Venture capital investments in the IT sector of Russia

Venture investment in IT

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Venture investment refers to the acquisition of the share, authorized capital of new or growing companies, while the acquired share is less than a controlling stake. The invested funds are directed mainly to business development, and not to the redemption of shares of existing shareholders (founders) of the company.

The information technology sector includes the following sub-sectors (2012):

• e-commerce services information exchange and transfer services;
• Cloud Development and Application;
• telecommunications;
• advertising technologies;
• mobile applications;
• services and applications,
• related to entertainment (including online gaming), the creation and development of social networks and internet communities.

IT and ICT market of Russia

• IT market of Russia
• ICT market of Russia
• Index of entrepreneurial confidence (IPU) in the IT market of Russia

2023: Investment in Russian IT startups decreased by 83% over the year

In 2023, Russian IT startups attracted $71 million in investments, which is 83% less than a year earlier. At the same time, the number of venture transactions in this market increased by 15%, to 158 units. Such data in early January 2024 are provided by the Dsight investment platform.

As Kommersant writes with reference to Dsight materials, the average volume of investments in Russian IT startups in 2023 amounted to $460 thousand. The manifestation of microchecks was affected by uncertainty in the market as a whole, experts say.

According to them, in 2023, high caution reigned in the venture financing market. Large money was achieved only by projects with an established business model, and the rest were interrupted by microchecks.

Elena Ivanova, editor-in-chief of Russian Venture, notes that politics has become the cause of negative trends, and there are no objective prerequisites for removing these obstacles in the near future, so there is no need to talk about growth.

According to Dsight estimates, in 2023, investors invested the most in startups in the field of business software (22% of the total volume of transactions in monetary terms), in educational technologies (10%), as well as in financial solutions (10%). 32% of the agreements were concluded by state funds and state corporations, 35% - private funds, and 27% - business angels, private venture investors.

Some funds have reoriented themselves to buying out Russian business from outgoing foreign companies, Dsight experts explain the trend. Some investors prefer to minimize risks and invest in more mature startups, instead of supporting new projects in the "sowing" rounds.

Among the most notable transactions in 2023 for investing in IT startups, the publication attributed the acquisition by the Astra group of 26% of the platform for working with the GitFlic code, investments amounted to about $320 thousand.

Also noted is the entry into the capital of Sense Machine (Candy Flip Robots) of the VimpelCom structure of Haiv LLC. The company is developing software in the field of analyzing the emotional response of people using neural networks, according to the service, investments amounted to $331.8 thousand.

A larger investment was received by the developer of the platform for accelerated development of medicines "Biotechnology Development" - the company received $1.7 million in investments from the venture capital club "Syndicate" and "Alfa-Investment."

According to experts, in 2024, an influx of individual investors is expected to enter the venture capital investment market. This will be facilitated by a pre-IPO - a pre-initial public offering with less risk and more liquidity.

We expect an increase in the number of new funds, including with the funds of individuals - qualified investors, - representatives of the investment fund told the newspaper. "Rising

Director of Innovation and Investments MTS Dmitry Kurin, commenting on the situation in the Russian venture capital market, said that "the real number of transactions is two to three times higher than what appears in the reports." According to him, 14-16 new investment funds opened in 2023 and the number of syndicated transactions (conducted by a group of investors or business angels) is growing.

This trend looks set to be sustained, "Kurin added.

According to experts, the role of the state and corporations will strengthen in the market. Alternative funding tools will also play an increasing role. These are, for example, crowdfunding and investment platforms like Rounds. They allow startups to receive financing from private, often unprofessional investors in exchange for shares, as on the stock exchange.^[1]

2020

A bill has been developed to reduce the risk of landing venture investors

The bill "On Science," amending the law "On Science and State Scientific and Technical Policy," was sent by the government to the State Duma. The document was posted on the official portal of the State Duma on March 25, 2020.

Bill

The draft law was developed by the Ministry of Economic Development in accordance with the presidential order on changes establishing the permissible level of financial risks of those development institutions that carry out venture financing using budget funds of high-risk technological projects given to the government on January 24, 2020.

It enshrines concepts such as "technological project," "venture and direct financing of innovative and technological projects" and "institute of innovative development." The document also prescribes to take into account when venture financing innovative projects the uncertainty of market and technological prospects for their implementation, which may entail, among other things, the loss of financial and other resources.

In addition, the bill involves institutions of innovative development in the provision of venture and direct funding, as well as other state support for expertise of innovative and technological projects before the start of their financing, in the process of their implementation and, if necessary, after their completion.

The planned (forecast) results of the implementation of innovative and technological projects carried out through venture capital and direct financing, in accordance with the bill, are financial, economic, socio-economic, scientific and technical and other socially useful results.

In addition, the success of venture capital funds and their financing, according to the draft law, is carried out on the principle of integrality and retrospective. It involves assessing the achievement of targeted and intermediate, as well as planned results of innovative activities from the beginning of receiving public funds.

Also, in assessing the effectiveness of the use of budget funds in the implementation of innovative and technological projects, the bill introduces the principle of "audit of the process" of providing state venture financing. Its features, according to the document, will be established by the government. They will be present in:

• forms and conditions of use of budget funds;
• criteria for making decisions on financing startups;
• methods of risk management in the implementation of projects, including the requirements for conducting examinations and monitoring the implementation of venture financing
• rules for assessing the effectiveness of the use of such means;
• GRBS authority and responsibility for monitoring compliance with risk management methods and decision-making criteria.

Objectives of the draft law

In an explanatory note to the draft law "On Science," its goal is to form a unified system of principles of state support for innovative activities and the implementation of high-risk technological projects. Such a system, according to the authors of the bill, will contribute to more effective implementation of activities by development institutions, as well as allow control and supervisory authorities to more comprehensively approach the assessment of the admissibility of financial risk in the implementation of innovative projects.

In addition, the bill is aimed at creating a unified system of principles for reducing the risks of unjustified criminal prosecution of organizations engaged in innovative activities.

Another goal pursued by the legislative initiative is to establish an acceptable level of financial risks for venture capital market participants, including entrepreneurs, startups and development institutions that carry out venture capital financing using state budget funds.

Due to the achievement of the indicated goals, the bill, according to its authors, will lead to an increase in venture capital investments in innovative projects, especially at the early stages of their life cycle, as well as acceleration of the development of high-risk technological projects and their transition to more mature stages.

Opinions on the legislative initiative

In February 2020 , the Agency for Strategic Initiatives (ASI) created a working group to work on changes in regulatory and legal regulation related to venture capital investment. As TAdviser was told in the Russian Fund for the Development of Information Technologies (RFRIT), which was a member of this working group, following the discussions, she formulated relevant proposals and sent on behalf of the Agency for Strategic Initiatives to the Ministry of Economic Development. The proposals included amendments to the federal law "On Science and State Scientific and Technical Policy" and the Criminal Code of the Russian Federation.

TAdviser asked the members of the working group how optimal the bill developed by the Ministry of Economic Development turned out to be. Not all of them appreciated the document completely in a positive way. In addition, as TAdviser found out, some of their proposals did not find their reflection in the draft law.

Thus, the document did not take into account the need to oblige Russian development institutions to allocate part of the funds to manage many private management teams. Allocate through the so-called "fund of funds" without the risks of criminal prosecution in case of failure. While the entire venture capital community, including the members of the working group, is convinced of the need for this allocation of funds, and this scheme is used by all large sovereign wealth funds in the world. TAdviser was informed about this by Anton Gopka, Dean of the Faculty of Technological Management and Innovation at ITMO University, Co-Founder of ATEM Capital Biotechnological Fund .

