Russian Venture Capital Market Overview 3Q2013
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Russian Venture Capital Market Overview 3Q2013

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Rye, Man & Gor Securities is pleased to present a fresh issue of the Russian Venture Capital Market Overview, which includes a rundown of Russia’s venture capital market in the 3rd quarter of 2013. ...

Rye, Man & Gor Securities is pleased to present a fresh issue of the Russian Venture Capital Market Overview, which includes a rundown of Russia’s venture capital market in the 3rd quarter of 2013. The primary goal of this report is to make Russia’s innovative sector more alluring for both foreign and domestic investors and increase the efficiency of contacts between investors and innovative companies seeking financing.

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    Russian Venture Capital Market Overview 3Q2013 Russian Venture Capital Market Overview 3Q2013 Document Transcript

    • Russian Venture Capital Market Overview 3Q 2013
    • Dear friends! • We are pleased to present the new issue of RMG’s Russian Venture Capital Market Overview, offering a detailed analysis of Russia’s VC market in 3Q2013. 3Q proved the most successful quarter to date in 2013 by VC invested and deal count. Russia made further progress towards a mature venture capital market, with a record amount of capital raised in exit deals and a surprising upsurge of activity by corporate VC investors. However, there are still a number of unresolved structural problems. Seed financing in Russia is scarce and comes mostly from state-backed funds and financial organizations. Also, the dominance of IT over other technology sectors on the VC market is much greater in Russia than in developed markets. Although the amount of venture capital invested in Russia is likely to be much lower in the four quarters of 2013 than in 2012, the current year has brought advances in the quality and depth of Russia’s VC market. Formation of a history of successful exits, increased interest in venture investments among corporations, and steps by the government to create a favorable venture environment are helping local and foreign VC investors to see Russia as an attractive market. Our aim in this report is to help make the Russian VC market more transparent and understandable, and thereby contribute to its growth. Arseniy Dabbakh Director, Corporate Finance Rye, Man & Gor Securities 2
    • Contents About Rye, Man & Gor Securities ..................................................................................... 4 Russia’s venture capital market: the 2-minute tour ........................................................... 5 Trends on the VC market .................................................................................................. 6 VC market overview .......................................................................................................... 7 Exits and large deals ……….............................................................................................. 8 New VC funds in 3Q ......................................................................................................... 9 VC market structure ......................................................................................................... 10 Methodology …................................................................................................................ 13 Contact information ......................................................................................................... 14 3
    • 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
    • Russia’s venture capital market: the 2-minute tour Biotech $1m Industrial tech $7m Other technologies $6m Soft/Internet B2B $14m Seed $20m 3Q2013 Round A $25m Round B $17m +17% Round С+ $8m compared to 2Q VC invested Soft/Internet B2C $42m $163m $93m $70m 7 91 98 non-exits Expansion $35m Exit $93m exits Private funds $40m deals closed +89% Growth $6m compared to 2Q Startup $14m Seed $15m Corporate $13m Public $9m Business angels $6m PPP $1m 5
