Business Angels Do Not Fly to Russia Due to Lack of Support, Experts Believe
The movement of business angels in Russia is gaining momentum, although the number of their foreign counterparts in the Russian Federation is gradually falling due to the legal vulnerability of such investors, the lack of state assistance and tax preferences said the experts polled by RIA Novosti.
Business angels are investors who invest their own money in projects (most often, start-ups) in exchange for a share in a business or a voting shareholding to have a decisive influence in making financial and management decisions.
As the president of the National Association of Business Angels of Russia, Vitaly Polekhin, told RIA Novosti, about twenty people invest professionally and regularly in Russia, contributing from quite small amounts up to $1 million a year.
Moreover, besides them, about five well-known “capitalists” in Russia invest up to several tens of millions of dollars a year.
“The problems of business angels are both a lack of quality projects and teams with the necessary qualities to build a successful business and some negative trends in the economy, but the key problem in principle is the lack of tools to exit projects and a small number of exits themselves. In 2017, the total volume of exits from projects in the Russian market amounted to $52 million compared to $66 million in 2016 and $1.309 billion in 2015 (including the $1.2 billion Avito deal),” said the General Director of VEB Innovation Oleg Teplov.
Where do angels fly?
According to Polekhin, the volume of “angel” investments in the Russian market is growing annually by no less than 30%.
“Business angels are in a better situation than venture capital funds; they do not need to wait for the project’s purchase of a “strategist” to show profitability, they just have to wait for the investor of the next round and sell their stake with a good yield,” he said.
“For several years, there has been a continuous growth of the business angel movement, their culture in our country is actively taking root and developing. There are more and more people investing in venture projects,” said Alexey Basov, investment director of Russian Venture Company (RVC).
Most often, business angels invest in projects related to IT, however less often - in industrial, biotechnology and industrial projects.
“Many people invest in b2c-projects when there is an opportunity to feel like a consumer of a service or product. Besides, business angels invest in areas that are close to their professional activities. For example, in technologies that are necessary for their projects,” said the partner of Target Global Alexander Frolov.
Teplov explained that IT for business angels is interested in quick payback and minimal risks.
“When choosing projects, many business angels are guided, among other things, by the opportunity to quickly sell them to one of the major players, such as it was with one of the most high-profile “angel” exits, when Facebook bought the Belarusian company MSQRD. Also, the contribution of a business angel in many cases is not money in the first place, but ties with potential investors and an understanding of how to position the business so that it is attractive to them,” he explained.
Foreign investors in Russia in the early stages practically do not invest, complained Polekhin.
“And this is a situation that needs to be corrected by attracting foreign capital into Russian projects. In the meantime, it is reversed, most Russian business angels would like to invest in more developed venture capital markets, where the sale of a project in the next round of investments or a “strategy” happens more often and easier,” he said.
“Quantitatively, there are fewer Russian business angels — we see few foreign ones except for investments in companies of Russian graduates of Harvard abroad,” Frolov agrees.
According to him, one of the main problems that business angels face is the legal insecurity of their interests.
“Major transactions (for this reason — editor) they are structured abroad, but it makes sense to carry out small ones in Russia,” he believes.
Teplov sees the reason for the reduction in the number of deals involving business angels in the decline of interest in Russia from foreign investors, “including for reasons of a political nature and reasons specific to the venture market”. In recent years, the availability of grant support has also increased, which is much more convenient for a start-up — no transfer of shares is required, and there is no obligation to show financial results.
“Besides, angels are called so for a reason — for many, it is a good opportunity to earn money by doing a good deed and investing in the success of start-ups. There are no strong mentoring traditions in Russia, and patronage of the arts is not the same thing as charity. Therefore, if we need more angels, we need to inculcate culture too,” added General Director of VEB Innovations.
According to Polekhin, the situation on the business angel market is generally quite favourable. However, some incentives “would help increase the activity of business angels” — due to various tax preferences from global practice, for example, such as private investors — participants of the public stock market.
“Also, the introduction of some investment instruments in the Civil Code, such as, for example, a convertible loan, would help simplify many of the processes involved in dealing with investors' transactions with projects. Investors actively use it at early stages all over the world,” the President of the National Association of Business Angels believes.