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.

1. Russian Venture Capital
Market Overview
3Q 2013

2. 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
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3. 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
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4. 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.
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5. 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
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6. 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 $200m) in promising early-stage companies.
•
A recent spate of checks and investigations by law-enforcers and
supervisory agencies after allegations of embezzlement in the governmentbacked VC world has been has come to an end. Skolkovo and Rusnano
seem to have convinced the “hard end” of the Russian government that VC
investments are inevitably high-risk, and that lost investments are not a
crime. We view this as a useful “despooking” of the Russian VC market
•
An increasing number of VC educational projects are being launched. One
educational initiative, People of the Future, started its Venture Academy in
the summer. Venture Kitchen, founded by the Higher School of Economics
and Russian Venture Company, has been operational since July.
•
Transparency remains the major issue for Russia’s VC market. Neither
private funds nor public institutions are eager to disclose their deals and
stakeholders. Even the government-backed IIDF (see above) refuses to say
whose money it will invest.
•
The business angel community is virtually non-existent in Russia. In 3Q,
angel investors took part in 40% of VC deals, but this is a much smaller
share than elsewhere in the world and the lack of such investors is stunting
market growth. For comparison, business angels financed as many as
50,000 US companies in 2012, whereas venture funds invested in just 600.
A strong angel investor community provides market depth and the seed
financing that Russia still lacks.
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7. VC market overview
3Q becomes the most successful quarter for Russia’s VC
Russia’s VC deal flow
US$ 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.
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8. 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,
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9. 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.
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10. 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
$35m
87%
Source: RMG
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11. VC market structure: investors
Public funds invest in technology, private funds in IT
VC financing by sector and investor type
US$ 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
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12. 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
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13. 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
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14. 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
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15. 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
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