Corporate venture in the IT industry of Russia the Research of TAdviser

Premises of a research

The relations of large corporations and startups in the Russian Federation considerably changed during 2016-2018. As volume (monetary, number of the corporations and startups involved in interaction with each other), and forms of this activity are rather considerable and various. The administrative initiative of the leadership of the Russian Federation about priority creation in state corporations and the companies with state participation of "the special divisions and venture funds performing investment into small innovative companies of corporate venture funds" also fell on this period.

In October, 2018 the government commission on innovations literally demanded from corporations – and not only state, but also private – to buy startups. According to the Deputy Prime Minister Maxim Akimov, a different way to provide the innovation growth the power does not see:

Most the global companies go to this direction, they already not so much direct the operating activities how many they buy startups worldwide, look for new technological solutions. Today it was discussed how to make so that to it there was a taste at the Russian companies, not only large, such as Rosatom, Rostec or Russian Railway, and first of all at medium-sized companies with revenue from 500 million to 4-5 billion rubles.

The Deputy Prime Minister Maxim Akimov considers that corporations should have a taste to investments into technology startups

But at the same time anybody has no understanding that now is created in this market: even the number of "corporate transactions" in different analytical reports a miscellaneous, and a situation in the market they describe very foggy if at all concern it. All analysts consider IT sector the most active, but his understanding also is exhausted by it. Tadviser together with researchers from MIPT decided to close this space.

The analytical center TAdviser directed in a row corporations the list of questions concerning the strategy of corporation for startups. We obtained the most detailed information from holding "Lanit", detailed answers also provided us SberbankRostelecom PJSC " and corporations, "Softline" and "1C". The materials received by us rather fully outline the general and private aspects of corporate strategies (completely cases of corporations are included in the unrolled report).

Besides, we processed databases of TAdviser on transactions of IT startups with corporations and on an IT industry personnel.

Strategy

Between the strategy of corporations for startups which we considered there is a considerable variety of approaches and the purposes. In the range of this variety the general sign for all strategy is that they rely on features of core business of the company, its competence and other specifics. All of them can be carried to type of corporate and venture. The studied strategy have no signs net strategy M&A (mergers and acquisitions – merges and acquisitions), net ecosystem strategy (not investment partnership for expansion of products and the markets).

Philip Gens, president of Lanit Group:

We prefer to invest in high-tech startups at an early stage because we at this stage can bring them a benefit maximum – to create strategy, to enter in an ecosystem, etc. We adhere to this tactics several years and we help startups to reach such level when they can work effectively and independently. The payback is reached through a dividend flow and capitalization (sale complete or partial). In our country venture, share infrastructure for financing of the growing companies is poorly developed, and there is practically no opportunity to do new rounds on more appreciation as it is accepted in the world.

Traditional corporate and venture strategy provides what corporation first of all interests how startups stimulate its core business. It distinguishes it from activity of venture funds whose strategy provides long-term (3-5-7 years) investments of "financial" type - i.e. security purchases without the purpose of control and with an exclusive task to sell them much more expensively than purchase price.

The most net ecosystem strategy at all levels from sorted by us – at Sberbank. Ecosystem approach is provided as strategy (stated purpose), as the control circuit (the key part in decision making is assigned to the head of Directorate on development of an ecosystem of SberX) and as the actual order of decision making and allocation of the capital (direct transactions of the considered period and an accelerator).

Mark Zavadsky, vice president of Sberbank:

The main criterion – a product should add or expand the Ecosystem of services of Sberbank potentially. Of course, Sberbank also looks at a command of the company and growth of its indicators.... In some cases Sberbank is interested to purchase the company and to develop services on this "base", in some cases – it is interesting to Sberbank to become the partner and to join in in key points.... The Ecosystem includes not only subsidiary companies, but also partners of Sberbank.... each large company wishing to remain the leader in the segment should look narrowly at such tool as building of investment.

Rostelecom where criteria of product synergy, compliance to strategic problems of business development, "a digital sandbox" for testing of products are provided adheres to similar classical corporate and venture strategy. And in general the complementarity of a startup to the existing and planned business of Rostelecom is recognized for a necessary condition.

