Alexey Basov, Deputy General Manager, Investment Director of Russian Venture Company (RVC), told in his interview to Interfax that industrial and corporate venture foundations will be developed in the near future, about the imbalance between “early” and “late” investments and of the prospects of RVC additional capitalization.
— The Ministry of Economic Development suggested that the development institutes, including RVC, should get surplus capital. If this idea is implemented, towards which goals can these foundations be channeled?
— Several initiatives related to RVC additional capitalization are being discussed. One of them is the use of foundations allocated to implementation of public programs and, consequently, intended to trigger deep institutional changes in a number of industries, via the venture investment tool. During the St. Petersburg Economic Forum, we jointly with the Ministry of Economic Development agreed upon the key parameters for setting up the specialized foundation intended to invest into the educational technologies. Its activities envisage that Russian educational companies will develop and subsequently expand abroad and that the global educational technologies will be transferred to Russia. The plan is that at least 200 educational projects will get investment support from the state in the next four to five years. And we hope that such large number of projects is likely to lead to major changes in the entire educational service market.
A similar agreement was signed with the Russian Ministry of Industry and Trade that also allocated money towards accelerated development of the pharmaceuticals and medicinal products market via the venture foundation establishment.
— What figures are you talking about?
— The overall size of the Ministry of Industry and Trade Medical Foundation is RUB 4.5 billion; the Education Foundation with the Ministry of Economic Development, RUB 7 billion. These are big figures for the venture market; most foundations are much smaller on average. It means the State realizes that large-scale changes in such industrial cannot be implemented using standard tools. Extraordinary efforts should be taken to modify and align them with the new process paradigm.
— What indicators are included into RVC plans for 2019?
— The main indicators we use to assess RVC’s investment business efficiency is the number of established foundations, the scope of raised co-investments, and, of course, profitability. We face much more complex objective that deriving profit from venture transactions. RVC’s mission is to initiate foundationamental changes on the venture market and in the key industrial in order to shape the innovative economy.
Therefore, shaping the investment instruments in the high-potential industries with the shortage of private capital is critical. These are normally the industries with active presence of the state and significant regulatory load: education, medicine, aerospace, some sectors in industry, subsoil use. Or with the markets of the National Technology Initiative that are just taking shape now but are capable of becoming drivers of major technology changes. In the near future, we plan to launch more than a ten foundations in this paradigm.
Speaking about yield, RVC assigns the minimum yield of 8% p.a. to the management teams, if the yield is lower the management partners cannot claim the investment success fee. The average yield of our foundations is much higher now, and the outcomes they achieve make us confident that most of created foundations will surpass this value by far.
— Does RVC plan to develop corporate venture foundations? Which restraints does the company see in this direction?
— Of course, corporate venture foundations for us are one of the main business focuses. In recent years, activity of players of this kind increased exponentially on the venture market. We believe that in the next few years the market development will be determined, first and foremost, by the corporations that are mastering venture tools actively.
In 2018, 27 corporations that concluded the total of approx. 80 deals were qualified as active investors, a triple increase on 2017. Both private companies, such as Mail.Ru, Megafon, MTS, and state-owned corporations, Sberbank, Rostelecom, Rosatom, RZhD, OAC, express interest in venture projects. In May, we closed a landmark transaction with our partners from Gazprom neft, Gazprombank and VEB Innovatsii to establish a new RUB 4 billion foundation that will focus on industrial solutions in mineral production and processing and related technological issues, including R&D innovation markets. Obviously, other corporations will follow these pioneers in mastering these business development tools.
In most cases, it is RVC that serves as the competencies center for creation of new foundations for corporations. We help create the tool itself, by involving managers and co-investors in it, structure the foundation with the view to interests of all participants, and then take part in corporate governance by helping the team whenever necessary.