    • Trends on the VC market • Both state-backed VC organizations and private funds are increasingly interested in early stage VC projects. In an attempt to bridge the existing seed capital gap, the government’s Agency for Strategic Initiatives has set up the Internet Initiative Development Fund (IIDF), which will invest RUR 6bn (about $200m) in promising early-stage companies. • A recent spate of checks and investigations by law-enforcers and supervisory agencies after allegations of embezzlement in the governmentbacked VC world has been has come to an end. Skolkovo and Rusnano seem to have convinced the “hard end” of the Russian government that VC investments are inevitably high-risk, and that lost investments are not a crime. We view this as a useful “despooking” of the Russian VC market • An increasing number of VC educational projects are being launched. One educational initiative, People of the Future, started its Venture Academy in the summer. Venture Kitchen, founded by the Higher School of Economics and Russian Venture Company, has been operational since July. • Transparency remains the major issue for Russia’s VC market. Neither private funds nor public institutions are eager to disclose their deals and stakeholders. Even the government-backed IIDF (see above) refuses to say whose money it will invest. • The business angel community is virtually non-existent in Russia. In 3Q, angel investors took part in 40% of VC deals, but this is a much smaller share than elsewhere in the world and the lack of such investors is stunting market growth. For comparison, business angels financed as many as 50,000 US companies in 2012, whereas venture funds invested in just 600. A strong angel investor community provides market depth and the seed financing that Russia still lacks. 6
    • VC market overview 3Q becomes the most successful quarter for Russia’s VC Russia’s VC deal flow US$ million, excl. deals closed 99 500 89 98 100 85 75 400 80 50 300 60 52 Exits Base market 200 40 55 52 100 93 167 336 135 149 87 3Q2012 4Q2012 1Q2013 2Q2013 20 70 2Q2012 Deals closed 3Q2013 0 0 Source: RMG According to our estimates, there were 98 VC deals closed in Russia in 3Q13, worth $163m in total, which is 17% more than a total of $139m invested in 2Q. The deal count increased by 88.5% q-o-q. So 3Q was the most successful quarter in 2013 in terms of both deal count and value. 3Q saw a record amount of exits, with $93m earned by investors who sold their shares in venture companies, accounting for 57% of total VC investments in 3Q13. For comparison, exits amounted to $52m (37.4% of all VC) in 2Q and no exits were registered in 1Q. We therefore estimate the size of the VC “base market” (VC investments, excluding exits and large deals) at $70m in 3Q, down by 19.5% compared to with 2Q. The total VC invested in 2013 (year-to-date) is $451m, far less than the $706m invested in the first three quarters of 2012. We expect the amount of VC investments in Russia in 2013 to be much lower that last year’s level of $861m. It should be noted that we exclude the deal, in which Russian Direct Investment Fund (RDIF), the EBRD and Capman Russia II invested $100m in Maykor, an IT consulting and outsourcing business. Maykor is a mature company that has a steady business model and a broad customer base, so we do not view this as a VC deal even though Maykor is an IT company. The same rationale applies to the $130m Lamoda deal closed in 2Q, which we also excluded. 7
    • Exits and large deals 3Q13 set new records for the number and size of exits Company name Business description Investor Exiting stakeholder Deal value, $ million Sector Exits Yandex.Money Electronic payments Sberbank of Russia Yandex 60 Finance QuickPay Cash payment terminal Net Element Founders 0.5 Other technologies Banki.ru Information portal for the banking industry Russia Partners Technology Finam 6 Content providers iConText Context ads service iTech Capital Lev Gleyzer 10 Marketing / Advertising Travel.ru Information portal on tourism Oktogo Founders, Touralliance 2 Content providers TM Media holding owning habrahabr.ru and other online media projects Denis Kryuchkov Mail.ru Group 4.5 Content providers Platron Acquiring system for E-commerce Ocean Bank Tatyana Glazacheva 10 Other B2B services 100 Other IT Large deals Maykor IT consulting / outsourcing RDIF, EBRD, Capman Russia II Source: RMG 3Q saw a record level of exit activity. There were 7 exit deals in which $93m were spent. For comparison, there were only 2 exit deals in 2Q with total value of $52m, and no exits were announced in 1Q. but in 2013 foreign VC investors started looking at Russia more positively thanks to improvement of market infrastructure and increase in market depth. A history of successful exits is viewed by investors as a mark of quality for any VC market. Exits are a key measure of market maturity. A poor exit record has been one of the factors limiting the inflow of foreign venture capital into Russia so far, 8
