The Russian venture market stopped stagnating and began to grow slowly. The share of investments from private foundations is dropping (foreign ones are waiting, domestic ones invest in foreign startups more frequently). However, the share of corporations is on the rise. Mail.ru Group’s and MegaFon’s investments into CityMobil became a record deal: the round amount exceeded RUB 2.3 billion. What trends determine the venture market development? RBC looked at the situation from four angles: that of a governmental development institute, that of a corporation, a private investment foundation and a business angel.
Mikhial Fedotov, Director of RVC subsidiary foundations
In 2017/2018, the Russian venture market demonstrated growth for the first time after many years of stagnation: in terms of volume and of the number of deals. The average check of investments fluctuate at $1 million to $ 2 million, which is by times lower than the indicators on mature venture markets of the U.S.A., Europe and Israel. That is to say, investors still prefer to invest small amounts into high risk early-stage projects, and more mature companies find it difficult to gain access to investments.
According to the Venture Barometer research, fin tech, AI and machine training are the most attractive industries for investors. This interest has not yet converted into specific figures and deals. As for the market structure, greater activity of corporations in venture capital, both via direct involvement in deals and via creation of corporate venture foundations, has become the prevailing trend of the last two years. Their emergence was announced by MTS, Gazprom neft and Gazprombank, Rosatom, Rostech.
The global venture investments into fin tech exceeded $ 30 billion in 2018 vs $ 1.8 billion in 2011. At present, approx. 40 fin tech startups are classified as “unicorns” worldwide — their capitalization exceeds $1 billion. These include Robinhood, the startup for service-charge-free share purchases, Stripe payment services and Revolut banking service with Russian founders. In terms of venture investments, fin tech is underestimated in Russia. The emergence of new projects from Russia and double-digit increase in investments may be forecast. After the hype surrounding crypto currencies, the investors’ focused will shift to insurtech (new insurance technologies), regtech (new compliance technologies) and smartcontracts (smart contracts on the real estate market).
E-commerce can be noted as a segment that used to be attractive for venture investments but is taking a back seat now.
In 2018, two new projects were added to the portfolio of RBF Ventures foundation (established by RVC with the Belorussian Innovation Foundation. — RBC note). Cinemood represents a new “children assistant” product category. The company produces family mini projectors with the built-in content library, including developing videos for children and slide films. Cinemood sells not only in Russia but also abroad now. The team is creating a new, economy-class, version of its Multi-Cube and is seeking to reduce the product cost.
The second project is RocketData. The Company provides the information management and Internet feedback handling services to marketers and business owners. The project is implemented on the Russian and Belorussian markets and is integrated with over 40 platforms: social media, catalogues, online maps, navigators.
Boris Dobrodeev, General Manager, Mail.ru Group.
We expect that strong projects will entail the penetration of technologies and streamlining of operations in conventional industries. AI, cloud technologies and machine training will penetrate such fields as medicine, education, smart retail and different industry segments more actively. These industries will be digitalized and start introducing new business models and best practices implemented by Internet companies into their operations. We can expect that own market places and communications environments that will enable companies’ employees to communicate with customers directly will emerge in such fields as industry and retail.
Education is becoming increasingly attractive for investments. In 2016, Mail.ru Group purchased 50% in GeekBrains online education service, and in 2019, it became co-owner of Skillbox educational platform. We see that the Internet is reshaping the education now and opens up new opportunities both to the students who are capable of gaining new knowledge and to teachers who can earn from online lessons. The Internet responds quickly and sensitively to the new education demands that the conventional educational institutions are slow to meet. Obviously, this trend will increase.
The key feature of the Russian venture investment market is prevalence of strategic investors who play the fundamental role in its development.
Another promising trend is the growing interest in fin tech services on the part of consumers and businesses. Consumer Internet enables to make payments conveniently, and different financial services may appear and grow on this foundation. Prevalence of strategic investors who play the fundamental role in the venture market development is the key feature of the Russian venture investments market. We will retain active presence on that market via investments and purchase of a 100% stake in other companies. Our advantage is that we are able to combine an operating company’s models with those of an investment fund, we can create new services and companies inside a group, or we can conclude transactions with strong market startups. Such partnerships consolidate resources, knowledge and experience, while opening up the investment opportunities on different markets. Our partners benefit from access to the Mail.ru Group ecosystem, and we are able to offer a broader product range to consumers.