Denis Ryabchenkov, development director of technology partnership Rostelecom:

Projects should be complementary to business of Rostelecom, enrich a product portfolio of the company. Work of Kommit Capital is directed to gain of product synergy and mutual penetration of technologies. A task of Kommit Capital in creation of added value of joint product solutions. An important factor for decision making about investment into projects - their stage. Rostelecom is interested in partnership with upcoming business, we do not invest in hypotheses. Also important technology factors of the project - a command and scalability of solutions

1C describes the strategy as creation of joint ventures – that in practice is expressed mainly in purchase of a share in 51%. Profit on operating activities is recognized as the only purpose of these joint ventures; the capital revenue, possible divestitutra and other investment transactions are not of to group of interest. According to the statements of 1C, the conglomerate from the small companies shows big growth rates as founders retain operational control behind business and interest in profit, at the same time getting access to resources and opportunities of new parent company.

Alexey Kharitonov, head of department of promotion of economic programs of 1C:

To us compliance of market area in which we work is important. The possible synergy with our main directions and also as far as the fact that it does the created joint venture, can contribute to business development of our partner franchisees is very valuable (for example when created the joint venture from SmartWay, it was important that our franchisees will be able to offer clients not only automation of basic processes, but also outsourcing of services in business trips now)

The Lanit system integrator where the synergy extends to customers and clients adheres to more flexible strategy, own sales volume of a startup is among key criteria, and heads of corporation emphasize that the experiences and competences acquired by corporation are applied to stimulation of growth of portfolio companies (including in specific successful cases).

According to the vice president for investments Denis Sitnikov, Lanit Group invests in projects where is:

• command with entrepreneurial experience,
• the product/solution, potentially having considerable sales market,
• the product/solution which is tested by one of our companies (as the customer or the partner),
• target profitability is more than 20%,
• possibility of synergy with Lanit group.

For us one of the most important selection criteria of projects is our opportunity in the current market situation to add value to the project and group in general, having increased sales and a cash flow: capitalization of business is a long-term goal, to it it is necessary to go consistently. Besides, at the expense of startups it is important to us to increase competences and to create the products answering to requests of clients in the field of digital transformation, - Denis Sitnikov notes.

Approach Softline combines elements of a corporate and financial venture, the corporation is guided by growth which moves the market, and for the role as the mentor and the guide of startups to IT market. Even lexicon of heads reminds a manner of venture capitalists, but not corporate managers more. It is possible to assume that Softline is in process of informal development of the IT distributor in the hybrid model combining business of venture fund.

Dmitry Polyakov, associate director of Softline Venture Partners:

If "startup" represents, for example, the modern platform which facilitates conditions of interaction between us as integrator and the current vendors, at the same time leading to significant economy of financial resources both from our party, and from our partners, then such products will have a special priority in our "funnel" of projects. Such projects are in a portfolio of fund...... We are a universal investor, acting, in fact, and as corporate fund which selects projects for further integration into sales channels of Softline and as stand-alone the investor focused on purchase of the companies for the purpose of "ekzit" in the medium term.

This distinction of approaches is shown also in what shares buy corporations and what their plans for the future. Softline is guided in a considerable measure by income acquisition from sale of portfolio companies while 1C – on control and operating income, and Rostelecom – by control and the cumulative economic effect. Lanit solves problems in flexible forms, selecting them under a situation.

Investments

For 2016-2018 corporations invested 126 times in 122 different startups in information technology field. The total amount of transactions which financial conditions were opened by participants exceeded 419.5 million US dollars (in an equivalent in all currencies at the rate of on trade date), and taking into account assessment of the possible amounts all of transactions which financial parameters were not disclosed, could reach the amount of 533.7 million US dollars.

On number of the announced investment transactions of all with a big separation outstripped the companies of group AFK "Sistema" (17 transactions) and Sberbank (10 transactions). On the volume of transactions the leader with a big separation is Mail.ru due to a large number of expensive acquisitions. The largest transaction of Mail.ru, Delivery Club (100 million dollars, November, 2016), makes nearly a quarter of the total amount of transactions for 3 years.

Classes of investment transactions

Venture investments of corporation can solve two problems: first, to provide to a means startup on development, and, secondly, to consolidate control over a startup. These are, certainly, not mutually exclusive events as control arises anyway due to acquisition of a packet of securities.