In his opinion, in order to stimulate innovation, it is necessary to provide an opportunity for the largest Russian state financial institutions to give a certain share of funds, significantly less than 10%, to manage private management companies that can place them at their own peril and risk in the most risky assets, which are breakthrough innovations. In case of failure of investments, according to Gopka, the main "fine" of the management team will be the failure to receive its income, which entails difficulties in attracting new funding in the future.

Another necessary measure, Anton Gopka sees the complete exclusion of the scenario of criminal prosecution for the failure of the venture capital fund.

In the current form, the draft law was reduced to several definitions and relatively vague wording regarding the assessment of the effectiveness of investments. Unfortunately, this may not be enough to stimulate the development of the venture capital industry in Russia and ensure a "technological breakthrough" by reducing the risks of state financing, "said Anton Gopka.

However, the head of ATEM Capital got the impression that during the development of the draft law, a large number of experts who had an opinion on the problems of venture investment in Russia were interviewed on the market.

By-laws

The general director of the Russian Venture Company (RVC), Alexander Povalko, drew the attention of TAdviser that the company is engaged in a series of by-laws of the future law "On Science." They will regulate the procedure for providing budget funds for state support of innovative activities through development institutions, as well as determine the criteria and principles for creating funds in foreign jurisdictions and investing in foreign companies to transfer the best world technologies to Russia.

The Accounts Chamber of TAdviser said that, in addition to determining the specifics of the implementation by institutions of innovative development of state support for innovative and technological projects, it is necessary to approve the lists of such institutions, as well as the introduction of a risk-oriented approach to the examination of projects and the assessment of their effectiveness.

The adoption of the bill "On Science" is only the first step in improving legislation in the field of state support for innovative and technological projects using venture investment mechanisms, the Accounts Chamber noted.

The department is convinced that the government and the Ministry of Economic Development will have a lot of work to do to develop regulatory legal acts related to monitoring the investment activities of innovative development institutions, venture funds and project companies, the procedure for assessing the investment portfolio, assessing the results of the activities of innovative development institutions using venture investment mechanisms, the procedure for justifying and providing budget funds for state support of high-risk projects.

Skolkovo Ventures CEO Vladimir Sakovich noted that the goals of the law "On Science" will be achieved depending on how detailed and flexible its by-laws will be and how they will be implemented.

The main factor restraining venture capital investment using the state budget, according to Sakovich, is the risk of criminal prosecution for misuse of public funds. This, he said, is feared by startups and investors.

However, if the by-laws of the law "On Science" are properly filled, the risks will decrease. Although it will take time until precedents are clear and the market gets used to the new practice, - said Vladimir Sakovich.

In, Sberbank,, VEB RF, and Rosinfokominvest Rosatom Rostec Analytical Center under the Government of the Russian Federation comments TAdviser did not provide.

Instruction on changing the regulatory framework of venture capital investment in the IT industry

Until June 1, 2020, amendments should be made to the regulatory legal acts of the Russian Federation that establish the permissible level of financial risks of those development institutions that carry out venture financing using budget funds of high-risk technological projects, follows from the order of Russian President Vladimir Putin, given to the Russian government on January 24, 2020.

Mikhail Mishustin has been appointed responsible for the execution of this order. As of February 3, 2020, changes in regulatory legal acts provided for by the order have not yet been developed. Their formation is carried out by a specially created ASI working group.

The appearance of the order was preceded by an indication in September 2019 by Russian Deputy Prime Minister Andrei Belousov, who became the main problem of the venture capital market in January 2020, at a meeting of the head of state with leaders of technical projects and companies of the national technological initiative.

Unfortunately, the legislation is so arranged that for eight failures with budget money you can get 20 years in total, - said Andrei Belousov.

At the same time, the meeting participants - representatives of the companies of the national technology initiative - formulated a number of basic proposals that could change the situation and introduce risk into the legal field. The President instructed to formalize all the ideas.

After this meeting and the release of the instructions of the head of state, as TAdviser was informed in ASI, the agency collected ideas and proposals from different stakeholders on the relevant regulatory changes. On January 27, 2020, Svetlana Chupsheva, Director General of the Agency for Strategic Initiatives, at a meeting with Vladimir Putin, announced the interim results of this work.

In the direction of regulatory changes related to venture financing of high-risk technological projects, as Chupsheva noted at the meeting, ASI has already made the first developments.

We would propose to assign the status to such projects as "experimental projects," the possibility of allocating a separate budget line for such projects and with a certain, special procedure for selecting, supporting, evaluating results for such projects, but with the obligation that accounting and supporting such projects goes through the treasury, - Svetlana Chupsheva told the head of state. - The Accounts Chamber has a cross-cutting audit on these projects - if we are talking about development institutions that finance these projects - not individual projects are evaluated, but the portfolio as a whole.

A specially created ASI interdepartmental working group, which includes representatives of the Government of the Russian Federation, the Accounts Chamber, development institutions, as well as state corporations, as TAdviser was informed in ASI, is engaged in finalizing and packaging the proposals collected by the agency. This group is in the active stage of work, the first results of its activities will be ready by March 1, 2020.

So far, it is too early to talk about specific changes in the regulatory framework - only basic approaches have been formulated, the ASI says. At the same time, the agency has already presented some ideas of the members of the working group on its website. True, as noted in ASI, it is too early to conclude about their inclusion in the consolidated proposals of the industry.

The official website of ASI contains ideas for regulatory changes in companies such as Rusnano, Skolkovo Ventures, ITMO University, as well as Special Representative of the President Dmitry Peskov.

According to Valeria Kovaleva, Managing Director of Rusnano for Legal Affairs, it is fundamentally important to introduce the category of "right to risk" into the legal field. In this sense, in her opinion, one of the key initiatives is to change the approach of regulatory authorities to assessing the success of investments.

Conclusions about the effectiveness or inefficiency of the work of each fund must be drawn on the portfolio of projects as a whole for the entire cycle of the fund's life, taking into account not only financial and economic indicators, but also the social and technological effect of the investments made, - notes Valeria Kovaleva

Businesses that have invested public money in the past, she said, should have the opportunity to pass a "venture amnesty" on their portfolio and deals.

We expect that the industry at the ASI site will develop a general methodology for assessing the portfolio, approve it from the Accounts Chamber and choose an independent auditor who can lead those who wish through the developed amnesty procedure, says Dmitry Peskov.

Skolkovo Ventures proposes to use a portfolio approach to assessing funds in completed transactions, according to the general director of the investment platform Vladimir Sakovich. According to him, it is also necessary to distinguish the responsibility of the parties to the transactions "based on their rights and powers to influence decisions made in projects."

We consider the result to be the growth of the share of private venture capital interested in co-investments with state capital, as well as the readiness of the best venture projects to take funds with the participation of state capital among their shareholders, "notes Vladimir Sakovich.

The approach proposed by ASI reflects the essence of venture capital investments - the results can be assessed exclusively by the portfolio as a whole and on a given time horizon, "says Anton Gopka, co-founder of the ATEM Capital venture fund, Dean of the Faculty of Technological Management and Innovation at ITMO University.

To ensure a technological push and a healthy venture capital investment industry, he believes private management teams should number in the dozens. The most effective tool to stimulate the venture capital industry, as Gopka notes, is the formation of state funds with various mandates and the transfer of corporate venture capital funds into the hands of independent management companies.