Moreover, we act as a financial co-investor of corporate foundations, normally, by participating in them by not more than a third. This allows us to balance our own investment interests and remain independent of captive interests of some particular corporation. In any case, we hope that at least of half of foundations where RVC is involved will be corporate foundations. It is a tool the venture market ecosystem is missing.
— Did you discuss a venture foundation creation with AFK Sistema? Can you share the details? What other investors can be involved there?
— It is inappropriate to get into detail of negotiations. So far, at the meeting of the Russian Union of Industrialists and Entrepreneurs, we managed to start the dialogue, and we think we have every opportunity to establish one more operating foundation with participation of AFK Sistema, that will focus on corporate interests of the group and the entire TMT market in general, and not only in Russia.
— What other foundation types are demanded for on the market?
— Late-stage foundations are another important product we pay much attention to. Today, there is a market slant towards new, just creating companies. It is easy to get investments at the early stages, often having just presentations and sparkling eyes. But when a company has achieved major revenues, e.g. a billion of rubles a year, it has difficulties with finding financing. Such company cannot engage bank financing because it does not have any pledge: revenues is based on products and contracts that the bank discounts to such extent that nobody is willing to get a long-term loan. As a result, the company is forced either to look for financing abroad or to sell itself to a Russian strategist without fully implementing its potential.
To correct this imbalance, we focus on establishing major late-stage foundations having a mandate to invest millions of dollars into each company. Such foundations operate at the junction between the venture capital and private equity and help encourage the appearance of national champions, the companies having competitive products on the global market, in this country.
— Are there examples of such foundations with RVC participation?
— DaVinciPre-IPO TechFoundation that we launched together with the management company DaVinciCapital this year became the first late-stage foundation as part of RVC’s updated strategy. The foundation’s target size is RUB 6 billion. The industry focus includes IT solutions for businesses, fin tech, AI, smart transportation, IoT based solutions. But at least 55% of that foundation will be invested into mature companies at C and Pre-IPO stages.
— What other co-investors can be interesting to you?
— In most cases, we structure foundations so that they will consist of at least three or four participants. In our opinion, it allows the balance of interests of both parties, in terms of both corporate governance and investors’ interests.
Each foundation is unique by its conditions, strategy and mandate — it is always the result of negotiations rather than a standard solution. Despite this, we structure our market offers into a certain product line in order to simplify the understanding of our main operating vectors. As I have already said, shaping corporate foundations for the companies that realized that their further competitive standing depends on active scaling up of the innovative revenues will be RVC’s key offers at the current stage. The innovative project portfolio is more conveniently created from outside than produced inside a corporation.
Foundations for young managers, so-called first-time GP, are another interesting vector we begin to develop. The fact is that the managers’ market is rather young in this country, with several dozens of teams operating on it. More than half of managers deal with more than foundation meaning that the market capacity is virtually exhausted. The money and the objectives set by the state and private investors to the managers’ market exceed the number of professionals who are ready to take the money and generate the yield to the investor. So we are interested in encouragement of the emergence of new managers.
This vicious circle can only be overcome by the investors capable of dealing with young managers, of controlling their risks properly and making up for the potential gaps in the teams’ experience by their expertise and investment technologies. RVC is willing to undertake this role. We are ready to invest up to RUB 250 million into the young managers’ foundations provided that the managers themselves contribute at least 5% of the foundation’s capital in order to assess the portfolio from the co-investors’ point of view. In our opinion, it is such tool that will help increase the number of professionals’ teams that are capable of getting investments from corporate players at the subsequent stage and thus increase the throughput of our market.
— What do the foundations of the National Technology Initiative represent?
— NTI program is really revolutionary and is intended to create new markets and to strengthen Russia’s leadership in the most breakthrough technological fields worldwide. In 2018, we launched a special venture foundation focusing on NPI technologies exclusively, and the elements of its mandate were incorporated into four more foundations. We expect to introduce the NTI gene into most foundations we are creating, by encouraging the foundations to review the projects with the maximum innovative potential and reasonable global ambitions.