The most essential distinction of transactions – on the seller of securities. It defines where money from the transaction will arrive. If a seller is the startup issuer, then means will be at disposal of the company and will arrive on its development. If securities are sold by their owner (the investor and the shareholder) – that the startup from sale of this packet of securities will not get money. Transactions of the first type – primary as the buyer becomes the first owner of securities. Resale of securities between shareholders is a secondary market in which the startup does not participate.

Primary transactions are corporate investments in a strong sense of this word. Only the money received from primary transactions is the budget of growth of the new directions in digital economy.

The distinction of primary (investment) and secondary transactions is important not only in terms of economy of a startup and tasks of corporation, but also for assessment of total amounts of the market.

Transparency of the market of corporate investments

Key problem in market research of corporate investments – unwillingness of the parties to open financial terms of transaction (capitalization of a startup to or after the transaction, the amount of investments, the investor's share). Any of investors to whom we appealed to provide the list of transactions, did not grant our request. Only one of corporate groups commented on our request, having sent us to the third party (website crunchbase.com), the others left a request in general without answer. Thereof the base of transactions was on public sources.

Transactions in primary market are much more transparent, than the secondary market transactions. In primary market the volume of 76% of transactions are disclosed; for only secondary 38%. The reason of it is unknown, and possible explanations do not instruct on what volume there can be these transactions. If sellers (among whom there are many well-founded individuals) do not want to advertize income, then these transactions should be considered considerable by the size. Perhaps and the directly return: sellers do not want to draw attention to terms of transaction, unprofitable for them. If the company is on sale at the asset price, is much lower than the invested amounts or for the symbolical amount in addition to hiring of its team of employees by the buyer (acquihire), the hidden transaction amount does not make an impression at observers that the seller was an unlucky investor.

As it is impossible to understand whether the unsolved amount hides the transaction above or below an average, the assumption is the most reasonable that in the amount the considerable number of these transactions can appear within median value for the period – the their more in the set period, the deviation forecast from settlement is less. We assume that undeclared transactions in general are within a median for the annual period as well because in 2016-2018 the shocks in financial market affecting availability of investment money fell generally on the autumn and winter period. The seasonality in the corporate and investment market is minimum, including because that transactions, as a rule, prepare long time – from 3 to 9 months. A little bigger number of transactions are closed in I and IV quarters (24% and 30%) against 21% in II and III quarters.

Structure of corporate venture investments and adoption of investment solutions

Formally structured venture funds in the Russian practice exist though meet less than informal structures without the selected legal entities. Examples of the selected structures are Commit Capital (Rostelecom), Softline Seed Fund (an investment partnership with RVC) and Softline Venture Partners (separate legal entity). Less formalized approach when decisions are made within the existing structures practices in many corporate groups. For example, in group of Severstal the division of Severstal Ventures functions as "directorate", one of structural divisions of parent organization. Even less formal are situations when the decision is made by investment committees which powers are strictly not described. At last, in some cases investment the solution proceeds directly from the management of corporation.

Almost all corporate venture structures considered by us deal not with the money allocated in their order, and with limits or need to receive means from corporation directly under the transaction. The sizes of means of which corporate venture investors can dispose reveals nobody – that probably says that formal limits for these purposes do not exist and funds are allocated in the range from "how many it will be required" to "within possible". Process of internal approval of the transactions approved by investment committees or specialists is also kept by all a secret.

Tough financial performance arises and becomes known only where it is inevitable for the reasons of legal character. For example, DIT "Sowing Fund Softline", according to information disclosed on the website of JSC Russian Venture Capital Company is created in January, 2014 for a period of 6 years of 136 million rubles.

Generalizing all information obtained both in an interview of representatives of corporations and from open sources, we can note that the general for all corporate investment schemes is the high level of decision making in the organization. All investment solutions as it is formal (through investment committees, Boards of Directors), and it is informal, can take place only from approval of the top management of corporation. On the level of specialists in venture investments and corporate strategy they are not delegated.

The family tree matters

We carried out sampling analysis of information about founders (key shareholders heads) of IT startups who participated in transactions with corporations. On the basis of this analysis we came to a conclusion that the considerable share of founders – natives of co-owners and the top management of the medium-sized and large IT companies, heads of IT departments of corporations, the management of infrastructure institutes of development of the industry and other persons holding and is earlier enough foreground in the industry. Almost all these persons are in the middle of career and 35-40 years are more senior. Some younger founders are younger members of families (children and sons-in-law) of prominent heads of the industry.

