange,  Smart  CheckOut,  etc.