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Perspectives for Venture Capital in Baltics and Russia (Allan Martinson)

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Slides from Connect Estonia seminar CONNECT WITH THE SMART MONEY, on August 29, 2006.

Slides from Connect Estonia seminar CONNECT WITH THE SMART MONEY, on August 29, 2006.

Published in: Economy & Finance

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  • 1. Venture Capital in Baltics and Russia Allan Martinson Managing Partner MTVP
  • 2. What is Venture Capital?• Private Equity Industry = funds and vehicles investing into non-listed enterprises• Two main categories of private equity: – Buyout funds – Venture Capital funds• Venture Capital funds invest into – New and fast-growing industries – Usually taking minority stakes – Usually seed to early growth stages – Often, but not always into innovation and technology
  • 3. Private equity from investor’s viewpoint• High risk/high return asset class• Usually reserved only for investment professionals and high net worth individuals – Pension funds – Government-sponsored funds – Funds of funds – High net worth individuals and family offices• Usual minimum ticket 1 million dollars• Sizes of the funds between 10 m USD-10 b USD• Typical lifetime of funds between 5-10 years• Low liquidity, high return expectations• Typical investor does not allocate more than 10% of its portfolio to private equity and he/she must like this asset class
  • 4. Model of private equity industry PE/VC fund managers Mgt Ideas $ Enterprises Stock market or Enterpreneurs PE/VC funds trade buyers $ $ $ $ Investors of PE/VC funds
  • 5. Cost of Venture Capital• Minimal expected (promised) return no less than 25-35% – >80% of profits are generated by <25% of the funds – Best funds show >100% annual returns – Historic average 15-17%• As all portfolio companies may not succeed VC funds expect at least 50% annual growth in value of separate companies• 5-year return expectations expressed in money-back ratios: – Failed: write-off – Walking dead: 1X money-back (0% return) – Okay 5X money-back (50% per annum) – Good 10X money-back (80% per annum) – Superior >20X money-back (>110% per annum)• Skype: over 100X money-back in 2 years
  • 6. What does Venture Capital produce?• VC industry produces mature companies from raw ideas and young teams by adding finances, experience and contact network• VCs assist in company-building: from seed to growth stage• VCs are human and always invest into humans, not into companies
  • 7. Venture Capital is more than just money• Good Venture Capital = Smart Capital – Extensive experience and good instincts – Strategic management and mentorship – Maintaining of discipline and focus – Assistance in recruiting of top talent – Assistance in creating partnerships – Assistance in exits• Mediocre companies get the most attention of VCs – Failed companies = “no money, no time” – Superior companies usually manage themselves
  • 8. How do VCs pick their investments?• All VC funds have formal pre-selection criterias: – Geography – Stage of investments – Size of investments – Industries• … but informal criterias are the most important!
  • 9. MTVP’s 6 investment criterias1. Does it fit our formal criterias (geography, size, industry?)2. Do we believe into the people and the team?3. Does the company operate on growing market?4. Does the company have unique competitive advantage?5. Do we as VCs have necessary skills and understanding of the business?6. Does the company have any substantial risks?
  • 10. Human aspect - the most importantcriteria• We always invest into people, not into companies, market shares or business plans – We invest if we like the team and we would like it to continue – We help the enterpreneurs to bring their visions to reality• What makes a good team: – Strong vision – Strong execution – Has been together at least one year – Have been succesful in the past – Carries common values: integrity, trust and transparency
  • 11. MTVP’s annual deal funnel 30-40 First Meetings 10-15 Follow-on Review 5-7 Meetings>200 Every Investments Plan Per Year Due diligence process
  • 12. Typical myths about VCs• Myth: VC is a long-term strategic partner – Reality: VC has horizon of 2-7 years, helps the company to mature and then exits• Myth: VC money goes to R&D – Reality: 90% of the Venture Capital goes to commercialization of the products and services• Myth: VCs like early stages – Reality: In moct cases VCs would like to see at least 1 m USD in annual revenues• Myth: VCs invest lots of time into their companies – Reality: Typical partner in VC fund manager has 5-7 companies under supervision and can spend no more than 100 hours per company per year
  • 13. MartinsonTrigon – summary• AS MartinsonTrigon: – ~12 m EUR investment vehicle – Founded in 2005 – 1st fund of Martinson Trigon Venture Partners – Geography: the Baltics and Russia – 4 investments signed by far, 2 in works – 3 full-time professionals + Trigon Capital investment bank – Next fundraising in late 2006
  • 14. Focus areas• Information technology • Internet and new media – Offshore software – Social networking development – Search technologies – IT services and outsourcing – Mobile content – Software products and – Internet-based new media technologies – Gaming industry – E-commerce and e-services• Telecom – New media – New generation TV – Data communication broadcasters services and datacentres – “New telecoms” (VoIP, WiFi, WiMAX, 2.5G/3G etc)
  • 15. MartinsonTrigon’s investment profile• Typical investment between EUR 0.5-3m (average EUR 2m) – In syndicates with other VC’up to EUR 10 m• Strong control either through majority stake or strong minorities + shareholders agreements• Extensive support to the management• Earnout & option schemes• Holding period 3-5 years• Exits through strategic sale or IPO
  • 16. Portfolio • Offshore programming in Russia • IT services and data communications in Lithuania • Music TV franchise in the Baltics • CRM collaboration technology company in Russia/USA
  • 17. Baltic VC landscape• Two dedicated high-tech funds: – MartinsonTrigon (2 Baltic investments) – ASI Private Equity (3 Estonian investments)• Occasional investments by generalist PE players – Mostly into IT services and telecom companies• Handful of angels – ~10-20 angel investments• No direct presence of foreign VC funds• State-sponsored VC programs in Estonia and Latvia
  • 18. Baltic high-tech successes• Skype• Playtech• SAF Tehnika• Hansabank• Tens of interesting startups, but often failing to get critical mass• Problem of getting over 1 m EUR barrier• E-services is the most promising industry
  • 19. Russian roulette• 4 high-tech VC funds operating locally: – Russian Technologies, MTVP, Intel Capital, ABRT – U.S. VCs have done ~10 deals (Bessemer, Insight Partners, Merifin etc) – IT and telecom investments by general PE• Up to 10 success stories – Rambler Media, RBC, Aelita, Acronis etc• State-sponsored VC initiatives under way ($550m)• Hundreds of companies available for pipeline• Growths 50-200% p.a.• Finances, accounting, reporting, taxes usually in mess• Strong global ambitions, often not matched with management experience
  • 20. CONTACTSALLAN MARTINSON SVEN NUUTMANN # "" ! !#$ % %& ! ! !" ! !") (* + !ANDRES SUSI - - ! - !" - -! - " *#$ & ,! ! !") (* ,!