As the Russian economy seems to be sinking as a result of the western sanctions, Alexey Solovyov, a figure of the Russian venture scene, has a nuanced analysis of the impact on his industry. From a deal cancelled to the disruption of an essential banking service, the crisis has already affected his firm and portfolio startups.
What has been, or could be the impact of the war and the sanctions on Russian venture?
With new sanctions against Russia announced every day, if not every hour, it is too early to say anything definitive. But I would make here some important distinctions. First, there is the Russian economy as a whole. On the road to becoming an outcast, the country could have its economy significantly cut off from the global market, with very painful consequences.
Second, there is the Russian venture community, which consists of two parts. You have investors (public, corporate or private) who support startups focusing essentially on the domestic market – typically in the fields of e-commerce, payments or edtech. There might still be big investment opportunities there, in particular in software or hardware segments that are targeted by the sanctions: the government is likely to invest even more than before in the emergence of national technology providers. Yandex, Ozon, CIAN, HH.ru and alike are here to show how far can go successful Russian startups, even those targeting essentially the domestic market.
Domestic VCs could, nevertheless, be affected by the current crisis. As a result of the sanctions, their portfolio companies will feel the impact of falling consumer demand as well as the perturbations in payments and banking transactions.
The other segment of the Russian venture community is more internationally than domestically oriented. In this globalized segment, the impact of the war and the sanctions will probably be very attenuated. Nowadays VC business and tech entrepreneurship are, by their very nature, global industries – and Russian VCs and LPs are among the least “attached” to Russia as a territory.
Aren’t they still Russian, though?
In the business sense, they can hardly even be called “Russians,” even though we may be talking about Russian nationals or people born in Russia.
There is hardly any specifically “Russian” way of doing venture business: VCs with Russian roots deal with startups across the world in exactly the same way as their US or European peers.
Let’s take quite a typical situation: three Russian-speaking GPs, residing in Cyprus, Boston and Moscow, manage a fund formally domiciled in Cayman and partly filled in with Russian tax residents money (typically HNWIs). No matter where they are physically located (even in Moscow), these GPs invest the fund’s money all over the world – from Israel, to the USA, to Western Europe, and sometimes Russia.
Thus, a generation of Russian-born VC firms and venture professionals have become even more active abroad than in Russia. A number of them even left Russia a long time ago and got foreign citizenship.
This is why this part of the “Russian” VC ecosystem will be less damaged by the current events.
What about those adhering to the official Russian state position ?
Ideologies are a matter of individuals. But in recent years, the tensions between Russia and the USA didn’t prevent globalised Russian investors to associate themselves massively with US businesses, or even co-invest with Ukrainian peers!
How could these Russian VCs established or operating abroad be impacted, even in an attenuated way?
They may be hit at several levels. First, given today’s uncertainty — or due to certain sanctions or restrictions, including possibly at the individual level – some Russian LPs (mostly HNWIs) could either retract their capital commitments from funds (when possible) or postpone, in various ways, their contributions to funds.
Second, some transactions involving Russia (e.g. from/to LP/GP instance or SPC entities) can be exposed to additional KYC/AML procedures. These could lead to delays with transaction execution with a negative impact on the business.
Another kind of potential, long-lasting impact could be in people’s minds. Across the world, Russian nationals, or just people with Russian-sounding names, could be affected by this hot or cold war atmosphere. People will be more cautious, more suspicious working with them.
This could affect not only government-related persons, but also ordinary associates and partners of global VC firms, M&A managers from strategic investors, clerks from banks, as well as startup entrepreneurs. Due to this kind of impact, some business decisions, which were possible just a week ago, might not be made now and have a chance not to be taken ever.
Have your own businesses already been affected in any of these ways?
Unfortunately, yes. We are about to lose a deal which we syndicated with our LPs two weeks ago. At least half of the syndicate participants have recalled their commitments due to today’s uncertainty. No sanctions or banking restrictions are involved: it is only a question of instability and unpredictability of the whole situation.
Some operations are also impacted at the portfolio level. One of our startups, registered in the UK with its teams based in Russia and the Baltic states, runs a distributed media business model for sport event broadcasting in 20+ countries all around the world. This startup just had an important contract cancelled. No reason, no explanation – their counterpart just “changed their decision.”
Also, we’ve just experienced an issue with a bank. Due to the unprecedented sanctions against the Russian banking system, one of the country’s largest banks, albeit not included in the sanction list, has cancelled their pay-by-installment program. One of our portfolio companies, in the field of edtech, is suffering from this decision as installments are central to its business model.
- Alexey Solovyov founded the investment firm A.Partners and co-founded angel investment club AngelsDeck. He was previously a Partner and Managing Director at Prostor Capital, and headed the Moscow office of iTech Capital, two leading VC firms with Russian roots.
