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Startups are waiting for RMB

Source: Kommersant

Venture market hopes for investment from Asia

The key event in 2018 and the main barrier to the development of the Russian venture capital industry was the extension of Western sanctions, investors say. They hope that the market will receive help from Arab and Asian countries’ money, including China. Nevertheless, in the next two to three years, investors are unlikely to succeed in leaving the companies operating only on the Russian market with good profitability, experts say.

As the study “Venture Barometer 2018” conducted by the investor and manager of iTech Capital fund Alexey Soloviev supported by Russian Venture Company (RVC) has shown, the main barriers to the growth of the Russian venture capital market were sanctions, lack of withdrawals from assets, the political situation around Russia and insufficiently developed legislation. Sanctions hindering the penetration of foreign capital have become by far the main event of the year for the investors interviewed. According to the experts, the second most important event were investment activities of Yandex and Mail.Ru Group: merger of Yandex.Taxi and Uber as well as the alliance between Mail.Ru Group and the Chinese Internet retailer Alibaba. The new factor that was ranked sixth in importance was “the unexpected interest of law enforcement agencies to the leaders of a number of venture and IT structures”.

Among promising groups of potential investors, the first place, as in the past year, was taken by “High Net Worth Individuals,” individual investors with high fortune (85%), as well as former and current IT entrepreneurs (56%).

The third place went to institutional investors from Asian and Arab countries (32%), which hit the rating for the first time in five years. Expectations in relation to Western private companies also grew, despite the sanctions: 15% of investment is expected from them, compared with 3% a year earlier. Russian state-owned companies and companies with state participation this year remained almost at the very bottom of the list: if in 2017, Russian development institutions received 44% of the vote, now it is only 16%. The hopes for them as a source of capital were not justified, the authors of the study state.

“If we combine sanctions, counter-sanctions, import substitution, the policy of isolationism, attempts to build a sovereign market of innovations and thereby cut off our companies from the world market, then this is certainly the number one problem. The merits of our authorities here are larger than the Western ones,” says Alexander Chachava, Leta Capital Managing Partner.

But “the weakness of the judicial system and the lack of professionalism of the security forces” do not heavily affect the venture capital industry, only tangentially, the expert believes.

One of the biggest problems of the Russian market remains the number and size of investor exits from assets, said Sergei Negodyaev, Director for Working with Portfolio Companies of the Internet Initiatives Development Fund. The fund companies also face operational difficulties due to sanctions, he confirms: in the UK, banks do not open accounts, procedures are more closely controlled, and there is more distrust and fear from foreign investors.

“There is an opinion that the existing cold will not allow to carry out exits according to good estimates for companies operating only on the Russian market for the next two to three years,” notes Mr. Negodyaev.

At the same time, institutional investors from Asian countries are not afraid of Western sanctions, and they have really become more active, he says:

“In Russia, promising technological solutions are being created that can be in demand in Asian markets, while the cost of labor and development in Russia is often cheaper now.”

The venture market has adapted to new foreign policy conditions, which is also confirmed by the growth in the number of transactions in 2017 and 2018, the Deputy General Director, Investment Director of RVC Alexey Basov, is sure. He also notes a tendency to replace investors from the US and Europe with investors from Asia and the fact that, due to restrictions on the work of Russian investors abroad, they are beginning to return to the country and are considering options for investing in domestic projects. Among Asian countries, “big interest” in the Russian market, according to Mr. Basov, is shown by China, where the volume of venture capital investments in 2017 exceeded $ 40 billion and will continue to grow, as companies are looking for technologies to use in the home market.

By: Kristina Zhukova

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