    • New VC funds in 3Q Internet Initiative Development Fund Assets under management: RUR 6bn Stages: seed Average deal value: $15,000 – $50,000 IIDF was founded by the government’s Agency for Strategic Initiatives in spring 2013 but selection of projects only began in 3Q. The Fund’s goal is to provide pre-seed and seed financing for promising IT projects. Kirill Varlamov, the head of IIDF, said that the Fund’s assets under management were contributed by large corporations. Flint Capital Assets under management : $30m Sectors: TMT, E-commerce, finance Average deal value: $0.5m - $2m The fund was set up by ex-employees of Finam Global and already has 4 companies in its portfolio as well as managing Bull Ventures, an Ukraine-based subsidiary fund. IT-Online Venture Sectors: IT Stages: startup Average deal value: $50,000 - $500,000 The fund is affiliated with ITOnline Group, a Russian-American company engaged in launching and managing Internet projects. No deals have been announced to date. Impulse Founders: Grigory Firsov, Kirill Belov Sectors: marketing, advertising Stages: seed, startup Average deal value: $250,000 - $750,000 Impulse acts as a VC fund, incubator and accelerator. Round A co-investments ($1m+) are also possible. Rostelecom Venture Projects Department The state-owned telecommunications provider announced the creation of a department for venture project development. The department is not a VC fund but is expected to invest in third-party projects that are of interest for Rostelecom. Skolkovo RusInnovations Founders: Rye, Man & Gor Securities AUM: $250m Skolkovo RusInnovations, an investment holding founded by RMG, will invest in Russia and CIS-based innovative companies. SKRI plans to obtain a dual listing in London and Moscow in 2014. 9
    • VC market structure: stages Early-stage deal numbers increased in 3Q VC deal flow by stage Deals closed 7 51 69 45 29 60 26 27 Seed 22 16 20 Startup 3Q2012 4Q2012 7 3 5 4 3 Growth 1Q2013 1 1 3 7 Expansion 2Q2013 3Q2013 Source: RMG There was a sharp q-o-q increase in the number of early-stage deals in 3Q2013, with 60 seed and 20 startup projects receiving financing, compared to 29 and 16, respectively, in 2Q. Also, more expansion deals were closed in 3Q13 than in any of the 4 previous quarters. Distribution of investor types in various VC stages in 3Q reflects the structural specifics of Russia’s VC market. A large chunk of VC invested at early stages (38% at the seed stage and 24% at the startup stage) was accounted for by public funds and development organizations. However, government bodies did not participate in late-stage deals, where private funds and corporations were more involved. Involvement of different investor types at different VC stages Share of total VC invested at the respective stage, excl. exits Business angels 4% Corporate Public 3% 13% 17% 23% Private funds 13% 22% 33% 31% Seed $15m 38% 18% PPP Startup $14m 24% 29% Growth $6m 45% Expansion $35m 87% Source: RMG 10
    • VC market structure: investors Public funds invest in technology, private funds in IT VC financing by sector and investor type US$ million, excl. exits Business angels 6.3 Biotech Corporate Industrial tech 13.4 Other technologies Public Soft/Internet - B2B 9.0 Soft/Internet - B2C Private funds PPP 40.1 0.9 Source: RMG The sector allocation of VC investments in 3Q followed the established Russian pattern. Tech sectors, including biotech and industrial technologies, are mainly financed by state-backed organizations, which tend to specialize in this sphere. Other investors are IT-oriented, with over 80% of all VC invested in software and Internet projects. Private funds were again the most active investors, contributing almost 50% of all capital The structure of VC rounds is indicative of insufficient seed financing in Russia. Private funds are reluctant to invest in concepts that have yet to show their efficacy in practice, and therefore contributed only 18% of all seed capital in the quarter. Financing from state-backed institutions also dipped in 3Q, but IIDF, a state-backed RUR 6bn fund set up in spring 2013, is expected to invest RUR 2bn in early-stage projects by the end of the year, which is a substantial amount for Russia’s VC economy. invested. Corporate investors were unusually active in the VC market in 3Q, accounting for 19% of all investments compared with just 2% in the previous quarter. High levels of corporate VC investment activity is a characteristic feature of developed VC markets, so the 3Q trend suggests that Russia is moving in the right direction. VC invested by round US$ million Business angels Corporate Public Private PPP 100 80 60 40 20 0 Seed A B C+ Exit Source: RMG 11
