Central regions | Finance, business

Russian VC market shows signs of thawing, RB Partners and EY found

28 Apr '17
RB Partners and EY have published a comprehensive 2016 Russian VC market study.

According to the research, in 2016, VC market sentiments changed in Russia, and market players showed some optimism, getting out of the mire of the previous crisis-crippled 2014 and 2015. There’s evidence to that both in stats and market players’ opinions.

Key findings and trends in Russia’s VC market identified in 2016:

- A symbolic market growth from a depressed 2015, with the number of deals inching from 297 to 302 and the overall investment value growing more noticeably from $383m to $894m.

- An upsettingly sustained decline in both deal numbers and deal values at the early seed and start-up stages.

- A substantial increase in growth and expansion stage investment, which gave the market an overall boost.

- A clearer government focus—scaled down though in money terms—on funding research-intensive projects and technologies, which eventually prevents the latter from moving on into the commercial sector. As a result, such start-ups don’t reach out to private investors, a reason for curtailed investment in the early stages.

- A considerable market transformation in the B2B segment. While in prior years most investors stuck to time-tested areas like corporate management systems, platforms and traditional B2B solutions, in 2016 all these investments saw an appreciable 2-to-15-time nosedive. In the overall B2B segment, investment grew. It appears to be a sign of investors’ hunger for new investment ideas.

- The software and Internet segments are still the primary investor targets, and no trend has been identified to denote any perceptible change in the market structure in years to come. That said, investors are setting sights on industrial tech, too.

- The B2C segment also saw a reshuffle of preferences. Investments in e-commerce and search/recommendations declined dramatically, giving way to service start-ups that reigned supreme (an aftermath of uberization, perhaps).

- Private VC funds were focused on the most surefire and least risky growth and expansion stages. Corporate investors played first fiddle at the advanced stages, while the early ones had to rely on the government and the angel community—and suffered an investment slump therefore.

- A sharp rise in the number and value of exits: 14 in 2016 vs. four in 2015, worth $663m and $11m, respectively. As always, large deals made a difference here, but they all came within an already clear trend.

2016 trends which the authors of the research believe will impact the market in 2017:

- Government-owned and government-invested funds are putting the brakes on investing, exiting projects or closing. The Skolkovo Foundation appears to be the only exception.

- Corporate innovation investing is on the rise in various forms, such as corporate accelerator programs (IKEA, SAP, InspiRUSSIA and others) and corporate funds (Sistema VC, Sistema Asia Fund and others as most active). Collaborations with start-ups are numerous, especially in the field of fintech.

- Angel investing has been on the rise with parallel formation of angel and microangel investor groups and P2P and crowdfunding platforms. The year 2016 also saw a growing wave of investment from what looks like a brand new type of private venture capitalists, including chief corporate executives and SME leaders in the Russian capital city and regions.

- Start-ups and funds are going global—with limited success, though. Each fund of the top elite runs one or more offices outside Russia in Tel Aviv, San Francisco, Berlin and other cities.

- Russian VC investors’ sector preferences have shifted from social networks and e-commerce to education and games.

Arseniy Dabbakh, Partner, RB Partners: “We saw an impressive upsurge in tech-focused interest from corporations, which resulted in about 30 exits and the launch of more than five new corporate VC funds last year. Russia’s venture market still accounts for less than 0.5% of the global market; however, this trend brings optimism.”
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