TAdviser also learned the position of the Rostec state corporation regarding improving the situation in the venture capital market.

The possibility of evaluating venture capital funds not for single projects, but for a common investment portfolio has been discussed for a long time. If the fund as a whole works successfully, then the presence of individual unsuccessful projects should not become fatal. This is a sensible approach that is being taken around the world today. It must be recognized that venture capital investment a priori involves risks that sometimes cannot be foreseen, - said TAdviser in Rostec.

Minimizing the risks of losses and losses in the field of venture capital investment in corporations is achieved by selecting projects with clear production and commercial prospects or projects that allow quick access to new technologies, the self-development of which the company could use significant funds.

This approach, on the one hand, certainly increases the effectiveness of investments, on the other hand, is a noticeable deterrent, - noted in Rostec.

2019: IT sector accounted for 60% of venture capital investment in Russia

60% of venture capital investments in Russia in 2019 fell on the IT sector. This is more than in the world, where the figure does not exceed 40%. This is evidenced by the data of the Accounts Chamber (JV), which analyzed the development of the Russian venture capital market since the 1990s.

The volume of this market at the end of 2019 was estimated by the department at $124 million. Thus, the IT industry accounted for about $74.4 million in venture capital money. Funds with the participation of state corporations have an even higher share of investments in information technology - about 70%, Vedomosti cites data from the joint venture.

At the same time, according to the calculation of the chamber, Russia lagged behind the countries of the Organization for Economic Cooperation and Development (OECD) in terms of venture capital investments by 43 times and 11 times inferior to the average indicator for OECD countries under the share of venture capital investments as a percentage of GDP. The share of venture capital investment at the sowing and initial stages in Russia is 7% and 20%, respectively, against 10.5% and 52.8% in OECD countries, respectively.

According to Alexander Gorny, co-founder of United Investors, several factors influence the popularity of investments in IT. Firstly, this is a low entry threshold - for example, to launch an online project, you need less money than to start clinical trials of a new drug.

Secondly, the IT company is easier to bring to the global market - technology projects almost do not face customs and regulatory barriers. The importance of both factors will not fall in the coming years, so the statistics will not change dramatically, the expert believes.

In the IT sector, you can quickly see the first results without serious investment in infrastructure and many years of expectations, says Alexander Neymark, Chief Executive Officer of Digital Doubles. Given the factors of the outflow of qualified specialists in the past and the trend towards the development of IT infrastructure in Russia, as well as the fact that a number of advanced technologies in the world are certainly assigned to Russians (face recognition, blockchain development) IT specialists, it is not surprising that the IT sector in Russia is very attractive for investment, he said.

In addition, as the expert noted, the ruble is weak, the salaries of specialists are relatively small for investments, and the percentage of return on invested capital is quite large.

With the growth of investor competition in the international arena for good IT projects, the conditions for "entry" are deteriorating, which, in turn, forces some investors to include related industries in their focus, Vladimir Bubnitsky, head of the PwC Russia technology and innovation center, told Vedomosti.

The role of venture capital investments and their share in the total IT market financing is constantly increasing, notes Stanislav Kolesnichenko, Managing Director of Skolkovo Ventures.

The IT sector is certainly the beneficiary of such a shift and remains the most attractive sector for Russian and foreign venture investors, he stressed.

According to Kolesnichenko, investments in IT industries allow you to get a quick understanding of the success of a particular technological solution or a certain business model. In Russia, IT projects are popular for the same reasons as in the world as a whole, but these reasons increase the presence of political and country risks.

A short development cycle, lack of physical assets and easy team relocation are factors that help reduce these risks, Bubnitsky emphasizes.

It is natural for a large company to be present in rapidly developing markets for innovation and venture capital investments. One of the forms of such presence is a corporate venture capital fund and, based on the above statistics, we can say that the most common creation of a venture capital fund in these markets is characteristic of corporations in the field of information technology, explains the venture capital investor, founder of A.Partners Aleksei Solovyov.^[2]

2018

TAdviser: Corporate venture in the Russian IT industry

• Main article Corporate venture in the Russian IT industry

2017

J'son & Partners Consulting: Investment potential of the Russian IT market

What is the peculiarity of the Russian IT market, for example, compared to the telecom market close to it? The IT market is an information closed market, unlike the telecom market, about which a lot is known and understandable. At the same time, companies are very different from each other and, moreover, different revenues from different directions within the same company or group of companies are also very different. The multiplier of this revenue can differ by 10 or more times, so simply analyzing the company by the standard method in terms of revenue, EBITDA, growth rates, and so on, you can be very mistaken ^[3] of the ^[4]].

In this situation, analysis only on such formal statistics works poorly, so we used all our knowledge that we have accumulated over 20 years of research on this market, on the one hand, on the other hand, we relied not only on ourselves and attracted examples of IT companies (we did not try to do such statistical research), but we engaged 13 companies, conducted in-depth interviews with them to understand how our point of view on the market fits the point of view of those players who play in this market and form it.

If we look at the IT market, the first feature that distinguishes it from telecom, for example, the market, is that no one disputes about the telecom market about its volumes. The volumes that are called official statistics data - this is the Ministry of Economic Development and the Rosstat accountable to it - this is about 1.6 trillion rubles, no one raises any questions. No one argues or says that, for example, not 1.6 trillion, but 3.2 billion. For the IT market, this is not the case.

There are official data that the Ministry of Economic Development publishes annually, and we have reduced them to one schedule. For the first time, by the way, I don't know why, the state does not... And these numbers, a total of about 700 billion rubles. If we look at alternative reports that describe the IT market, we see that there are estimates twice as large as this market, for example, 1.3 trillion, 1.4 trillion.

The reason may be that, unlike the telecom market, the IT market does not require licensing. This is unlicensed activity, so the very concept of "IT market" is very vague. Someone includes some segments, someone does not include. It was very important for us to focus on the official figures of the Ministry of Economic Development, because a) it was important for us to look at what share in the economy, Russia's GDP is made up of individual segments in order to understand the growth potential that they have. This is on the one hand. On the other hand, these figures quite adequately describe the dynamics of the market, which is very strongly correlated with the interests of investors in the players of this market. The only thing we have removed here is from the blue part of the "service" of broadband Internet access, which partially sit... in IT services due to the peculiarities of statistics. We didn't do anything else here.

And here we see that three periods of the development of the Russian IT market can be distinguished, starting from the beginning of the 2000s. The first stage is the stage of rapid growth in volumes, which began sometime in the 99th year and lasted until 2008. Around 2004, 2005, the process of consolidating the industry and preparing for the IPO of large IT companies began. In 2007, these IPOs began, for example, the IPO Sitronics, the listing of IBS on the Frankfurt Stock Exchange and the IPO of another Russian company, a subsidiary of RBC. But then that process stopped. 2008 came, there was a sharp breakdown of the trend, and those IPOs that were being prepared, in particular, were attended by Alexei Ananyin, who was one of the conductors of the IPO of the combined company IBS Borlas, which was planned for the end of 2008 - the beginning of 2009. It was one of those IPOs that did not take place.

In fact, since then there have been no large IPOs of classic IT companies, I do not take Yandex, Bank Tinkoff here, there were none.. there were only two IPOs. These are IPOs of Luxoft and EPAM..., but these companies depend to an extremely small extent on the Russian market. They account for less than 10% of revenue in the Russian market, so this is an IPO of global companies that are incorrectly attributed to the Russian market. We see a very clear correlation between the growth rate of the market and the interests of investors.

