Last week, RVC, the national fund of funds dedicated to innovation, and PWC presented a report about the Russian VC market in 2012. While in 2011 the total amount of deals reached approximately $400 million, the market more than doubled in 2012, reaching $910.6 million.
The figure includes only those deals which have been made public, with a PWC estimate included whenever their amount remained undisclosed.
Most of the deals (84%) took place in the IT sector, with biotech accounting for only 7% and industrial technologies for 9%. The number of venture funds also notably increased, from 120 at most in 2011 to 160 in 2012.
Last year, a total of 702 non-venture investment grants were also allocated, with an aggregate worth of more than $145 million, a figure not included in the overall market volume.
This impressive growth is mostly the result of larger average deal sizes. The main reason is that investors notably refocused their activity from early-stage to later-stage funding with more mature companies. As an illustration, in the IT sector, the number of identified seed funding deals dropped from 77 to 60 in one year, while the number of later-stage ones more than doubled.
Within the IT market, e-commerce remains the leading segment in terms of volume of investment funds raised, with almost $400 million invested. But the need for greater industry diversification in investment portfolios boosted the development of other segments such as mobile applications, social media, and cloud computing.
The report counted 12 “successful exits” last year (for a total amount of $372 million). Among them are Sapato.ru, an online shoe retailer that was fully acquired by Ozon for $50 million – a revelation contained in the report – Sotmarket.ru, a site specializing in mobile devices and accessories acquired by IQ One Holdings for the same amount, and virtual currency operator Yandex.Money, acquired by Sberbank for $60 million.
Angel investment still hampered by many issues
Another report, dedicated to country’s angel investment ecosystem, was released earlier this month by RVC with the assistance of VTsIOM, a major polling institute.
Compared to countries with a more mature VC market, Russian investors do not necessarily expect early exit perspectives, which remain unclear to them. One of the reasons for the difference is that major Russian industry players are not used to acquiring small companies to take advantage of their innovative solutions.
The survey respondents also underlined the inadequacy of Russian legislation in addressing the requirements of seed stage investment. The legal framework is regarded as insufficient to ensure the protection of minority shareholders’ rights and their participation in company management. In case of problems or conflicts, court rulings are unpredictable. By contrast with Anglo-Saxon law, Russian law does not allow deals to be structured with such efficient instruments as convertible loans, for example.
Another key problem is the lack of trust between players in the angel investment sector, the report notes. Most investors tend not to disclose their investment activities, which hampers sharing information and success stories that could attract new investors to this sector.
Some criticize venture associations for their lack of maturity. Some of them try to make money out of business angels and startups rather than effectively assisting business angels in co-investing, spreading VC culture, and sharing information about deal flows.
The experts point out, however, that mentalities are changing. Understanding the necessity of structuring the market, all the business angels interviewed by VTsIOM are potentially ready to co-invest, while fully 88% of those surveyed said they would not exclude participation in a VC fund, which they find attractive for better screening of projects and risk syndication.
As an illustration of this, the proportion of syndicated deals is increasing constantly, already totaling one third of the transactions in 2012.
In Russia, government subsidies mostly support R&D. As a result, entrepreneurs were tempted to spend too much time on research activities, to the detriment of the commercialization of their products. Once a grant is received, they also tend to overestimate the value of their technology, because in many cases the developed prototype is still far from a marketable product. But things are changing, with authorities progressively switching from subsidy programs to co-investment policies.
Please click here to download the Russian version of the report on the venture market in 2012. (The English version will be available later from PWC).
For the report on angel investment, please click here (in Russian)