    • VC market structure: sectors VC investors place most faith in consumer markets VC investments by sector Investments, excl. exits, US$ million 80 0,9 Biotech 70 Industrial tech 6,5 60 Enterprise management systems 5,6 Other tech 6,0 50 Software/Internet B2C E-commerce 14,4 Software/Internet B2B 40 8,8 Other B2B services 30 16,1 Education 20 13,3 Other B2C services 10 69,7 41,9 12,6 0 Total Tech 19.2% IT 80.8% Source: RMG B2C software and Internet services attracted more than a half of all VC investments (excluding exits) in 3Q and over 23% of all VC was invested in ecommerce projects. E-commerce retained its popularity with investors but the bias in its favor was less marked than in previous quarters. The proportion between tech and IT has shifted a little towards the former: IT attracted 80.8% of all VC invested, whereas the figure was 87% in 2Q and The average value per VC deal declined to $0.8m in 3Q from $1.7m in 2Q. The decrease was mainly due to a sharp rise in the number of seed-stage deals. 89% in 2012. More importantly, biotech and industrial tech financing is no longer a government preserve, as corporate investors are increasingly interested in these sectors. Average VC deal value 3 US$ million 2 1 0,7 0,7 1,9 0,8 1,7 0,8 2,5 1,7 Tech IT All sectors 2Q2013 0 Including exits Excluding exits Source: RMG 12
    • Methodology For the purposes of this report, ‘venture capital investments’ stand for investments 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. 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. 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 have modified the methodology of VC sector classification, compared to our 2Q report. The methodology we have adopted for this report (and future reports) enables us to determine more easily and correctly which sector a venture project belongs to, based on the nature of its business. 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. Biotech: healthcare, pharmaceuticals, diagnostics and medical equipment development. Industrial tech: laser, energy, green, aerospace 13
    • Contact information 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 vc@rmg.ru Report authors: Arseniy Dabbakh Director Corporate Finance Rye, Man & Gor Securities arseniy.dabbakh@rmg.ru +7 495 258 62 62 Boris Orlovetsky Analyst Corporate finance Rye, Man & Gor Securities boris.orlovetsky@rmg.ru +7 495 258 62 62 14
    • Any information and opinions contained in this analytical document (hereinafter – the “Analytical Materials”) are published solely for informational purposes and are not and should not be construed as an offer or a solicitation of an offer to buy or sell any securities or other financial instruments mentioned herein. Any investments in securities or other financial instruments may be related to significant risks, appear inefficient or unacceptable for this or that category of investors. Any decision on investments in the securities and other instruments requires significant experience and knowledge in financial matters, and in issues of evaluation of risks and benefits related to investments in this or that financial instrument. The Analytical Materials may be used by investors in the Russian Federation subject to the laws of the Russian Federation. The Analytical Materials are not addressed to residents of the USA, UK, Canada, Australia, Japan and to investors in other jurisdictions, unless this is permitted to particular investors in special circumstances provided for by the laws of their home jurisdiction. Rye, Man and Gor Securities accepts no liability for use of the Analytical Materials by investors, who are not permitted to do so under the laws of their home jurisdiction. Information has been obtained from reliable sources and any opinions herein are based on sources believed to be reliable, but no representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of such information. Any opinions expressed are the opinion of specialists of Rye, Man and Gor Securities and subject to change without notice. Rye, Man and Gor Securities is under no obligation to update or correct any inaccuracies contained in the Analytical Materials. Neither Rye, Man and Gor Securities nor any of its directors, employees, agents, affiliates or licensees accept any liability for any loss or damage arising from use of the Analytical Materials. Investors should assume that Rye, Man and Gor Securities does or seeks to do investment business with any of the companies mentioned herein. Rye, Man and 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 Tristan Neuhaus under Creative Commons license. Copyright © Rye, Man & Gor Securities, 2013 Tel: 7 (495) 258 6262; e-mail: vc@rmg.ru 15