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At a Low Start-up: the Number of Venture Capital Deals in Russia Decrease by 43%

Source: Izvestia

Coronavirus has dramatically reduced the activity of venture capital investors in Russia. The number of investments in start-ups in the six months of 2020 decreased from 56 to 32, by 43% compared to the same period last year. The Russian Association of Venture Investment (RAVI) said this to Izvestia. The volume of investments also decreased, but less dramatically — by 13%. Against the backdrop of the crisis, many funds chose to suspend entry into new assets and focus on supporting the existing portfolio. According to the Ministry of Economic Development, the state IT policy should help return the positive trend. Return to previous levels of activity will take at least a year, experts say.

Fewer transactions — little money

Preliminary estimations of private equity and venture capital funds proved that in January-June 2020, the number of venture capital transactions in Russia reduced by 43%, as was said to Izvestia by RAVI. According to the organization, during this period, 32 investment agreements were concluded against 56 in the first half of 2019.

The most significant part — about two thirds — of transactions fell on funds with the participation of state capital, added to the RAWI. Thanks to this, the volume of investments avoided a severe reduction and lowered by only 13% (the association did not promptly provide absolute figures). There was also no significant decrease in the number of portfolio companies' sales by funds: the number of exits from investments did not get 5% to come up to last year's indicators and amounted to 21 transactions against 22. In RAWI, these dynamics are also explained by state intervention: state-owned funds provided about half of such transactions. The high investment activity of the past years could also have a positive impact, the association believes.

— It will be possible to draw conclusions only based on the results of the entire 2020. However, it is already clear that venture investors' overall activity will be noticeably lower throughout the year. It will take at least one to two years to reach the values of industry indicators characteristic of the period before the COVID-19 pandemic, the organization said.

The slowdown in business activity amid the coronavirus around the world could not but impact the Russian venture capital market, Deputy Minister of Economic Development Oksana Tarasenko said.

“Naturally, in the second quarter of 2020, the processes of structuring transactions slowed down. Many funds chose to postpone entry in any assets and focus on supporting the existing portfolio“, Deputy Minister explained to Izvestia.

She added that several market segments — related, for example, to the provision of distance services — on the contrary, received new impetus for growth. The deputy head of the Ministry of Economic Development emphasized that the development of the technology sector and venture financing is one of government policy priorities.

“We expect that the government’s initiatives to support technology companies will, among other things, minimize the consequences of the pandemic for the venture capital market and maintain a long-term positive trend“, said Oksana Tarasenko.

Earlier, the authorities announced the introduction of stimulating tax breaks for the IT industry; the State Duma has already adopted the relevant document in the third reading. From January 1, 2021, the innovations will reduce the income tax for high-tech companies by almost seven times — from 20% to 3%.

Venture “Kitchen“

Working with start-ups and the path to the first joint pilots have become longer due to the coronavirus epidemic, Vitaly Mzokov — the head of the innovation centre Kaspersky Labs — admitted. According to him, the center continued to search for possible cooperation projects even during the period of self-isolation — in a remote format. The increase in digital activity has led to a change in the landscape of cyber threats and the growth of the information security sector. Soon, more and more start-ups will appear in this area, he is sure. Besides, as the trend for remote work continues, the demand for teleworking services will also grow — for example, programs for collaboration in distributed teams and cloud storage.

During the pandemic, investors had to pause making investments in some areas — for example, in tourism, said Alexander Zhuravlev, executive director of the venture capital community AltaClub. However, despite this, the pandemic has become an active period, he said.

At the beginning of the year, there was active communication with start-ups. Thus, new investments will be announced soon, according to Kirill Varlamov, director of the Internet Initiatives Development Fund. First, the fund is interested in IT companies developing new software and Internet platforms. Educational technologies, telemedicine, corporate software, telecommunications, advertising technologies, and the Internet of Things are considered priority areas.

Reasons for Optimism

The venture capital market is resistant to crisis phenomena: on a ten-year horizon, any fund faces economic collapses several times, said Aleksei Basov, investment director of Russian Venture Company. According to him, long-term investors are in a favourable position today: a half-year turbulence did not particularly affect their strategy.

Investments in information technology and medicine make it possible to benefit from the pandemic. These areas have become the most popular worldwide in the past six months, the expert added. Moreover, IT accounts for about 70% of the invested funds, and pharmaceuticals — about 30%.

The annual decline in venture capital investments in IT alone in Russia may reach 32–35%. The analyst predicts Freedom Finance Evgeny Mironyuk. He noted that it is difficult to estimate the size of the entire market's contraction because many transactions are not advertised — investors are not required to report them. To a lesser extent, the sector of transactions with foreign start-ups may decrease: they are implemented in Western markets, which are experiencing an influx of investment — for example, the NASDAQ technology index is updating historical highs, the expert summed up.

By: Ekaterina Vinogradova.

Reference from Izvestia

The Russian Venture Investment Association is an organization embracing the leading players in the Russian private equity and venture capital market. Its participants include the Innovation Promotion Fund, JSC Rusnano, and Russian Venture Company (JSC RVC).

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