Sometime in 2014, we began to notice signs of a rather significant internal transformation of the market, the transformation of its structure without changing volumes. This story may be even more interesting to investors than, in fact, growth.

Why? Because transformation is more relevant, the worse the situation in the economy, and quantitative growth occurs only with improvement, with the corresponding growth of the country's economy, which is not observed now. Here we can say that the internal qualitative transformation of the IT market is caused by the general stagnation of the Russian economy and is a long-term sustainable factor.

Now let's talk about the potential. It is very interesting to evaluate it in terms of comparing the shares of the corresponding segments of the IT market with the corresponding segments of the market, for example, in the USA. What do we see here? We start with a telecom market familiar to investors. Parity takes place here, when the share of the telecom market in the overall structure of the Russian economy and the corresponding share in the United States are almost equal. Does that say what? Firstly, this suggests that such parity is quite achievable under certain conditions, and secondly, that everything is fine with us from the point of view of infrastructure. From the point of view of broadband Internet access, telephone communications, and so on, the infrastructure is there, and it monetizes well.

If we go further, look at the IT segment, we see here that the situation is much worse. Moreover, if we divide this segment into user hardware, personal computers, laptops, and so on, then we will see that there is also approximate parity here. That is, everything is fine with broadband access, and with user equipment, but with corporate hardware, which is the basis for the next segment, it is much worse.

And

the worst situation, but at the same time the most potentially interesting is the share of IT services. This share is nine times less than that in the United States. What does that say? This suggests that if there was parity the same as for the telecom market, then the volume of the IT services market in Russia would be nine times larger.

This suggests that there are some very significant deterrents that do not allow this to be done, but if they are eliminated, just explosive growth is possible. And, again, the example of telecom shows that parity is quite possible.

We carefully looked at the IT services market. Here, if on the previous slide there were estimates of the Ministry of Economic Development, then here we made our own estimates using a completely different method, but it is surprising that the volumes coincided with an accuracy of 10%, which suggests that, probably, when assessing the volume of the IT services market, we were not very mistaken. I repeat that the methods are completely different, the results coincide. Here you do not need to pay very attention to these fluctuations in dynamics, these are just features of the methodology, but here this trend of rapid growth is also visible, only it lasted much longer here, until 2012, and then the transition to stagnation. The question arises - is this a ceiling or can something be done about it? If we look at the nine-fold difference in this parity and multiply by another fifteen-fold difference in the Russian and US economies, we see that

Therefore, it is interesting to look at the reasons why so? What's holding back? And, in our opinion, the main reason is that we have multiple less, four times less penetration... I also forgot an important point to say that if we look at the structure of this market, we will see that this market is mainly formed by services for the implementation of corporate software, business applications. These are ERP systems, these are ECM, PLM systems, and so on, all kinds of multi-user corporate information systems. That is, the volume of the IT services market is, in fact, the volume of consumption of multi-user business applications in Russia. It is practically possible to put an equal sign. So, our penetration of such systems in Russia is four times less than that in the United States, and this is what determines the difference in volumes. And why less? The fact is that we also have about four - five times the difference in labor productivity. What does it mean? This means that with the same headcount, the company's revenue in Russia is four times less. And this means, since the IT budget is considered from revenue, approximately 1% is that Russian companies of the same size have four times less money to finance IT.

The fact is that with the classic model of implementing business applications, there is a very large input threshold associated with the need to implement this application, which for a company of a relatively small size is an insurmountable obstacle. This bar in Russia is four times lower than that in the United States. In the United States, many companies pass over this bar, we do not have.

There is such a vicious circle when, on the one hand, we have low labor productivity, which is largely caused by a lack of means and the level of automation and optimization of processes, but the unavailability of automation means determines low labor productivity.

We need something that would break this vicious circle. It makes sense here to look carefully at what has been mentioned by previous speakers.

• a new paradigm for providing, deploying software applications that are conventionally called cloud applications, and
• to what is now called digitalization.

Let's see what implementation obstacles exist in the classic IT usage model. The first obstacle is the need to buy a license, that is, we must, not yet knowing the result of the implementation, spend significant money on the purchase of a license. The cloud model eliminates this obstacle, it provides the opportunity to pay for the actual volume of consumption and through constant payments, which significantly reduces this part of the barrier. Next. Even more significant costs are implementation costs. Firstly, according to statistics, they are about twice as much as the cost of licenses, that is, this is an even more significant barrier, while the announced implementation dates are approximately 21 months now, according to global statistics. This is a very long time, and in about half of the implementations, these deadlines increase significantly relative to the planned ones. This is the second very strong deterrent, which is also significantly leveled using the cloud model.

Why? Because the cloud model is a new deployment paradigm that does not involve such a heavy and complex implementation. Because, on the one hand, a different system deployment philosophy is used, that is, this is an approach from a predefined template to microservice architectures. This eliminates the human factor that is at the implementation stage. Because in almost the same enterprises, in which we chose the same software product and implemented it, the result was different implementations. The third point and obstacle is that even after successful implementation, the role of information systems consists in information support for decision-making, and not, in fact, in automating the processes themselves, that is, the person from these processes is not eliminated. There is still manual information entry, there is still a human factor, which is due to the fact that a person simply does not perform the process as it is laid down in the system.

This is where what is called digitalization begins, when a digital enterprise has an automation tool - this is no longer a means of information support, but what the process itself executes. We remove the human factor from this process, firstly, and secondly, we get data that has a point of truth, because the data in this system comes not from a person, but directly from those devices that are in this system. Here we get a result that a) significantly removes barriers to access to automation tools, at the same time significantly increases and improves the economy of such funds, the economic effect of such implementation, and at the same time it also removes risks, that is, here we can talk about that the proportion of applications that are used in cloud format is a marker of the level of digitalization, and it significantly improves the availability of sophisticated automation tools for a small company.

When we talk about penetration, it makes sense to speak in terms of classical.... What is it? This means that there is now an existing barrier of access, which is approximately at the border of medium and large companies, and you can see what will happen if this barrier moves, for example, to the level of small and micro enterprises. Green is painted over the market in monetary terms that exists now. Beliy is a market that can arise when this significant barrier shifts towards micro-enterprises, this existing volume is about twice as large, and another potentially huge market is if these applications can reach individual entrepreneurs and even households, because households can also be considered an enterprise. It has resources, procurement, finance, projects and so on. Here we see that the further the barrier of access towards small companies is shifted, the more such a market has. For example, if we look at the US market, we see that more than 50% of the total consumption of cloud services in the US is in small businesses. We see the same thing in Brazil, that is, there is a very clear relationship between the level of penetration and market volume.

Another significant factor that should also be taken into account when evaluating the company. The fact is that...

When a market is in the early stages of transformation, there are markets within that market - donors and markets - recipients. Actually, the decrease in donor markets is compensated by the growth of recipient markets, so we do not see a general increase in market volume.

But at the same time, what do we see? We see that the transition from the classic implementation model to the cloud significantly increases the share of added value that is created by Russian companies. This is exactly the factor that greatly affects the revenue multiplier. For example. If the classic deployment model, which assumes the presence of iron on the consumer side of the system, is now approximately 420 billion rubles, there is a very small share of the added value that is created by Russian companies. It is less than 15%.

If we look at the same infrastructure, but in the format of a cloud service, IaaS we will see that the share, despite the fact that this market is only about 8 billion rubles so far, the share of value added created by Russian IT companies is radically higher here. And the same situation with all other markets.

