A new player on the Russian venture scene, iTech Capital has attracted capital from a variety of prominent Russian IT businessmen. Its first investments, in late 2011, went to play marketing site The Battle Of Brands and to Giftofoni, an innovative social gifting app launched on the Turkish-language segment of Facebook. In this exchange with East-West Digital News, iTech Capital managing partner Gleb Davidyuk presents the fund’s investment strategy and comments on Russia’s place on the global IT map.
iTech Capital is a relative newcomer to the Russian private equity scene. Please tell us a bit about your fund and the people behind it.
We set up the fund in formal terms just half a year ago, in July 2011, initially managing money for friends and family. Some of our major LPs are well known IT professionals, including QIWI Group shareholders headed by Andrey Romanenko, DST co-founders Gregory Finger and Michael Vinchel, former Mail.ru Group senior VP Igor Matsanyuk and a few dozen other well-known Russian individuals. The main idea behind the fund is to combine investor expertise and a formal institutional approach in sourcing and funding while diversifying classic investment risks through collective investing.
Today we have over 30 LPs, and all of them are high net-worth Russians. We have committed capital exceeding $80 million already, but we aim to raise an additional $40 million this year.
What is your investment strategy?
We invest wherever code can be turned into money. This includes numerous web applications, digital content and digital infrastructure projects, cloud computing, SaaS and, of course, e-commerce, the flavor of the year. B2C is our core competence, though we are happy to look at B2B business as well.
Our investment geography is not limited to Russia and neighboring countries, though an appropriate balance of managerial control is required in each investment. Our team’s expertise in payments and infrastructure, gaming, and social media helps create a well-balanced portfolio.
We usually invest in the range of $1 to $10 million, focusing on cash-generating businesses. However, we do not exclude companies at earlier stages if the adressable market is global.
For example, last summer we backed Giftofoni, a social gifting app that we launched a few months ago on Facebook-Turkey. We believe Turkey is a perfect fit in terms of well-developed infrastructure and a large, psychologically similar target audience. Our Giftofoni partner has already proven this business model successful in Russia, having launched a similar application in Odnoklasniki.ru at the beginning of last year.
Are there a lot of valuable startups on the domestic scene?
We receive on average three or four applications per day, most of them through our website. Out of 100 applications, five rate serious consideration – and we actually invest in perhaps one. Russia has ideas, developers and capital, but still lacks business culture. Valuations look like bubbles, with very few fundamentals behind them. As Warren Buffet said: “Bubbles are invisible if you’re inside them.” His words perfectly describe the perception of valuation issues by many young entrepreneurs.
Education is a key to crystalizing and better preparing the market to face VC reality. We are trying to support all incubators and business accelerators on the market, even though a new one emerges almost every month. We also may create one once we see a professional team to head up such an initiative.
Does Russia have a specific place on the global IT map?
In IT there are five key segments: e-commerce, e-advertising, content, services/SaaS and infrastructure. Each has a certain size and is subject to competition between projects and between investors. The winners are either the first movers or those who bring a unique value proposition. These rules are valid in Russia as well anywhere else in the world;in this sense IT has no boundaries.
Yet each market has its own features. Russia is now the largest Internet market in Europe by number of users – but still relatively virgin in terms of investment activity. The country’s 140 million inhabitants are also 140 million consumers, actual or potential – and Russians like to spend money, which means good prospects for B2C projects.
Russia has a specific political situation; do you think this can have an impact on the development of these industries?
The beauty of investing in IT is the absence of geographical boundaries. Virtually none of our portfolio companies has to depend on the political situation in the country. For the moment, the state has been helping rather than disturbing or blocking the development of the IT and financial industries. Significant educational and financial efforts have been made. Managerial and financial literacy have progressed considerably, with the active part of the population starting to understand investment matters.
The Russian startup scene also seems largely to have been spared by corruption. In the digital sphere, greedy civil servants don’t know what to look for – or where. This helps the industry to stay below various radar screens.
• Gleb Davidyuk has over 14 years experience in both Western and Russian private equity funds. Prior to founding iTech Capital, he was a partner with Mint Capital, a Scandinavian private equity fund actively investing on the Russian market. From 2000 to 2005, Davidyuk co-founded and managed Alfa Capital Partners. He gained his initial investment experience in the late 1990s at the Central Russia Regional Venture Fund, an EBRD-sponsored private equity fund managed by Quadriga Capital Russia.
Davidyuk holds a B.S. degree from Ivanovo State Power Engineering University. He also received a Ph.D. in Finance from Yaroslavl State University and an Executive MBA in 2010 from the Booth School of Business at the University of Chicago.
