Press about RVC

There are almost no series venture funds in Russia

09.12.2014

There are almost no series venture funds in Russia

In the programme "Trial", Igor Agamirzyan, General Director of RVC, Alexander Galitskiy, a member of the Advisory Board of RVC, the managing partner of Almaz Capital Partners, answered to the questions of ,host of Kommersant FM Anatoliy Kuzichev.

— This is not the first program in our project, we have already met with your colleague Evgeniy Kuznetsov, and he explained me the meaning and the ideology of the activities of RVC in the Russian market. Let us speak about this topic in more details.

I. A.: Ok.

— Taking into account that it is December now, and there is already a pre-Christmas feeling, it is not in the form of gifts and ringing glasses for us, but in summary talks and attempts to summarize the results of the year. How do you assess the outcome of this very difficult expiring 2014 in terms of venture capital investment and creation of the venture capital ecosystem?

I. A.: I think that this year, of course, was not easy. I can say in advance that I anticipate that the next year will not also be the easiest, but it is certain that the period of rapid growth the Russian market experienced in 2010-12 slowed down in 2013, there has been an obvious decline in the amount of money in this market this year. By the way, according to recent data, I have a feeling that there is no significant downturn in the number of transactions. But there is obviously less money invested, the average transaction value significantly decreased.

— Could you say specific numbers so that we can understand how many transactions and how much money we are talking about?

I. A.: There are exact figures in studies, you can look at them. But if to speak approximately, in recent years of rapid growth, in 2010-12, the market has grown almost tenfold and investments in Russian companies reached about $1 billion per year. As far as I know, there are about 170 funds on the Russian market. At least half of them are alive. The total capital is also at its peak reaching some $7.5-8 billion, this is the capital available for investment. Accordingly, the maximum of 2012 was about $1 billion. It appears that there was no fundamental decline in 2013, but there was also no such growth as in the previous period. This year there is a 30% drop in terms of money quantity. But at the same time the international analysis that we reviewed and got says there is a 30% increase in transactions in Russia.

A. G.: There is growth in the world in general, and the situation reflects this.

I. A.: But for sure, we have lost the first place in terms of growth. In Europe, we were in the first place in terms of growth in 2010-2012, and during this time we managed to enter inside the top five and there is every likelihood we are in the second place.

— Is it about the growth rate?

I. A.: Yes, it is.

— But it can also be explained by two ...

I. A.: Low starting level, of course.

— Yes, the lower the starting position is, the faster you grow.

I. A.: Moreover, it was obvious there is stagnation in developed countries if not particularly deceleration. According to the results of this year, or rather half of 2013 and 2014, in Europe Sweden is in the first place, and France is in the second place in terms of growth of the venture capital industry. The UK still remains the leader in absolute figures, but its market is in stagnation, without any growth.

— And in what place are we now?

I. A.: We are in the third place in terms of the growth rate.

— Well, it is ok.

I. A.: In fact, it is not the worst situation. I cannot say precisely, but we are likely to remain in the top five in absolute figures.

A. G.: I would say it is a normal situation, even if to speak in general. But if to speak about us in particular...

— "Normal" - Do you mean a slowdown?

A. G.: Well, there are waves, this issue is determined by the number of funds: they opened, closed. There are cycles; a fund is always a cycle. Nevertheless, in spite of the difficulties, if we take the political situation, however, we closed the fund this year at 200 million, a rather big figure for a private foundation not accepting public money. On the other hand, we have increased the number of transactions this year, it is odd enough, too. So, it is such a question, I think, because we are in the initial stage, we closed the fund and we have growth, and someone is in this recession. So, I would not completely agree that there is a significant decline in Russia, it is just a normal development pace. As far as there are still no series funds in Russia, it is difficult to talk about seriation.

— Well, it is clear.

A. G.: So, someone opens, someone closes. All opened approximately at the same time, someone has already run out of money for the next cycles of investment, so that is why it is ...

I. A.: Yes, in fact I agree completely. In this case, I can add that we studied the development of the venture capital industry in developing countries which started earlier than Russia, BRICS countries, for example, and found that they almost always developed by the so-called Gartner's Hype Cycle. A period of rapid growth at first, then overreach, a slight recession, and then a much slower growth. In general, frankly speaking, I expected that Russia would have this overreach and the transition from rapid growth to the first phase of recession a little later, we had expected it somewhere in 2015-16, but the macroeconomic and political situation exerted its influence.