Separately, I note a large market, 208 billion rubles is a market that is no longer focused on the Russian market, but on exports, that is, this is part of the global market. This is also a very promising segment, but it is shown here conditionally, because this is not part of the Russian market. Let's look at how the Russian market for business applications can grow in terms of penetration. Now we see that the existing penetration of such multi-user complex business applications without accounting systems in Russia is only about 21%. These are data obtained through indirect estimates based on Parallels data, but we double-checked them according to our colleagues. In 2015, they conducted a very large survey of Russian corporate users of IT systems, for example, which proportion of them have such complex systems installed and who plans to install them. So, they got similar data, there was even less than 21% penetration. A very important point is that those who do not have these systems answered negatively to the question of whether they plan to implement such systems. This suggests that the onpremises implementation model of such systems has exhausted itself, that is, this potentially huge market can only be taken from the cloud model, because any other causes all these problems that I described, they make IT systems inaccessible to most Russian enterprises.

If these barriers are overcome, then what potentially achievable market penetration? If we had a penetration rate of such systems as in the United States in 2013, then the total penetration rate would not be 21%, but almost four times higher, 76%. This is the first growth potential, but not the only one. The second growth potential is that now the ratio of cloud locations and onpremises systems is about one to 10 in favor of onpremises implementations. The decrease in the share of onpremises implementation and the corresponding growth in cloud placement also contributes to market growth. An additional factor is, of course, the Digital Economy program. Here we separately note a new strategy that is focused on supporting this program, as well as measures to stimulate import substitution, measures to support Russian developers.

We made a forecast of the main markets, the main types of cloud services in Russia both in terms of penetration and in terms of growth in the volume of these markets in monetary terms. Two scenarios are presented here. The first scenario is conservative. This means that the market will develop as it develops mainly at the expense of companies' own funds, as is happening now. And a more aggressive scenario that assumes that external funding will be attracted. At the same time, if we look at the penetration line, an aggressive scenario, we will see that it is not aggressive at all, and in 2021 - 2023, it assumes that the SaaS penetration rate, excluding mandatory reporting services, will be less than 20%, and the IaaS penetration rate is slightly more than 15%. That is, from the point of view of revenue growth - yes, this is an aggressive scenario, because, for example, according to SaaS, revenue increases by more than 10 times, but from the point of view of penetration - this is not an aggressive scenario, it still has huge growth potential.

File:Исследование J’son & Partners Consulting Инвестиционный потенциал российского ИТ-рынка 2017 10.jpg

This is what the result of the conservative forecast looks like. We predict that segments focused on onpremises will shrink, but smoothly, that is, there will be no emergency fall, and at the same time segments that are associated with cloud models will grow. This is IT equipment as a cloud service, IaaS, it is software as a cloud service, while the supply of licenses and equipment for onpremises implementations and traditional IT services, which are focused on the implementation of onpremises, will gradually decrease. Why is this a conservative scenario? Separately, we highlighted this basic component to assess the significant attractiveness of IT companies, this is the dynamics of added value, which is set by Russian IT companies. Here we predict a slight decrease in value added, which arises due to resale of software and hardware, and at the same time there is a stable increase in value added, which arises due to IT services and software development. Why so small? Because the growth of the cloud component will be offset by some decrease in the onpremises component.

So, indeed, the small size of the Russian IT services market and, in fact, corporate information systems is a serious limiter in the situation of the actual absence of Russian IT companies in the external financing markets. By the way, this very much distinguishes the Russian market from the US market, where it is very difficult to find a large successful IT company that would never attract external financing. Rather, our situation is the opposite, out of a huge number of quite successful companies that have never resorted to this.

This means that almost the only source for the development of new products and services for Russian IT companies is now its own funds. This very much restrains the dynamics of the development of even the domestic Russian IT market, on the one hand.

On the other hand, very significantly impedes the entry of Russian companies into the global market. Why? Because the old markets of large volume, there is very high competition, they are low-margin, respectively, they have a very limited source of their own funds for development, and new, albeit much more marginal, but they are very small in volume, because our transformation began with a significant delay relative to the world.

In our opinion, a very favorable situation is currently developing for the entry of capital of promising IT companies.

That is, on the one hand, it is necessary, indeed, on the other hand, you can get the most out of it. Yes, indeed, individual companies are now ready for an IPO, but the largest part will be ready for this only in three to five years. Because, once again, promising markets are still very small, and old markets do not create revenue that is interesting to both sides. Obviously, during this period from three to five years, close contact between potential investors and IT companies themselves is needed so that a transparent strategy for the development of IT companies is developed, which will be understandable to investors.

2016

IIDF data

At the request of Inc. The Internet Initiatives Development Fund (IIDF) collected statistics on all transactions in the IT and Internet segment on the Russian market for 2016 and the first quarter of 2017. The data obtained clearly show who in Russia is now investing in startups and in which areas they invest most actively. Based on the numbers, we made an infographic - it will help novice entrepreneurs understand who can turn to for money for their business^[5]

Accelerators (primarily IIDF) and business angels (private investors) demonstrated the greatest activity during the period under review - 102 transactions each. Private funds entered into 99 transactions, here we also took into account the transactions of the IIDF, in which the fund acts as an investor in the later than sowing stages. Companies and corporate funds have made 66 transactions, including the partial or full purchase of companies by strategists. Funds and accelerators with state participation funded 23 startups.

However, in terms of project financing, the picture is diametrically opposite. Most of the money in the Russian venture capital market was spent by companies and affiliated funds (about 20.9 billion rubles) and private funds (20 billion). They are followed by private investors (3.2 billion) and accelerators (about 323 million). This is explained simply: accelerators and private investors usually invest small amounts in the early stages of startup development, and funds and corporations invest in later stages and larger checks. State funds invested only 724 million rubles. The small funding from the state is explained by the fact that most state funds - such as the Bortnik Foundation - invest in science-intensive projects in the form of grants, not counting on a return on investment.

Over the past year and a half, investors have most often financed various solutions for automating and simplifying business - from electronic document management to corporate medical services. More than 100 transactions were made in this area. Investors are also interested in projects in the field of e-commerce (food and food delivery, car sharing and other services paid for online or through applications) - about 80 transactions. The rest of the spheres are significantly lagging behind. Thus, startups related to medicine concluded 17 transactions, projects in the field of the "Internet of Things" - 21, companies working with advertising technologies - 26. Investors remain interested in the field of financial technology (20 investments) and educational projects - 18 companies have been financed.

Interviewed Inc. investors agree that some kind of "life" in the Russian market is "warming." However, the direction of the Russian venture remains unclear.

Statistics and comments by market participants show that sentiment is still rather pessimistic. Thus, the MoneyTree study (conducted annually by PwC) showed that the total size of the Russian market for high-risk investments in 2016 decreased by 29% - from $232.6 million to $165.2 million, and the number of concluded transactions increased very slightly - from 180 to 184. At the same time, transactions that amounted to less than $50 thousand were not taken into account - they are reflected in the statistics of the IIDF. It is the "angel" transactions that now make up the bulk of all activity in the venture capital market.

According to the annual Venture Barometer survey, in 2016, the optimism of Russian investors decreased. As part of the study, respondents were asked how the number of transactions in Russia will increase by 2022. In 2016, 34% of Russian investors predicted significant growth (in 2015 there were 40%), and a slight increase - 43% (in 2015 - 13%). On the other hand, in 2015, 25% of respondents expected a "significant decrease" in the number of transactions, and in 2016 only 6% held this opinion.

