The Russian startup ecosystem, part 1: venture capital
Similarly to other markets, venture capital investments in internet companies in Russia are not very transparent. This makes it difficult to assess the scale of the market, especially for foreign partners. As this is my first post on Whiteboard, I want to list the most important players in the market amongst venture funds. I decided to concentrate on the most active funds that are investing in the very (in my opinion) promising projects and Internet companies.
Venture capital market began in Russia 6 years ago. The very first Russian venture fund around $ 100 million ”VTB - Venture Fund” was only formed in 2007, with the participation (49% of share) of the Russian Venture Company (RVC), a government fund of funds and development institute of the Russian Federation.
In addition to RVC, other investors included VTB Bank (30%), its managers (1%) and the European Bank for Reconstruction and Development (20%). From this moment onwards, the market grew very rapidly in terms of volume and capital: in 2008 there were already 10-15 funds, in 2009 about 20-25 funds, in 2010 between 30-40, in 2011 60-70, and in 2012 about 100.
Growing number of funds triggers number of investments
Although “VTB - Venture Fund” focused on tech-companies (COMDI.ru, FamilySpace.ru, Oktogo.ru) only appeared in 2007, prior to this it there were private equity funds that used to perform this function. Examples of such major companies are ru-NET, Yandex and Mail.ru.
Foreign capital in Russia: e-commerce rules
This rapid growth has attracted foreign investors, and there are around 30 international venture capital funds that are active in the Russian market now. Foreign funds prefer to co-invest with Russian funds or to invest in mature projects rather than early stage startups.
Examples of large deals made by international investors are: the investment made by a Japanese online retailer Rakuten in the Russian e-store Ozon.ru, the investment by General Catalyst Partners, Accel Partners and Founders Fund in the Russian travel-startup Ostrovok.ru, and Tiger Global’s investment in the e-commerce project Wikimart.
All data on investments made by foreign funds in Russian startups points to a clear trend: e-commerce is the leading sector. The explanation for this is not the fact that there is a lack of interesting projects in other spheres, but that foreign investors mitigate their risks and invest in projects with transactional profitable business models.
Russian Funds today
iTech Capital: PE-fund specialising in investments in IT
This is the only one fund in my list that is not a purely partnership venture fund but a private equity one. iTech Capital specialises in the following industries: information technologies, processing companies and new media.
Among the fund’s portfolio projects are online service for automated SEO and PPC management “SeoPult” (IPO expected in 2014) and a group of companies in the field of e-commerce. These will all become part of a service that will be the Russian analogue of Eventbrite.com.
General partner of iTech Capital Andrey Romanenko, is a major shareholder of Russian leading payment system QIWI. iTech Capital invested in QIWI subsidiary - QIWI post, which is a B2C delivery service. The fund’s size is about $ 130 million
Frontier Ventures: Invest in Russia as a must
This fund was established by famous entrepreneur Dmitry Alimov in 2011, a Harvard University graduate. The fund got support from Gregory Finger, ex-Mail.ru Group shareholder.
Since 2011 Frontier Ventures has been investing in projects focusing on end-user web services. Among the fund portfolio one can see IVI.ru, leader in the Russian online video market, coupon service “Biglion” and short-term rental service “TravelRent”.
The fund’s size is $ 100 million.
IMI.VC: Mobile First
IMI.vc Venture Fund was established by entrepreneur Igor Matsanyuk who sold his game developer company Astrum Online Entertainment to Mail.ru Group in 2009, then later sold his Mail.ru Group shares, earning around $ 80 millions.
IMI.VC specialises in investments in mobile applications with focus on global markets. I would also like to draw your attention that Matsanyuk is a very active and proliferate business angel, who invests in 3-4 companies every month.
IMI.VC was established for investments in mobile and gaming projects which will be integrated or acquired by Game Insight, a world leader in the development of games for mobile platforms and social networks. The company is a key asset of IMI.VC and expects IPO in 2014.
Additionally, IMI.VC supports the projects of Russian prominent business incubator Farminers. Among them I can name My-Apps, Dish.fm, Prognolic, Kula. In December 2012, the co-founder of Mail.ru Michael Vinchel invested of $ 75 million of his own funds in IMI.vc.
According to RusBase estimation, the fund’s size is about $ 60-70 million.
LETA Capital: Russian companies are increasingly interested in Internet startups.
LETA Capital venture fund was founded by the Group of Companies LETA. The Fund was formed on the proceeds of the net income of the group. The fund invests in perspective high-tech companies.
The fund has invested in companies such as Displair (interactive 3D-hologram, considered the best innovation project by many experts), Budist (social alarm clock) and Red Helper (SaaS solutions for e-commerce).
The fund’s size is $ 30 million
TMT Investments: Foreign investment with Russian roots.
Investment company founded in September 2010 investing in telecommunications and technology companies. The fund was established by German Kaplun, co-founder of one of the largest media holdings in Russia RBC.
Among the fund’s portfolio companies, the most impressive are Virool, a platform for the dissemination of commercial video content, the “Pinterest for things” Wanelo and the mobile advertising platform Adinch.
In the end of 2012 TMT Investments launched its business incubator to invest $ 10 million in up to 50 Russian startups.
The fund’s size is $ 10 million
Life.SREDA: The banking sector is waiting for innovation
Life.SREDA venture fund was established by shareholders of the management company LIFE Financial Group, one of the largest financial corporations in the country, which includes eight banks and a leasing company. Life.SREDA focuses on investing in financial mobile and Internet startups.
The long-term purpose of the fund is not concentrated on the future exits: Life.SREDA invests in projects that can be integrated into the core business of the financial group. It is important to remark that Life.SREDA supports companies not just through capital investment, but also with mentoring, enabling startups to develop quickly thanks to the synergies built with the group’s existing products, services and client base.
So far, the fund has managed the following projects: SmartMarket (crowd investing platform), ThinkTwice! (service for finding experts in the field of investments), LifePay (electronic payment service, analogue of “Square”), My-Apps (online designer of mobile applications), Instabank (mobile financial service).
The fund’s size is $ 10 million.
Projector Ventures: Not only Moscow
Projector Ventures is a Ekaterinburg-based pre-seed and seed VC fund launched in 2010 as a ventures department in SKB Kontur, Russian state projects IT-integrator and software vendor (SaaS).
Project Ventures is looking forward to the most prominent startups from Ural Region and invested in 8 companies mostly focused in B2B and Internet with average ticket of 50K USD. There were 2 partially exits – Citrea was acquired by Yandex via Yandex.Fabrika for undisclosed sum in summer 2012 and Domosite had raised $ 1,2 million on next round from RunaCapital (Projector Ventures still holds the stakes) in Oct 2012.
Please note that I purposefully did not include international funds founded by Russian businessmen in this post. Such examples would be Runa Capital, founded by Sergey Belousov, who is also the founder of companies like Parallels and Acronis. Another one is Grishin Robotics, founded by Mail.ru Group’s CEO Dmitry Grishin.
To sum it up, I would like to say that our VC industry is still quite young. RusBase predicts that the Russian VC market will grow 30-50% in the next 2-3 years, competition among investors will increase, but the market will also become more mature, transparent and efficient.
On the other hand, despite the considerable growth, Russian funds need to take one fundamental step. Until now, they have mostly invested in projects with clear business models, sometimes copycats of international companies. Only when funds will be willing to take more risk and invest in innovative, breakthrough projects, Russian funds will become the drivers of a new economy in Russia and over the world.[photo: Cavin, Flickr]
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