Report: The thaw of the Russian venture market

Editor’s note:This post from East-West Digital News was syndicated with permission.

After two years of apathy, the Russian venture market showed signs of revival in 2016, reveals the latest edition of the Russian venture report (PDF) published annually by RG Partners, in partnership with EY and East-West Digital News.

From the seed stage to maturity deals, venture investment amounted to $894 million last year, up from just $383 million in 2015. “Market growth was essentially driven by a dramatic increase in expansion deals, whereas the volume of seed- and startup-stage deals fell to new lows,” notes Arseniy Dabbakh of RG Partners.

While the total number of deals at all stages was approximately the same (around 300), the average deal value jumped from $1.3 million in 2015 to $3 million in 2016. Last year also saw 11 exits, with transactions amounting to $663 million, up from just $11 million in 2015.

“The euphoria of 2012-2013 was followed by two years of apathy as the international sanctions against Russia, the plunge of oil prices and of the ruble alike took their toll. The upturn in exits in 2016 makes us hope that a significant part of this money will come back to the innovation ecosystem this year,” says EY Partner Anton Ustimenko.

Key Russian VC market figures in 2016

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Key trends in 2016

Analysis by segment:

– In 2016, traditional B2B technologies (corporate management systems, platforms, e-commerce and search/recommendations) shrank by a half or more, while service start-ups reigned supreme — in which the authors of the report see a possible “sign of uberization.”

– Software and Internet remained investors’ favorite playground, with VC preferences shifting from social networks and e-commerce to education and gaming.

– Investment in industrial tech was on the rise with the involvement of several corporations and private-public partnerships. State-backed or state-related investors were also active this segment, in line with the government’s strategy to develop the national economy.

On the investor side:

– In 2016, private VC funds and corporations focused on the growth and expansion stages.

– Angel investment was vibrant, including the formation of angel and micro-angel investor groups as well as P2P and crowdfunding platforms. Last year also saw a new wave of investments from what appears to be a new type of private venture capitalists, including senior corporate executives and SME leaders, both in Moscow and in the regions.

– State-backed or state-related investors continued to support startups at the seed and start-up stages, remaining key investors in certain segments, even though an increasing part of this support took the form of grants rather than equity investments.

– On the corporate side, 2016 appears as a year of transition. Several Russian corporations made noticeable moves, from startup acceleration to acquisitions, to corporate venturing initiatives. Thus new funds were set up by such powerful players as Sberbank, Rostelecom, AFK Sistema and others.

However, a range of Russian corporations have not clearly defined their innovation and venture strategies yet and remained little active in 2016. “There is huge potential for more efficient interactions between venture funds and corporations, and this area could drive an upturn in the venture market in 2017,” believes Ustimenko.

In addition:

– Several of the Russian venture funds from the first generation are now raising new money. That is no easy task since the key investors for Russia’s VC funds are not institutions (as elsewhere in the world), but high net worth individuals and their families – a relatively small population, a part of which is already deeply involved in venture investment.

– In 2016, many Russian VC funds continued to invest in foreign startups — an orientation which started in 2011 and accelerated in 2014-2015, with Russian investors seeking abroad better profitability in dollar terms. (The present report, however, reflects essentially domestic investment activity.)

Please click here to download the full report, and here for the list of deals. For any questions, feel free to reach lead author Arseniy Dabbakh at DabbakhAD[at]rbpartners.ru.

Featured image credit:Starover Sibiriak / Adobe Stock

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