Russoft data

At the end of 2016, 11% of the surveyed companies managed to attract investments. This figure was higher only in 2012 (12%), and in 2013-2014 it decreased to 7%. The growth of this indicator began in the crisis of 2015. This year, service companies began to expand, which gained an additional competitive advantage in foreign markets due to a sharp decrease in the cost of software development in dollar terms. Additional investments were also attracted for the upcoming import substitution in the Russian market.

The volume of investments RUSSOFT was calculated by the Association based on the data of the annual survey of software company managers for the first time in 2016, since in previous years the respondents did not indicate the volume of attracted investments, but only the fact of raising funds. The change in the questionnaire made it possible to determine that the total investment in the software industry Russia in 2016 amounted to approximately $335 million.

The expected volume of external investments in 2017 and 2018 should be about $1 billion. However, in reality, the value is likely to be lower, since in previous years, companies' plans to attract investments were fulfilled no more than half. From year to year, 20-25% of the surveyed companies expected to receive money over the next two years, but in reality they received only 7-12%.

At the same time, a 2017 survey showed that companies are more realistic about the prospects for attracting investments in the foreseeable future. At the end of this year, only 14% of respondents predict receiving external funding, and not 20-25%, as before. Investments in the industry should grow not so much by expanding the circle of their recipients, but by increasing the average amount of external funding attracted per company. Almost two-thirds (62%) of all software developers who received such funding in 2016 count on it in 2017, but with an average 2.5 times increase in investment per company.

Most often, investments are attracted by regional and St. Petersburg software companies that are focused on foreign markets (especially those of developing countries) and were created no more than 10 years ago. However, in absolute terms, the capital's companies still have a much larger volume of attracted investments.

With all the improvements identified, for regional companies and for the entire software industry, the lack of investment funds remains one of the key development problems. The expected amount of investment attracted only reflects the plans of companies, which they consider quite realistic. The real need for external funding is much greater (most likely, several times). Therefore, it can be said that every year the industry needs billions of dollars in investment.

The following somewhat paradoxical situation arises: in Russia there is a huge unmet need for investments from software companies with a significant amount of free funds from enterprises in various sectors of the economy. At the same time, the owners of these enterprises are already interested in the possibility of investing in the IT sector, but do not know how to do this. Available free funds in other industries can fully cover all the current needs of software developers and other high-tech enterprises. Especially if you take into account the capital formed in the oil and gas industry.

The inter-sectoral capital flow is hampered by the fact that there are very few specialists in Russia who know foreign markets and are able to assess the prospects of new software products being created. The corresponding examination is concentrated in the United States and in a number of countries (for example, in Israel). This is partly why Russian startups are moving to where there is such expertise. They receive investments there, open companies, although development remains most often in Russia. American venture investors tend to require them to change jurisdiction. With rare exceptions, they are not ready to invest in a purely Russian company due to geopolitical risks.

The Russian venture capital funds also lack the necessary expertise, which went not along the path of its expansion, but along the path of expanding the geography of their activities, largely reorienting themselves in the last 2 years from Russia to other countries. The number of Russian specialists who know foreign markets and have product expertise is gradually growing, but this growth needs to be significantly accelerated.

PwC data

The information technology sector attracted the most venture capital investments in Russia. IT has become the subject of 110 venture capital deals, that is, 70% of all such deals concluded during the year. At the same time, the total amount of investments in IT amounted to $149.6 million, or 90% of all investments of this type. The rest was invested in biological and industrial technologies. These conclusions were reached by PricewaterhouseCoopers (PwC), which investigated the Russian venture capital investment market.

According to PwC, the number of venture capital transactions in the IT sector increased in 2016 by 13% compared to 2015, when there were 97. The company explains this by the fact that the importance of IT in various areas of the business is constantly growing, so investors are increasingly willing to invest in technological transformation.

However, the total amount of transactions compared to the previous year decreased by 27% - in 2015 it amounted to $2.1 million. According to PwC, the reason was the decrease in the average value of one transaction: in 2016 this figure amounted to $1.4 million, while in 2015 it reached $2.1 million.

Investment across IT

Most venture capital funds in 2016 were invested in cloud technologies and software - the amount reached $41.8 million, that is, 28% of the total market volume. In 2015, the most funded area was e-commerce, which received a total of $73 million for the year. PwC explains the change in the leading direction by the fact that technologies in e-commerce have already reached the required level of development. Accordingly, the challenges of translating data into clouds, securing that data, and building the necessary software have come to the fore ^[6]

The top three IT areas in terms of investment also included technologies in the financial sector (fintech) and reference and recommendation services along with social networks. In 2016, they received $15 million each, that is, 10% of the total amount of venture capital investments in IT.

As for the number of transactions, cloud technologies are also the leader here, which accounted for 19 transactions in 2016 - 8 more than in 2015. The top three are closed by e-commerce and advertising technologies - 13 agreements were concluded in these areas. PwC notes a sharp increase in investor interest in advertising technologies - in 2015 they were the object of only 2 transactions.

The largest average transaction value was noted in the tourism subsector - $3 million with 4 agreements. The second line is occupied by telecommunications - $2.7 million with 4 transactions. In third place are cloud technologies and software - $2.2 million with 19 agreements.

The largest IT venture agreements in 2016 are deals made by GridGain Systems (Gridgain Rus) and NGINX. GridGain Systems raised $15 million in February from investors such as Sberbank, as well as funds from Almaz Capital, MoneyTime Ventures and RTP Ventures. NGINX received $8 million in April from Runa Capital, Telstra Ventures, NEA, e.ventures and Index Ventures.

IT Investments by Segment and Quarter

Of the $149.6 million in venture capital investments in the IT sector, most of it was spent on business expansion - about $86.9 million. Seed investments amounted to only $3.7 million, financing startups - $7.9 million, investments at an early stage - $51.1 million. In general, sowing and startup received 8% of funds, more mature investments - 92%.

If we talk about the number of transactions, then in 2016 early stage investments are leading - this segment accounted for 53 agreements. There were 16 seed deals for the year, 12 startup agreements, 29 expansion agreements. Startups are the only segment where the number of transactions has decreased: in 2015, their number reached 16.

According to PwC, the fact that investors invest mainly in the late stages of IT projects indicates their caution. This caution is caused by uncertain macroeconomic indicators, against which investors prefer "understandable" IT products and already tested business models.

Almost half of the IT venture capital investments that fell in 2016 were placed during the first quarter: $54.5 million in 26 transactions. The second, third and fourth quarters accounted for 27, 31 and 26 agreements, totaling $31.9 million, $34.7 million and $28.5 million, respectively. In 2015, investors most actively invested in IT in the fourth quarter.

2015

Data from the Internet Initiatives Development Fund

The Internet Initiatives Development Fund (IIDF) published in February 2016 a report on the state of the Russian direct and venture capital investment market in the Internet and Information Technologies segment for 2015. The overall market dynamics are descending. The market decreased by 43% in terms of investment at all stages and by 20% in terms of the number of transactions.

The average transaction value in 2015 was p152 million against 210 million in 2014. Thus, the average transaction amount decreased by 29%.

"This is due to a surge in activity in the late rounds in 2014. Compared to 2013, in 2015 the average transaction amount increased from p129 to p152 million," the researchers explained.

Compared to 2013, there was an increase in investment volumes by 1.2%, while the number of transactions decreased by 14%^[7].

Deal Structure

At the pre-sowing stage, the number of transactions in 2015 decreased by 7%, and the volume - by 5%. The average volume of the transaction at the pre-sowing stage remained at the level of 2014 and amounted to p1.64 million.

