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Unicorn Farm: Experts Told How to Grow a Company Worth $1 Billion in Russia

30.10.2019
Source: PRIME

The leading countries in the number of unicorn companies characterizing the development of the venture capital market are the USA and China; Russia still lags behind in the world ranking of such fast-growing start-ups. Experts interviewed by the Prime agency told about the problems and prospects of growing “unicorns” in Russia.

The unicorn company is a fast-growing technology non-public company with a capitalization of over $1 billion. According to the latest data of CB Insights research company, today, there are more than 400 “unicorns” in the world, with the total capitalization of about $1.288 trillion.

“China and the USA are leaders as to the number of the “unicorns”. So, according to the CB Insights rating, the most expensive non-public “unicorn” in the world remains the Bytedance Chinese company working in the field of artificial intelligence — its value has reached $75 billion," said Alexey Basov, Deputy General Director, Investment Director of Russian Venture Company (RVC).

Where do the “unicorns" live?

Experts associate the appearance of the “unicorns” with various factors and expect that their number in the world will grow, although, in countries with the most significant number of such start-ups, there may be some decline according to the law of cyclicity.

According to Dmitry Schigolev, Head of the Skolkovo Ventures investment department, the leading suppliers of the “unicorns” are the USA, China, India, and Europe.

“This is primarily due to the size of the population and consumer habits. With a population of 145 million and an active school of programmers and mathematicians, Russia could become a system supplier of the “unicorns”, he said.

The head of the practice of providing services to technology companies and venture funds PwC in Russia Vladimir Bubnitsky, on the contrary, believes that the number of the “unicorns” does not depend on the population of countries and the total number of start-ups.

So, according to his data, in Estonia, with a population of 1.3 million people and about 180 start-ups, there are four “unicorns” — Taxify, Skype, Transferwise, and Playtech. In France, with a population of about 67 million people, there are 1,500 start-ups and also four "unicorns" — Blablacar, Deezer, Doctolib, and Meero. In Canada, there are more start-ups — around 2.5 thousand; the population is 37 million, and there are no “unicorns”.

“Thus, the situation with the “unicorns” in each country must be viewed in the context of the industry. It is most interesting to observe which start-ups achieve the status of the “unicorns” in different countries: In emerging markets, more practical solutions are needed to help solving socio-economic problems. Examples of such companies can be seen in Indonesia — Go-jek, in Brazil — Nubank, in India — PayTM,” comments Bubnitsky.

In general, experts expect the number of the “unicorns” in the world to increase.

“In general, the global trend is to consolidate the size of funds and transaction amounts and simplify issuers' access to exchanges. Thus, the number of the “unicorns” will grow, as well as their volatility,” says Basov.

At the same time, according to Denis Efremov, the investment director of the Da Vinci Capital fund, the number of the unicorns in the most developed from this point of view regions may decrease, following the market correction law.

“I would single out China and the USA as regions with a certain level of risk — they have been growing for a long time, and there should be some correction. On the other hand, the European venture capital market is more stable and growing, up-and-coming, and large-scale projects appear there. I would also single out Japan: this country has always been a bastion of stability and prudent investment,” he says.

A $100 Million Unicorn?

Experts slightly diverged in assessing which start-ups in Russia can be considered the “unicorns”.

Schigolev indicated Avito (before the sale of the controlling interest to a strategic investor), Playrix, and Qiwi.

“Moreover, if you consider companies with Russian founders who have left to develop their business abroad, then B2B companies Acronis and Revolut can be ranked as such,” he said.

Basov has identified other start-ups.

“This year, HeadHunter became the new “honest” Russian “unicorn,” which has been confirmed by the public market. This autumn, RDIF, Alibaba, MegaFon, and Mail.ru closed a deal to create AliExpress Russia. According to many experts, this company can already be confidently ranked among the Russian “unicorns” in the e-commerce market,” he says.

“You can recall Luxsoft, which at the beginning of 2019 during the acquisition by the IT company DXC Technology was valued at more than $2 billion. Hence, there are enough large companies in the near-Russian business space,” added the RVC Investment Director.

At the same time, some experts believe that in Russia, unlike the world market, companies with a capitalization of $100 million can be considered the “unicorns”.

As Efremov explained, it is often hard for Russian start-ups to achieve such an indicator.

“In my opinion, the concept of “unicorn” is more of a marketing phenomenon for the Russian market and the capitalization of projects of $100 million can provide such a phenomenon,” he said.

“We see in Russia a couple of dozen companies with a capitalization of more than $100 million that claim to be the “unicorns”. It is important that high-tech businesses appear among such companies, including those in B2B segments,” Schigolev added.

How to raise a “unicorn”?

Experts called several conditions under which you can grow a “unicorn” in Russia.

In particular, Bubnitsky believes that for this, the company should work in international markets. In Russia, technological start-ups in almost every industry were successful, achieved high financial performance. Still, only a few reached or approached the unicorn level, he said.

“Talented Russian founders often achieve great success by growing the “unicorns” outside of Russia in the B2C and B2B segments in the areas of software development, fintech, and cloud technology: Acronis, NGINX, Revolut, Luxoft, Wrike, Epam. Thus, Russian technology companies have undeniable potential, able to adapt and operate in new international markets, showing product and organizational flexibility,” says Bubnitsky.

Efremov shares this point of view.

“Global start-ups, in which either the founders from Russia or the main team from Russia, have chances to become the “unicorns” along with start-ups from other countries. But it is challenging to do so, having a significant part of the business in Russia. The Russian market is valued at a substantial discount,” stated investment director of Da Vinci Capital.

The expert added that the market capacity in Russia is insufficient; investors are not ready to take risks. As a result, essential deals, when strategic investors acquire a start-up with venture capital, “can be counted on fingers.”

For the emergence of the “unicorns” inside the country, not only institutional investors are needed, but also private pension funds and insurance companies, which are the leading investors around the world, Efremov emphasized.

“On the other hand, economic and tax incentives could also be incentive motivation for market evolution and new capital raising. Something in this direction has already been done; it's enough to recall the benefits for business angels,” he noticed.

Schigolev from Skolkovo Ventures called a small number of investors in the late stages of development of venture projects, one of the barriers for the development of the “unicorns” in the Russian Federation.

“Such investors can provide liquidity to rapidly growing companies,” he explained.

Basov, in turn, believes that the market situation is improving; tools for supporting projects in the later stages are being prepared for launch.

“Next year, we expect an increase in the number of venture deals in the later stages,” he said.

“The growth of the domestic venture capital market suggests that in the near future, including as early as next year, the number of the “unicorns” will replenish with new names. Many entrepreneurs in Russia are successfully mastering the fast-growing segments of the innovative economy. Skyeng, Uchi.ru, Wildberries, VkusVill, Ozon, and JetBrains have high potential. These companies have already shown good results and are continuing to develop actively,” added RVC's Investment Director.



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