A. G.: Not only. It is really when all funds were established. Most funds were established in 2008-2009. All had an investment cycle of four or five years. Accordingly, now all should have the second funds.

— Ok.

A. G.: Someone was not able to form them, or people did not manage to work in teams, or something else happened. Naturally, the foreign economic or political situation affects ...

— You have already mentioned several times the phrase "macroeconomic situation" and the word "policy". Do political circumstances affect the work of RVC?

I. A.: I would not say that they affect directly, but despite the fact that the venture capital industry has a clear national focus in each country, it is very global. And therefore, any restriction, any trend to isolation of the national economy is certainly harmful to the venture capital technology business in general. So I would say that this is concerns, but confirmed, inter alia, by facts. In particular, for a long time, we were actively working to attract foreign big investors, including corporate foundations, in Russia. We had several transactions off to a good start, these transactions would have been very important for the market. The arrival of large corporate investors, expanding the range from purely IT to other sectors of the industry would mean a lot for our market, our start-ups. Unfortunately, the transactions were postponed. And nobody told us so far it was the final decision, but most potential investors have taken the position that they would wait and see how the situation will develop.

— By the way, you said this dynamics when the number of transactions remained the same, but their cost was greatly reduced, was, in fact, the activity without external inflow.

I. A.: You know, I think it is even a little bit different situation. In my opinion, this is just an indicative of a certain maturing of the market, reaching a level of maturity. Frankly speaking, at this stage of rapid growth in 2010-2012, as I said, we had a number of start-ups highly overrated. Upon the conditions of shortage of projects and excessive offering of money in this market, investors began to invest more than projects actually required and, frankly speaking, deserved. Therefore, in my opinion, those amounts that are now being invested are much more realistic. By the way, there is another very curious fact that really impressed me: this year almost all polls of venture investors showed a sharp drop in interest in the sector of e-commerce, online booking and so on, in which up to 80-90% of all money was invested in recent years.

A. G.: I would like to distinguish two sectors, because when they are mixed, the figures are obtained and it is not proper. It is because there is the technology sector in which people invest in the hope that capitalization will be due to technological innovation, growth. This is an innovative business. And there is a game in business models of Marketplace, which were quite crowded in the world, that is where the big bucks are working. In fact, everything is based on advertising, it is rather hard to achieve profitability of the company in e-commerce. Amazon is still playing on the balance of profitability and loss.

— What about the phenomenon of Alibaba?

A. G.: This is exactly the same situation. A lot of money is invested. There is a dynamic growth. You should understand that in some businesses people evaluate the dynamics of growth in the hope that this dynamic growth creates a big market, and then positive things appear. This is what distinguishes the technology market, where the very exponent starts to apply much earlier, because there appeared a high-tech product that is in demand. All are anxious to buy it and they make money due to this fact. So there is such a trend. Now it should be formed yet. We mixed it all together and said: "Here is the assessment of the venture market in Russia". When it comes to such a situation, it is necessary to distinguish things. The technological transactions, from my point of view, did not decrease. On the contrary, they are increasing, because, in my opinion, there is a positive factor of establishment of the innovative venture capital industry in Russia, if to speak about it specifically. Offers in this field are becoming more interesting and attractive in terms of quality and content.

I. A.: I can add that about two years ago RVC decided we would not work with the Internet, e-commerce, etc., in principle, not because it is bad and should not be worked with, but because there is already a quite big amount of private money. On the other hand, at that time other public instruments appeared. For example, FDII (the Foundation for Development of Internet Initiatives). Our presence became just pointless. Accordingly, we are focusing all new tools, funds on those areas of the technology market in which there are gaps and lack of private investment. For example, we have become the largest investor in biotechnology. Now, just recently, we announced about another biofund, and I think that in Russia today venture capital investments in biotech with the participation of funds, with the participation of RVC are probably up to 75-80% of all investments that go into this industry. It is a lot.

A. G.: 80%, that is why the connection of physical and digital world is what is new and promising.

— As far as we talked about the New Year situation, this 2014, thanks to you, we reviewed 2013, 2012, 2011 and 2010, let us always talk about the coming 2015: plans, the trend, though we have already talked about the trend.