At the sowing stage, there was a decrease in the number of transactions by 14%, but an increase in the amount of investments by 17%. The average volume of the transaction in 2015 increased by 36% to p24.75 million.

The growth of transactions at the pre-sowing stage in 2014 affected the growth of transactions at the sowing stage in 2015, as, according to investors, the number of high-quality startups increased.

A similar situation with transactions in round A: the number of transactions decreased (by 36%), while the amount of investments increased (by 10%).

In the late rounds, the volume of investments decreased by 48%, and the number of transactions - by 62%. "The average amount of the transaction in 2015 increased by 38%, but in general we see a downward trend in both the number and volume of investments. The reduction in transactions and volumes at late rounds and the simultaneous growth of investments at the pre-sowing stage show a tendency to increase the life of the project in the status of a startup and attract investments at earlier stages, "the authors of the report explained

.

Geography of investment

In 2015, the number of regional startups grew, which led to a reduction in the share of Moscow from 71% to 56%, and as a result, the share of the central federal district by 11% - from 73% to 62%. The share of Moscow from transactions of the central federal district amounted to 91% in 2015.

Among cities, St. Petersburg (12% of the total number of transactions in Russia), Yekaterinburg (4%) and Kazan (3%) retain their leadership. A large share of IIDF investments in 2015 fell on the regions - 61%.

Industry Investment Distribution

In 2015, the largest investments were in the following industries: business solutions (31%), e-commerce and recommendation services (19%). There was interest in investments in the Internet of things (if in 2014 the share of this industry was 1%, then in 2015 - 7%) and medicine (an increase from 1% to 4%, respectively). "The increased number of invested projects in these industries indicates a strengthening of the declared trends. We can expect that these industries will become market engines in 2016, "the researchers commented.

2014

Data from J'son & Partners Consulting

According to J'son & Partners Consulting research, the volume of new funding in the venture capital market of the Russian Federation with the participation of ICT projects decreased by 16.8% compared to 2013 and amounted to $122.5^[8].

In 2014, 182 transactions were made in the venture capital market of the Russian Federation with the participation of ICT projects, among which 138 transactions in the amount of $74.7 million belong to the segment of Internet services. The most popular in this segment were SaaS projects, advertising platforms and marketing services, primarily in the field of B2B.

In 2014, the mobile applications segment of the Russian venture capital market raised $23.5 million by 29.8% more than in 2013. The number of completed transactions in this segment in 2014 decreased by 17.6% to 28. Among them are several projects to increase the level of linguistics, recruitment portals. Analysts noted the prevalence of B2B projects in these segments.

In the segment of e-commerce of the venture capital market of the Russian Federation in 2014, 32 transactions were completed in the amount of $90.2 million. In 2013, 43 transactions worth $163.6 million were completed in the e-commerce segment.

J'son & Partners Consulting estimated the amount of new funding in the venture capital market of the Russian Federation in 2014 at $258.2 million, which showed a decrease of $88.8 million compared to 2013. The number of transactions decreased by 14. According to analysts, the market contracted due to the increasing risks of venture projects, and financing rose significantly - as a result, banks closed limits on lending to risky projects.

PWC Data: IT Sector Leads in VC Volume

The volume of the venture capital market in Russia amounted to $480.9 million in 2014. The IT sector was leading in the number of venture capital transactions and the amount of attracted investments in the reporting period, PricewaterhouseCoopers and the Russian Venture Capital Company (RVC) reported in their research.

The number of venture capital transactions in the IT sector in 2014, compared to the previous year, decreased by 31% and amounted to 133 transactions with a total value of $440.6 million. The average deal size in the sector has not changed and amounted to $3.3 million.

Among the IT subsectors in 2014, the e-commerce segment was the leader in terms of the number of transactions, the amount of investments and the average transaction amount. In this subsector in 2014, 25 transactions were recorded for a total amount of $96.4 million. The second place in terms of the number of transactions is shared by reference services and social networks, advertising technologies and cloud technologies/software.

Map of transactions in the Russian Internet segment 2012-1P2014

The map of transactions in the Russian Internet segment of 2012-1P2014, presented in August 2014, is based on the international database on the venture capital industry CB Insights and includes transactions with Russian Internet companies over 150 thousand dollars for the period from January 1, 2012 to June 30, 2014.

The CB Insights methodology assumes a smaller division by segment than most Russian analytical companies. Thus, the Internet segment according to the CB Insights classification does not include: startups and companies engaged in mobile applications, mobile commerce, Wi-Fi, devices and communication technologies (included in the Mobile & Telecom segment).

During the 2012-1P2014 period, 17 investor/owner exits took place in the Russian Internet segment. At the same time, five of them - in the first half of 2014 (Finparty.ru, Delivery Club, Auto.ru, VKontakte, IT Invest).

Double click to enlarge

In 2012-2013, about half of investments in the Internet segment accounted for the sowing stage (52% of all transactions). The average deal size at this stage was $0.65 million, the most common - $0.45 million.

In total, according to CB Insights, Russian startups attracted $231.7 million in investments in the first half of 2014.

The largest transaction after VKontakte transactions (Tavrin - VK (formerly Mail.ru Group)) was Yandex's purchase of the auto.ru portal (the announced transaction amount of $175 million) and the acquisition of an additional issue of Ozon ( 10.8%) for $150 million AFK Sistema and MTS.

Large transactions in the first half of the year took place mainly in the e-commerce segment: in addition to Ozon.ru, this is the acquisition of the food delivery services aggregator Delivery Club by the international group of companies Foodpanda, transactions Naspers - Esky.ru, Vaizra Capital - Ostrovok, Kinnevik - Avito, IFC - Lamoda.

In the world, the Internet segment accounted for $ 1 billion of investments in the 2014 half of the 23.93, which is 110% more than in the first half of 2013.

The average transaction size in the Internet segment in the world in the second quarter amounted to 10.2 million, the most common - $1.7 million. In Russia, $21.45 million and $1.9 million, respectively.

2012: E-commerce is investors' top target

Expectation of 50% growth

If favorable conditions remain in the Russian and global economies, the Russian venture capital market will continue to grow and reach new records in 2012. According to PwC and OJSC RVC"" (June 2012), the volume of venture investments in the Russian IT sector in 2012 may grow by more than 50% and exceed $450 million. USA

"A large number of projects that received seed money in the last 12-18 months have already grown and need further funding to consolidate the successes achieved, enter the market, scale the business. Against the background of the general high activity of Russian and foreign venture investors in Russia and the emergence of a large number of new players, many of these companies have a good chance of attracting the next, larger rounds of investments this year, "said Anton Abashkin, head of the PwCAccelerator program in Russia, PwC Technology and Innovation Center

.

"The further development of the venture capital market in Russia will be facilitated by both an increase in the number of investors in the market and an expansion of their specialization," said Igor Agamirzyan, General Director and Chairman of the Board of RVC OJSC. "We expect that as the market develops, qualitative changes will continue - in particular, the market will become more transparent, and investment and corporate governance standards will approach the level of developed countries

."

Rating of Russian-speaking Internet millionaires

In 2012, the publication "Secret of the Company" prepared a rating of 50 Internet millionaires from among Russian-speaking entrepreneurs.

December 2012:25 deals for $170 million

December 2012 became a rather busy month on the market - during this period, the largest number of transactions for the year was recorded and the most funds and incubators also appeared. At the same time, the industry is still developing unevenly and its background is determined by the 1-2 largest transactions for amounts exceeding a third of the total investment in the market, and not by several dozen transactions for smaller amounts, but totaling up to 20-40% of the market, which is typical for the developed venture capital market.