In a number of the studied cases of corporation bought the startups created their former and even by the acting managers (we did not study questions of a possible conflict of interest in such cases). For example, in the considered period (October, 2018) of "Yandex" redeemed 100% of the aggregator of discounts of Edadil which main owner was the former product manager of "Yandex" Natalia Shagarina. In the comment of Inc. Shagarina characterized the transaction so: "We with a project team pass into Yandex. For us it is a planned stage. We knew that the project in case of success will become a part of Yandex." It is possible to assume that between corporation and the founder explicit or implied mutual understanding was initial that the startup prepares for sale of the founder to the former corporation.

Collected data are not enough to claim that sale of an IT startup of corporation is possible only in the presence at key persons of a startup of communications or at least reputation of the high level. But the output that an experience, the reputation and communications in the management of the IT industry considerably increase chances of a startup of corporate investments or purchase by its corporation is represented to us rather reasonable. It is possible to assume that corporations proceed not only from personal, but also for business reasons, preferring founders with the checked experience, essential reputation and the history of the previous joint activity – thanks to it they locate bigger confidence in success of a startup and can rely on its management more.

Dmitry Polyakov, Softline Venture Partners:

We especially stare at those who already have behind shoulders an experience of an entrepreneurship in IT. Even if a bad experience, a good command learned a lot of new about IT-Business, learned to work together. At such initial data probability that at a command it will turn out to make the viable project, above, than at people without the corresponding experience. In a command presence of the leader is important. The leader is a compass for a command, it is touched the drive, style, work speed.

World experience also shows that founders of startups with the leading experience also are more senior than 40 years have considerably the best chances of investment cooperation with the leading corporations, than the startups based by yesterday's students and ordinary programmers (Azoulay et al. Age and High-Growth Entrepreneurship, 2018).

Not only money

We carry schemes of interaction of corporations with IT startups where the same tasks of business development of corporation are set to non-financial programs, but at the same time the startup, as a rule, does not receive financing (or, much more rare, receives it at the sowing level – as, for example, in acceleration programs of Sberbank or Mail.ru). For this research we considered programs which offer Sberbank, Mail.ru, Rostelecom, MTS, Lanit, Qiwi (the list does not apply for completeness).

Instead of monetary support the startup can get access to infrastructure of corporation, a partner network, top mendzhementu and to operating units, have target educational and practical training, perform test projects and so on. Corporate accelerators put the main objective to select and prepare startups for commercial cooperation with corporation in the same interests of business development. The main interest of a startup in these acceleration schemes consists in receiving on behalf of corporation or through corporation of the first or key consumers of its products and services.

At some corporations is on several non-financial programs, both simultaneous, and occurring at different times. In Sberbank only in 2018 the corporate accelerator of Sber#Up and an accelerator for external participants together with the international accelerator of 500 Startups worked. At Rostelecom three accelerators are revealed: A joint accelerator with IIDF (cybersecurity, DLT, BigData, AI, AV/VR, IoT, M2M), Rostelecom + Skolkovo (selection and commercialization of solutions of the resident companies Skolkovo) and an accelerator based on the center of an entrepreneurship of the ITMO University (the scheme of participation of the companies which are already cooperating with Rostelecom in accelerators of Future Technologies ITMO and SumIT). In addition to it, search and selection of startups in Rostelecom employed the selected project office.

Lyubov Simonova-Yemelyanova, director of project office "Development of Technologies", "Rostelecom":

Task of project office "Development of Technologies" - search of the startups corresponding to the investment interests of Rostelecom and information transfer about them in fund which makes decisions on investment. At the same time the companies can address to fund behind investments if they consider the projects perspective. Rostelecom does not provide free of charge to startups material resources, for example, server capacities or premises. At the same time, in case of interest of the company in development of a startup, Rostelecom gives the chance for testing of a product on the technology base in a so-called "digital sandbox"

Some corporations create the incubatory and acceleration programs aimed specially at own employees. Such accelerators work in Sberbank (Sber#Up), Lanita. Participation of employees in creation of the startups connected with parent corporation is informal it is encouraged also in some other corporations (for example, in "Yandex"). Such startups are often created with the assistance of the subcontractors specializing in acceleration of startups. Sberbank invited as trackers of staff of the HSE, and Lanit – Disruptive.vc company. The state and prigosudarstvenny companies rather regularly had in recent years programs with IIDF and Skolkovo Foundation (partly owing to directive intervention, partly in the form of the programs prepared under their requests and orders).