I. A.: I think Alexander will correct me if I am wrong, but my firm belief is that the time of any crisis, any problems is... And now, there are publications like "The Great Depression of the Russian venture capital market", just recently an article with this title was published. Studies conducted by various independent agencies and venture capital funds are also quite alarming. I have a firm belief that the time of any crisis, any problems is the time for new opportunities, because there is less money in the market. So money is becoming more precious. And those who are able to use them effectively may, with the same volume, do more, achieve greater results, if they do invest wisely and correctly. And it is very important to choose the strategic direction of the priority markets, where growth is expected, and to balance between short-term financial interests and long-term strategic ones. Because if let us say you want to get as fast return on investment as possible, it is not about the venture business. The venture business is rather about a long-term strategy and the prospects of becoming the leader in the next generation of technology.

— You said about this round, about the next turn, about the new economic and technological - this is connected - situation: when do you expect it? It is interesting because everybody is talking about it taking into account development of 3D printers.

A. G.: It has already come, it is seen in some elements, it is something that relates to wearables, now they are implanted into clothes, then they will be implanted into our body. It is clear this will depend on how we will be. The same relates to fridges. In 2000s people said that refrigerators would do something, and start-ups were based on this. And there was the so-called Internet bubble, but today it is becoming a reality. What was a dream in 2000 is materializing due to the fact that there appeared technologies related to non-energy intensive chips with the ability of rapid communication, the ability to work with large data, invention or revision, cloud technology about which there were talks in the 1990s. One must understand that people start to do something and then, after some time, a real thing appears as the second release. And, therefore, it is time now: things from science fiction films are coming into reality. If you watch some films of 1980s, you will see things that seemed impossible came into reality today.

— Except one.

A. G.: Except what?

— Except for a doomsday scenario that is regularly shown in fantastic films, inter alia, thanks to high technologies. This has not happened yet, or maybe happened - who knows?

I. A.: At least, I can agree with Alexander, because a revolution is not a one-time process, it is a phenomenon in which we live, and things have been developing groundbreakingly for a long time at quite fantastic pace. You can talk about, deepen on specific technological breakthroughs, new products that are now appearing, but they do appear. Even in 2014 there are two or three revolutionary solutions that have emerged in the internet of things, about which I definitely know that a year ago they were not known and now they have turned into reality. As an example, I can say that last year the minimum retail price of a Wi-Fi unit for any microcontroller was about $50, but today it is $5. A tenfold drop in one year. And it is a qualitatively different level.

A. G.: It happened with memory.

I. A.: The same was with computer memory.

— And even memory capacity was the basis for this well-known formula, was not it?

I. A.: Yes, this is the Moore's law, this is what is happening with communications control systems.

A. G.: Speed and power consumption.

I. A.: And the combination of power consumption and price is the most important.

— I asked about this new way of life and about the revolution, because I had a naive hope that it was clear that we were a developing country, and in a curve, at some new stage, if we suddenly understood some aspect this turnaround would happen, we would be able to succeed someday.

A. G.: In today's world, no one can overcome another one. Today you can win only on the condition of integration into the global processing chain. And in case of just borrowing niches you can become the leader, but it is difficult to imagine a country working all alone.

— But such examples exist.

A. G.: Look at any device that is produced by the United States, and you will see that they are not alone.

— It is clear, but it is a question of profitability, not a question of competence.

A. G.: No, it is competencies, including, excuse me, today screens for the same devices, which we all have, which the United States cannot produce. So they are produced in South Korea.

— Is this a question of competencies?

A. G.: It is a question of competencies which are developing in a particular country, and someone has time to develop so much that he becomes simply irreplaceable in this chain.

I. A.: And this is more due to the fact that the biggest market of technology consumption is the consumer market, the market of the end user, for mass products, focused on horizontal markets, first of all, the consumer market. Not army men, not the nuclear industry, not the state, but the end users. So the competitiveness can only be achieved on the scale effect on this market, that is, you need to be able to do a perfect product and sell it worldwide. As for what Alexander said, I have an iPod in my hands. And there is the same inscription on the back of iPhone: “Designed by Apple in California, assembled in China”. And the same is on all devices. Why? It is because good designers are only in California. In fact, it is strange but we have a breakthrough in Russia: YotaPhone 2. It is a product of the world class. It is designed in Russia, but assembled still in China.



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