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Angels to come back: what to happen to venture investment market in 2019

05.02.2019
Source: Forbes

Investors believe that this year, investments in high-tech start-ups can significantly increase due to the activity of new major players in the venture capital market.

In 2019, we can count on the activity of corporations, as well as corporate funds and accelerators — programs for the intensive development of startups. 2018 demonstrated the readiness of the largest companies to develop through investments in startups and their takeovers. The number of corporate venture capital deals more than tripled over the year — from 23 in 2017 to 77 in 2018. Interest to the venture is shown by both private companies — Mail.Ru, Megafon, MTS, and corporations partially owned by the state — Sberbank, Gazprom Neft, Rostelecom, Rosatom and others. The recent examples include the investments of 2.3 billion rubles in Citimobil taxi aggregator (Mail.Ru and Megafon), the purchase of IT-Grad 1Cloud cloud provider by MTS for 2.5 billion rubles.

A number of large corporations are implementing a systemic strategy for their presence in the venture capital market by forming their own corporate funds or by joining the existing ones. The latter scenario was preferred by such players as Russian Railways, Russian Helicopters, UAC, USC, and others. Obviously, after the pioneers, these business development practices will be mastered by other companies. In the horizon of 2-3 years, at least a dozen new funds will open, which will radically change the landscape of the venture capital market in Russia.

Of course, I would like to see an even higher rate of change. However, for large companies, entering the venture capital market is not an easy step. We see how difficult it is for a conservative corporate culture with a negative attitude to financial failures to combine with a venture capital culture, where risk and possible mistakes are embedded in its business model. On the other hand, the potential gain outweighs the difficulties of restructuring the investment and product strategy, in many respects — the change of mentality. Venture investment for corporations is a proven and almost indispensable tool for maintaining competitiveness, entering adjacent markets, and ensuring technological development.

Funds against “private investors”

I believe that in 2019, venture capital funds will further strengthen their position in the market. At the end of 2018, a clear increase was seen in this segment — the number of investments increased by 13% (441 transactions versus 391 a year earlier). At the same time, the number of active funds has doubled (from 55 to 95). As for the areas of investment, investors’ focus will, obviously, continue to shift in new industries. In 2018, investors increasingly preferred such sectors as mining and heavy industry, energy, agriculture, transport, education, medicine, and others to the “classical” IT segment.

For example, last year Sberbank invested in Plazius payment system, in the project in the field of accounting services JSC Intercomp, iiko restaurants automation. Yandex invested in the delivery of gasoline to cars Toplivo V Bak, as well as in Partiya Edy. Rucard acquired ARena Space virtual reality parks chain. MTV Holding invested in a high-tech project in the production of equipment for railway transport Express Industry. Senam Service invested in Unimatech 3D printer developer.

In recent years, there has also been an increase in investor interest in such a narrow and high-tech market as biotechnology: the volume of investments in them in 2017 increased by 55% to $ 14.7 million. In 2018, this trend continued. The volume of investments in biotech in the first half of last year alone exceeded the figures for the entire 2016 — $ 9.8 million. For example, last year, RBV Capital Fund sold the developer of high-speed Bonti neurotoxins to pharmaceutical manufacturer Allergan, and venture biotech-fund Primer Capital invested in Hemofarm’s drug for patients with multiple myeloma.

Now we see a kind of regrouping of forces, an important phase in the development of the venture capital market and the formation of the digital economy. Digitalization, big data and artificial intelligence revolutionize any industry, so the investment focus shifts to where competition is lower, and there are more chances to change the landscape of the market and take a significant share on it. In this sense, the least digitized industries have the greatest potential, and they become the mainstream. The majority of new funds planned by us are aimed at such segments.

The angels will come back

We see that many business angels of past years have stopped investing in new startups and expanding the portfolios of supported companies. In comparison with funds, private investors noticeably lost ground last year — they accounted for 167 transactions. This is largely due to increasing competition for projects in the early stages, where professional funds are often able to operate more systematically. But if a number of barriers are legislatively removed, as the Venture Capital Market Development Strategy until 2030 suggests, the business angel investment market will expand significantly and retain the role of holding the initial risks of the national funnel of projects.

Positive news for the projects of early stages was the accelerator launched in 2018 by Sberbank and the American 500 Startups accelerator with investments of up to 10 million rubles in the project. Time will show what this will give the market in terms of new deals, but access to Sberbank’s ecosystem and global expertise 500 Startups forms an exclusive offer for entrepreneurs.

NPFs are at the start

In the next two years, we expect a new type of player in the venture capital market — non-state pension funds. In principle, the Central Bank approves such an opportunity for NPFs, but with a number of restrictive conditions that actually isolate the venture capital market from pension money. The situation in Russia differs from the situation in developed countries, where pension funds are active investors in the innovation market. RVC transmitted to the Government the Venture Market Development Strategy until 2030, which proposes to allow pension funds to place a certain limit of funds (up to 10% of pension reserves, which are formed from voluntary deductions and, possibly, up to 5% of pension savings) in venture capital. An investment partnership tool that is successfully used in the global venture capital practice can be used for venture capital investments of pension funds. Participation in such partnership agreements is also offered to individuals — business angels and private investors.

If the NPFs enter the market, the sector will receive an inflow of “long money”, and the funds themselves and their investors will receive an increased return compensating for the limited results from investing in super-conservative instruments. In this sense, the key tasks of the state and market participants are to determine the principles for the selection of managers, tools for monitoring investment decisions and a system for ensuring the transparency of activities. Some NPFs are already ready to be pioneers and begin to master a new class of investment upon receiving such a mandate.

By: Alexey Basov




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