Looking to the future№ 1 July 2018

Times are not easy for the global venture capital market. The 2015 boom, when the market grew by 50%, was followed by a serious fall of almost 20% in 2016 (according to PwC and CB Insights data). Many experts drew parallels with the dotcom bubble which burst in 2000, blaming a crisis of investor confidence. However, 2017 then proved something of a success for the global market, with 11,000 venture capital deals completed for a record total of USD 164.4 billion. Growth was driven by Asia, where transactions surged to a total of USD 70.8 billion.

All quiet on the Russian front

The Russian startup market, young and beset by problems, is developing at a slow pace. 2016 was a bad year: according to the Russian Venture Company (RVC), total venture capital fell to USD 410 million. The negative trend was not limited to Russia, but worse here than elsewhere: the Russian market, worth USD 2.2 billion in 2015, lost four fifths of its value.

Despite improvements in global venture capital markets in 2017, Russia did not follow suit. According to the annual survey by venture market agency Firrma, RVC and consultants EY, there were just 391 venture capital transactions in Russia between 1 December 2016 and 1 December 2017, not counting the activities of angel investors (as compared to 390 the year before). The number of investment funds increased slightly from 42 to 49. However, six foreign funds left the market, leaving only 11.

Global venture capital market trends

Deals and volumes, USD billion

"It was an uneventful year – no big successes, but no disasters either. Not bad, given the unfavourable macroeconomic context," said Dmitry Smirnov, managing partner of Flint Capital.

There have even been some signs of revival in recent months, which experts put down to the emergence of promising startups and the arrival of new investors, including corporate funds.


 

Waiting for the corporations

One of the most striking trends in the global venture capital market is the arrival of corporate venture capital (CVC). According to CB Insights, CVC hit historic highs in 2017 for both transactions and total value (up 18% and 19% respectively from 2016).

After several years’ steady growth, CVC now represents approximately 20% of all venture capital investments worldwide. This trend has not bypassed Russia.


 

A question of definitions

The classic definition of the startup was provided by the American entrepreneur Steve Blank, "the godfather of Silicon Valley" behind eight projects that grew from nothing to achieve staggering success. As he put it, a startup is "a temporary organisation formed to search for a repeatable and scalable business model".

In Russia, the definition is not so clear. The term startup is often used for the launch of any business, from the Skolkovo innovation hub to a pizza delivery company. Conversely, by some it is used only for science, technology or online projects. When understood properly, it is clear that startups have just one common characteristic: a unique idea that can be turned into a business model and replicated to produce a profit.


In the last couple of years, corporations have moved strongly into the venture capital market. This is a new stage in the development of the venture capital ecosystem.


Alexei Basov

investment director of RVC

Many investors note the increasing activity in 2017 of corporations making strategic acquisitions of promising Russian startups. "Yandex, Mail.ru Group, Sberbank and a number of corporates that don’t advertise their activities have become players in the venture capital market, which suggests the formation of an ecosystem," says Maxim Medvedev, managing partner of the AddVenture investment fund. For example, last year Sberbank bought 80% of the online doctor’s appointment booking service DocDoc, Tinkoff Bank bought 55% of the online payment service CloudPayments, and Modulbank invested in several startups.

Size of transactions by main type of investors

(First 9 months of 2017, RUB billion)

Source: Inc.Russia, Internet Initiatives Development Fund


 

Awakening giants

CVC is a major stimulus to market development and therefore taken seriously by the Russian government. After last year’s St Petersburg International Economic Forum, the Russian President instructed the biggest state corporations to set up their own venture capital funds. The head of the National Association of Business Angels Vitaly Polekhin called this "the event of the year" – he said that the move would be "a powerful incentive to all those engaged in developing the market, given that the main buyers of startups worldwide are large corporations."

Global venture capital market trends

Deals and volumes, USD billion

Experts say the emergence of venture capital funds belonging to state corporations could bring the market greater maturity. "By acting as the final buyers of successful startups, corporations will be able to close the investment cycle, moving the whole market to a more mature phase containing all the elements necessary to form an ecosystem – development institutions, universities, entrepreneurs, angel investors, funds and corporations," thinks Alexei Basov. By providing CVC, state corporations will be able to make their own value proposition and interest the type of innovation companies that prioritise access to infrastructure, sales channels, customer base and technological expertise over smart money, he says.

Which sectors saw the most transactions

(First 9 months of 2017, RUB billion)

Source: Inc.Russia, Internet Initiatives Development Fund

"Russian corporations have started looking more seriously for opportunities to complete deals," said Anton Ustimenko, partner and head of the technology, media, entertainment and communications groups in the CIS at EY. "While the deals are not so large yet, they are creating more opportunities for entrepreneurs to exit profitably from their projects, thus providing fresh cash flow into the venture capital ecosystem. This gives reason for hope of a rise in venture capital investment in 2018."


 

Russia’s startups of tomorrow

Translation app for robots

RCML is a high-level programming language. It can be used to write programmes readable by robots made by different manufacturers. In general terms, it is a translation application that makes it possible to talk to robots. It enables machines performing different functions to act in concert, which is very important in industry.

Accelerator: RVC.

Agricultural drone

The drone flies over fields taking digital photographs to monitor key features – nutrients, moisture, weeds and rodents. The system can also be used to forecast the best time to harvest. Tests were carried out in May 2017.

Investor: Fund for the Promotion of Innovation.

Robot Recruiter

At the user’s request, Vera, the electronic headhunter, performs internet searches for CVs, calls candidates, informs them about vacancies and conducts video interviews directly in a web browser. The startup is already in use at Rostelecom, IKEA, MTS and Alfa-Bank and plans to enter the global market in 2018.

Investor: Internet Initiatives Development Fund (IIDF).

Express brain testing

The company DRD is developing a special test that can quickly check the state of a human brain, detect brain damage and assess the risk of stroke. One drop of blood is enough to carry out the test. Clinical trials and a product launch are both planned for 2018.

DRD is headquartered at the Skolkovo innovation park.

Save the World

Lazy Robin is an application that inserts advertisements into the web pages visited by users and credits them in return with virtual money, which can then be paid to a charity of their choice.

Accelerator: Higher School of Economics business-incubator.

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