Alexander Rodionov, director of the department of document management systems, head of the Center of innovations of Lanit:

We found the partner for start of the program - Disruptive.vc company which approaches were close to us. Then began to look for purposefully among employees of people with an entrepreneurial vein and the perspective business ideas. As a result at us it was formed approximately the 20th startup commands which offered new products or services.... To check hypotheses, to find the reproduced and scalable business models, we work with each of commands individually, weekly we meet and we discuss steps for the embodiment of the ideas

The analysis of all non-financial programs leaves two questions requiring further researches.

First, even the most transparent accelerators do not open all conditions of participation – especially concerning transfer to corporation of a share in a startup. Corporations not often clearly state the offers and obligations and is even less distinct – the fact that they want to receive from startups. Situations when the startup, having entered such program, refused afterwards it because of unprofitableness for itself, seldom become property of publicity, but arose in the considered period repeatedly. Even regardless of such extreme cases, it is extremely difficult to receive the clear protocol of conditions of participation.

Secondly, there are no data on efficiency of such programs. Practically all available information has marketing and piarny character. Success metrics, both quantitative, and estimated, no. Estimate on the objective facts as far as this or that startup won or lost from participation, it is impossible. Responses of participants of programs are extremely rare and differ in reserved and evasive character. Thus, non-financial programs remain for us a black box so far, and their critical analysis can become a subject of further researches.

Sber#Up is the reference

Sberbank started a corporate accelerator of Sber#Up together with Higher School of Economics in March, 2018. The project is directed to creation of startups in the field of electronic medicine, education, a fintech, rest, e-commerce, services for business, new technologies and other spheres of digital business which will enter an ecosystem of bank. From 575 arrived requests 12 projects were selected.

13 weeks of a command of an accelerator worked on a working prototype (MVP, minimum viable product), studied target audience of the product and demand for it. With startups trackers — the staff of the HSE with entrepreneurial experience who analyzed progress of a command were engaged and prompted further steps.

On August 7 projects performed on a demo bottom in Agile Home of Sberbank on Kutuzovsky Avenue with a pitch before jury on behalf of top managers of bank, private venture investors and experts of the HSE. According to the results of investment received:

• Personal Big Data - the platform of targeted advertizing on the basis of Big Data for microbusiness in the field of B2C – 2 million rubles.
• StilusBot is the online platform on management of the style where it is possible to get personal advice of the stylist, it is correct to pick up elements of clothes and to purchase the goods suitable your style at the special price – 4.5 million rubles.
• Payzacat — the solution for payment obligatory ("zakit") also voluntary assignments for Muslims - 5 million rubles.
• GetMeBack - the designer of mobile applications for programs of loyalty of small business (restaurants, beauty shops etc.) - 4 million rubles.
• RoboScan is the robotic manipulator, the scanner and "smart" trays scanning any office documents including "sewed" (did not attract investment).
• Start-up-Check-up is service of the analysis of the business ideas which calculates the business plan and offers several scenarios of development of own case - 5.6 million rubles.
• SportMe is the platform of armoring of trainings, halls and competitions for the staff of the large companies - 6 million rubles.

Outputs

• At decision making of corporation are guided by product and channel synergies and merits of founders in the industry (experience, communications, an experience);
• Corporate venture process is not formalized, and the center of decision making is at the level of the top management;
• In terms of money 2018 was reduced in comparison with 2017 by 18.7%;
• The opacity of the market of primary and especially secondary investments strongly complicates its analysis;
• Private groups, such as Lanit and 1C, do not concede, and somewhere and exceed state corporations on the activity during the work with startups.

From further problems of the most relevant creation of a technique of assessment of cost efficiency of corporate venture activity on the basis of not rates of return (IRR, ROI etc), and synergies with core business of the company and also methods of objective efficiency evaluation of non-financial programs separately for corporations and for participating startups is represented to us. The lack of information and objectivity of assessment of these processes complicates their analysis.

It is possible to study the complete version of a research on demand to the address editor@tadviser.ru.

Yury Ammosov, Alexander Levashov