Dmitry Filatov, President, Sistema_VC venture fund.
Speaking about the promising industries for investments, AI is one of the obvious long-term trends. The projects where algorithms are used to automate routine processes and to release a person for more complicated and exciting tasks will develop further. The formerly conservative agriculture starts digitalization. It is worth keeping an eye on the ecosystem of startups and projects in the field of logistics and transport, with various initiatives and services – from product delivery or restaurant food catering to unmanned aircraft, from transport control systems to refining logistics processes, last-mile services etc.
Our fund invests either into complex technologies or in promising markets. In the second case, we look at platform solutions, marketplaces with a greater growth potential, such as Ozon and YouDo, which are available in our portfolio, or at the one that make use of AI applied solutions that can reshape whole industries. In 2018, Connecterra (the Netherlands), TraceAir (USA/Russia) and SQream (Israel) were added to the foundation’s portfolio.
Connecterra has developed a smart assistant for diary product farmers, Ida. A modern farmer has to be adept at many, often not overlapping, fields, from accounting to biology. So when Ida relieves the farmer from the duty to monitor the animal health status, to prevent diseases, to reduce antibiotic use etc. if improves the diary farm productivity.
The projects where algorithms are used to automate routine processes, to free up a person for more complex and exciting objectives will evolve.
TraceAir created SW for process automation at the earthworks stage of construction and suggested that developers will use a drone as a “sensor” for collecting data on the construction site status.
The Israeli startup of SQream is processing Big Data using the graphic processor architecture. The company does not only use its facilities in its natural fields, such as telecommunications, but also to analyze air pollution, to improve road traffic and even to personalize cancer treatment.
Such startups as GOSU DataLab, DataSine and MEL Science were added to our portfolio a bit earlier. DataSine created Pomegranate, the AI platform for marketing content personalization – emails, telephone scripts, SMS and other digital content. MEL Science is contributing to transformation of one more conservative industry, education. The startup creates and distributes on the basis of subscription the training sets for chemical tests. VR-component in tests and during lessons changes the approach to learning chemistry.
Konstantin Sinyushin, Managing Partner, TheUntitledVentureCompany.
Most Russian private investment funds that invest at late stages have not considered the projects focusing on the domestic market for several years already. However, many startups are persistent in building business on the Russian market. Unfortunately, most industries in this country cannot secure an adequate consumer demand for growing up a business that can be sold at sufficient IRR for the venture foundation.
At the early stages, the situation with investments from accelerators, seed foundations and business angels is much better. However, they are almost unable to raise investments during subsequent, bigger, rounds unless they plan to expand to the global market. The pickiness of seed investors who got accustomed to assessing the possibility of the next round and future withdrawal from the project, rather than the beauty of idea and the team’s strength has peaked over the last ten years. At the early stages, the situation with investments from accelerators, seed foundations and business angels is much better. However, raising investments during subsequent rounds is next to impossible for them unless they plan to enter the global market.
More and more seed investors finance the relocation of successful Russian pilot projects abroad. There is virtually explosive interest in Latvia that managed to offer the best thought-of, the quick and cheap opportunity to relocate a business to Europe. If you need to relocate a startup to an Asian market, most popular jurisdiction is Singapore, and for dealing on the U.S. market, Canada. The growth of European venture market where the prejudice against Russian teams is lower than that in the United States and the competition with local startups is weaker is noteworthy.
Investors in Russia assess a particular technology depending on its potential for monetization: especially in the segments that are the most perceptive to innovations (i.e. the most competitive ones). These industries include advertising, retail, production of consumer goods, media and fashion. The bulk of our portfolio is concentrated there. Big Data, AI and computer vision are among the new technologies capable of enhancing efficiency in these sectors drastically. Moreover, we are looking at biotechinologies and unmanned systems in agriculture.
Text: Ilya Nosyrev
Photo: Yury Chichkov for RBC