In 2019, the Russian venture capital market grew in volume: According to DSight and E&Y, start-up investments exceeded $868 million. However, in 2020, the industry is likely to decline due to the pandemic, which put many business processes on a forced pause, and investment activity also decreased significantly. How can a start-up survive in such conditions?
About the expert: Ekaterina Petrova, Director of GenerationS Corporate Accelerator.
Surveys of venture capital funds and investment companies with Russian roots show that in a crisis, they not only take more conservative approaches to risk assessment but also change the focus of interests. For investment, only those start-ups that offer high-tech solutions to current problems are considered: online training and communications, digitalization of business processes, distance recruiting. Transactions that entered the negotiation section before the introduction of the self-isolation regime were temporarily suspended due to the impossibility of holding personal meetings; new agreements are less typical. Investors — both foundations and business angels — took a wait and see attitude. A study of technology start-ups from 50 countries revealed that over 70% of transactions, preliminary agreements on which were reached before the start of the "corona-crisis", were suspended, slowed down, or even canceled by investors.
At the same time, many start-ups do not have a “financial pillow”. According to surveys, 40% of them have already fallen into the red risk zone: they can only stay afloat for three months (or even less).
Corporations, exciting partners for start-ups — not only as investors but also as potential customers — can also reduce their venture. Last year, "corporate money" provided 15% of the venture capital market, and their strategy laid the focus on investments in "mature" start-ups, the appearance of which is preceded by rounds of seed investments. And if business angels and investment funds do not return shortly to financing young technology-based start-ups, in the next two to three years, we run the risk of a shortage of projects in the late stages that are potentially interesting for corporations.
But no wonder they say that the crisis is a time of opportunity. For some start-ups — those built around new technologies and remote interaction — the current situation creates unprecedented conditions for growth. Some areas turned out to be in a privileged position, and it is precisely such companies that the line of investors is "lining up" to.
— The pandemic predictably led to an increase in the reputation of biotech companies. US venture funds in the first quarter of 2020 sent $5.7 billion investment in pharmaceutical and biotech enterprises. In Russia, this segment of the market is historically not that developed. Still, now it should be stimulated, including through the launch of a specialized fund (in partnership between RVC and the Ministry of Industry and Trade), which will focus on financing high-tech medical projects.
— Services in the field of information and communication technologies are also in demand. According to the analytic company SimilarWeb, the number of visits to the download page of the Zoom video conferencing platform increased by 658% in March compared with February. The interest of investors in the company has risen proportionally: since the end of January, its shares have doubled in value. According to Microsoft, in March, the number of users of the Skype service increased by 70% and reached 40 million people. In Italy, in the same month, a considerable increase in the number of calls and online meetings through the Microsoft Teams platform was recorded — by 775%. On this wave, Russian companies joined the battle for users: at the end of April, Yandex introduced Yandex.Messenger, which integrates the function of decrypting voice messages into text.
— Interest in the EdTech sector has increased because the closure of schools has affected nearly 1.8 billion schoolchildren and students in 188 countries. The load on the most considerable Russian resources for distance learning — Foxford, YaKlass, and others — has increased dramatically. The same is observed on different resources: the number of daily sessions in Google Classroom from two million in early March rose to nearly five million by the middle of the month.
— Retail also switched to the remote work format during the pandemic, and it is not only for groceries. BMW Group Russia began selling cars via the Internet. PIK and VTB Bank conducted their first mortgage transaction in April. The purchase of an apartment was entirely online. Offline stores are also changing: Amazon, an online giant, has begun selling point-of-sale retail outlets without retailers and cashiers to Just Walk Out. Other retail technologies that are gaining popularity include the possibility of contactless payment for purchases through a face recognition system, online fitting of clothes and shoes using VR services, and a loyalty system using augmented reality technologies.
— The development of the fintech segment continues steadily. Remittances and payments remain the most popular services. In the context of self-isolation, the number of online payments in online stores has increased. However, other segments are developing: digital services for creating intelligent profiles of bank customers, anti-fraud technology, voice banking, and blockchain. So, fintech start-up Oriente raised $50 million to develop the consumer ecosystem of Southeast Asia, fintech start-up Neat raised $11 million to develop IT solutions for organizing international trade among small and medium-sized businesses.
Even though specific segments of the venture capital market continue to stay afloat even during the crisis, many start-ups and young companies now have a hard time. How to survive the crisis if the focus of your company does not correspond to market conditions?
First: evaluate the possibility of re-profiling (pivot) of your product, try to find a new application for it. That's what the Spaces start-up did, delivering VR rides to theme parks in China; when the number of orders due to the spread of the virus came to nothing, the company focused on helping businesses conduct Zoom conferences using augmented reality.
Secondly: Work on submitting a business plan for investors. If your start-up meets the needs of a pandemic society, explain how this technological solution can make life more convenient and safer, increase work and learning efficiency in an online environment, or through online entertainment to ease social exclusion. For example, HappyLend, a graduate of GenerationS accelerator, offers to use its platform to provide installment services to online and offline stores to support small and medium-sized businesses during the quarantine.
If you can't adapt your start-up to current trends, remember that there will be an increase in interest in technologies and solutions that will help businesses quickly compensate for losses in the post-crisis period. Focus on how your product can help mitigate the economic bang for the company.
Third: "Standby mode" is unproductive. Spend all your efforts on the search for new investors or mentors. For example, if you have not done so yet, apply for participation in one of the accelerators: they continue to search for promising start-ups.
And the last one: we must not forget that no matter how hard the trial the pandemic and the related regime of self-isolation may seem to us, this will not last forever. And if a start-up offers a genuinely excellent technological solution, it will undoubtedly be a success. The main thing is to hold out until the end of the crisis when investors begin to actively "sift" the market in search of new projects.