Unlike in previous months, banks and large startups that have been able to acquire assets or teams are active. The hottest topic for investment was the financial sector, which is developing in line with the construction of infrastructure for the already active developing domestic e-Commerce direction.

Analysts of the Russian venture capital market for December 2012 are presented in the StartupAfisha infographic^[9]. In total, in December 2012, 25 transactions were concluded in the amount of $170 million. In addition to e-commerce (28%), advertising and search (20%), content projects and SaaS (16% each), as well as finance (12%) and IT in medicine (6%) also became popular areas.

2011:139 deals for $237 million

Entire IT sector: RVC study

In 2011, the IT sector accounted for the vast majority of venture capital investments in Russia. Among the leading areas in terms of attracted investments were e-commerce, as well as projects related to online entertainment and social networks.

According to a study by PwC and RVC OJSC, the total volume of venture capital investments in the Russian IT sector in 2011 amounted to $237 million. United States, which was obtained through 139 transactions.

The full text of the study for 2011

The Russian venture capital market is characterized by heterogeneity: on the one hand, it is represented by a large number of small, unaccountable private investments in projects at the earliest stages and, on the other hand, by a number of large transactions involving companies that have already achieved success. The analysis of PwC and RVC OJSC did not include the majority of transactions of less than 50 thousand dollars. US and large transactions of more than $50 million. The United States, which is not systematic to date, as well as grants, which are a non-market tool for financing innovative companies.

According to various estimates, up to 50% of the market may be unaccounted for due to the closed nature of transactions.

Geography of investors

If we talk about the geography of investors, although investors from Russia are expected to be the main driver of the development of the Russian market (they took part in 74 transactions), it is interesting to note a considerable number of transactions involving foreign investors, including:

• from the United States (14 deals),
• Germany (8 deals), and
• France, Canada, Sweden and Switzerland (total - 6 transactions).

IT VC Analysis by Sub-Sector

The leaders in attracting investments in 2011 were projects that were somehow related to e-commerce. This subsector accounts for 33 transactions, in which investments worth about $107 million were attracted. USA

In terms of the number of completed transactions, this is followed by venture projects related to entertainment and social networks: 31 transactions and $57 million. US attracted investment. In third place in terms of the number of completed transactions are projects related to the use and development of cloud technologies: 29 transactions. Despite the high activity in this subsector, the volume of venture investments in the framework of these transactions amounted to only $17 million. UNITED STATES. Projects related to the development of services for working with information and its exchange, as well as distance learning services, attracted about $33 million in 2011. The United States - under 21 transactions.

IT Venture Investments by Project Phase

Analysis of the distribution of venture capital investments by stages of the life cycle of invested projects showed that more than half of the total number of transactions (77 transactions) were transactions to attract venture capital investments by companies in the "sowing" stage, and almost a quarter (34 transactions) - by companies in the "startup" stage. At the same time, the volume of investments attracted amounted to only $30.6 million. US $38.8 million United States, respectively.

The largest investment, $94 million as a result of only 16 transactions, was attracted by companies and projects in the "early growth" stage. These figures are characteristic of the young Russian market of innovative technology companies, the main activity on which began only a few years ago and where until now there was a predominantly need for "start-up" investments.

Internet Companies: Fast Lane Ventures Study

In June 2012, Fast Lane Ventures completed a study on financing Russian Internet companies and startups in 2010-2011. The study presents more than 270 transactions on the Russian Internet with complete information on the date, amount of financing and investors. The most complete information on grants, investments of the seed stage and subsequent rounds, as well as exits and purchases of shares of companies, is collected.

Full text of the study in one file here

In 2011, the number of transactions increased by almost 3.6 times (215). The total investment in "young" Internet companies and startups grew to $540 million, which amounted to 26.7% of the total market volume ($2.15 billion, taking into account Yandex IPO, purchase of a stake in VKontakte by Mail Group, ruNet investments, Rakuten and Index in Ozon). Despite the positive dynamics, the Russian Internet market continues to remain opaque. According to Fast Lane Ventures experts, the volume of non-public transactions in Runet is approximately equal to the amount of public information on which is open.

"We know not less than about 100-150 sidovy investments which are carried out by angel investors and non-public holdings and 20-30 large investments (for example, now.ru, wildberries.ru, bonsport.ru, autoscout24.ru, promenad.ru, bigbuzzy.ru, mebelrama.ru, holodilnik.ru, booking.ru, quto.ru, zvooq.ru, bookmate.ru, t&p.ru, etc.) on which all financial information is absolutely closed", - Andrei Kulikov, the senior investment analyst of Fast Lane Ventures comments.

Taking into account these transactions, the total investment in Russian Internet companies and startups could amount to about $500 million in 2010 and $1 billion in 2011.

The past two years have shown a radical rise in investor interest in seed-stage internet startups. The number of companies that received start-up investments in 2011 increased by more than 4 times compared to 2010 (22 transactions 2010 - 91 a transaction in 2011). The total seed investment in 2010 amounted to $8.7 million and 14.1 million in 2011.

Also during this period, an unprecedented increase in grant funding can be observed: over two years, 61 startups received more than $20 million in grants (until 2010, this figure sought to zero).

Against the background of a noticeable increase in investment volumes at the seed stage, financing of later rounds and going out of business do not show the same positive dynamics and rather represent a "bottleneck" in the investment process. RuNet An analysis of 8 deals that could qualify as exits found that half of them were acquisitions of teams and technology. Only two transactions can be considered full-fledged "success stories": the purchase Darberry by the company Groupon and Qik by the company. Skype

According to Andrei Kulikov, "Today - due to a noticeable increase in investor interest and infrastructure development, young entrepreneurs have more and more opportunities to" start "a business, but there is no need to count on" easy money "after the start. The creation of Internet companies in Russia is not much cheaper than, for example, in the United States, and investors' expectations for returning investments are quite comparable to America and Europe. Therefore, Russian Internet builders creating new businesses in a much smaller market will have to make a lot of efforts to get funding in later rounds. "

E-commerce remains the main object of investment and the main driver of the growth of the Russian Internet. The analysis of the largest transactions confirmed the commitment of investors to proven business models and leading companies in their segments. At least half of the top 10 investments, including VKontalte, Darberry, Avito, Kupivip and others, are analogues of Western business models.

The key issue of the coming years is the pace of development of the Russian venture infrastructure: will it have enough resources to continue investing in both newly launched and more mature businesses financed during the study period.

2010:59 Deals with Internet Companies

• In 2010, 59 transactions were conducted on the Russian Internet market. $225 million was invested in "young" Internet companies and startups, which is 17.3% of the total investment in Runet, taking into account the two largest transactions involving mature business: IPO Mail Group and purchase of a stake in VKontakte by Mail Group ($1.3 billion). Fast Lane Ventures Data (June 2012)

• Dmitry Chikhachev, managing partner of the Runa Capital venture capital fund, says that "in 2010, venture capital and private equity (direct - approx. CNews) transactions worth about $1.5-2 billion were officially announced in the IT and telecommunications industries." This amount includes investing at all stages of projects: from sowing to late. If we count only the IT industry, then the volume of investment in it at an early - venture stage - amounted to about $200 million.

Yuri Ammosov, Research Director of the Ernst & Young Innovation and High Technology Center, estimates venture capital investments in Russian IT in 2010 from $70 to 200 million. More precisely, the expert says, "it is impossible to assess due to the inconsistency of the data on this market."

Notes