The PwC Centre for Technology and Innovation (CTI) and the Russian Venture Company (RVC) are pleased to present their fourth annual overview of the venture industry – 2014 MoneyTreeTM: Venture Market Navigator. In 2014, the venture market was valued at a total of USD 480.9 million. Despite a general decline in investment activity (by 26% in cash terms), seed stage investments rose 30%, with total early stage investment rising by 4% (up to USD 141 million). The share of such investments in the market grew from 21% in 2013 to 30% in 2014. The number of exits continued to increase, gaining almost 43% over the previous year, which is seen as the most significant development during the past year. A significant increase was also noted in large deals and grant financing. Despite the obvious impact of the crisis, the venture industry has been largely demonstrating a certain degree of sustainability as well as the presence of a number of favourable factors (grants, seed investments and exits), which may prove to be the driving force behind a market recovery going forward.
The report highlights that the assessment of the market's size in 2014 was to some extent affected by the weakening of the Russian rouble; in dollar terms the market sustained higher losses than in the rouble equivalent. At the same time, 2014 saw a record number of exits in the Russian venture market. The increase over 2013 came to 43% in unit terms and 51% in cash terms (adjusted for mega deals), with 30 deals bringing USD 731.5 million in proceeds to investors. In combination with a more than 55% increase (up to 2,619 grants) in grant financing, which has helped boost the inflow of new early stage projects to the market, growing proceeds from investor exits obviously constitute a positive trend and, going forward, may become a meaningful driving force behind a revitalisation of the Russian venture industry.
Gulnara Bikkulova, Management Board member and Director of the Innovation Markets Department at RVC, notes: “In the current situation, the reserves for developing Russia's venture industry are linked to how effectively we create opportunities for 'exits' in Russia. This assumes the active involvement of Russian corporations as market actors, which in turn should lead to a significant shift in the market structure from the point of view of the industry mix, the emergence of new investment vehicles, and greater engagement and commitment from the government as a customer for new innovations."
The structure of venture deals broken down by the business development stage also remains positive. In response to a previously reported shortage of investments at the early stage of the company life cycle, investors became much more active at the seed stage in 2014, with seed stage investments rising 30% (up to USD 38.1 million) as the market generally shrunk, while total investments at both the seed and start-up stages grew to USD 141 million versus USD 136 million a year earlier. Thus, the early stage market came close to achieving a record 30% of the total volume of venture deals (versus 21% in 2013 and 15% in 2012).
According to Anton Abashkin, Director of the PwC Centre for Technology and Innovation (CTI): "Although the Russian market now presents higher investment risks, prompting many investors to revise their plans, it is still home to a rather large group of investors that look at the Russian market for innovation based on its long-term prospects and see new opportunities even in the current economic environment for investing in those areas that might get an additional impetus for development thanks to the crisis - for example, import-substituting technology. In addition, as the relative demand for investment and project valuations denominated in US dollars has declined, the economic parameters of many export-oriented projects, which have rouble-denominated costs, have improved, making them even more attractive for investors."
As previously, the IT sector comes in first by number of venture deals and the amount of investment raised in 2014. IT deals stand at 89.3% of the total number of deals and 91.6% of the total amount of all deals (86.9% and 93.6% in 2013, respectively). The number of venture deals in the IT sector showed a 31% year-on-year decrease to 133 deals with a total value of USD 440.6 million in 2014. The average deal size in the sector did not change, standing at USD 3.3 million.
The e-commerce segment again took the lead among IT sub-sectors by number of deals, amount of investment, and average deal value in 2014. Last year, 25 deals for a total amount of USD 96.4 million were concluded in this sub-sector, only three deals down from 2013. Social media and reference services, advertising technology and cloud technology/software all share second place. In cash terms, however, second place went to the tourist services sub-sector, which brought in USD 51.8 million through six deals. The financial services technology segment ranks third by the amount of investment raised, scoring USD 48 million, also from six deals.
The biotechnology and industrial technology sectors proved to be most sensitive to the crisis, and still make up only a minor share of the market as compared to the IT sector. Both sectors shrunk in 2014 by number of deals; the biotechnology segment dropped by 54% to six deals, whereas the industrial technology sector fell 37.5% to 10 deals. Although taken together in cash terms these sectors have remained almost at the prior year level, and totalled USD 40.3 million, given that more than 50% of this amount was attributed to a single large deal, the actual investment volumes plunged (by 79% from 2013), with the industrial technology sector hit hardest, showing a precipitous decline from USD 29 million to USD 5.2 million.
Grants still remain the main source of financing for small enterprises in these sectors (in accordance with this report's methodology, however, such grants are not considered venture investments). A total of 2,619 grants were given in 2014, worth a combined USD 127.3 million. In number terms, this was 55% more than in 2013 (1,693 grants) and almost four times more than in 2012 (702). The amount of grants given in 2014 also increased, with a 24% gain over the previous year. The majority of grants were given in the biotechnology (32% of the total number of grants and 15% of the total amount) and industrial technology (43% of the total number and 75% of the total amount) sectors. This creates favourable conditions for further development of this vital segment of the innovation market in Russia, provided that this market segment succeeds in attracting private capital.
Apart from total venture deals, the report looks into large deals worth over USD 100 million that are generally balanced between venture financing and classic direct investment, which is tapped for later business development stages. As a result, based on the survey methodology, such transactions are not viewed as venture deals. The number of large deals in 2014 was more than in 2013, with both transactions taking place in the IT sector and involving successful Russian later-stage companies, Parallels and Ozon. The total value of these deals is estimated at USD 350 million, which is 169% more than in 2013 (the USD 130 million Lamoda deal).
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RVC is a government-operated fund of venture funds, a Russian Federation development institution, and one of Russia's key instruments in building its own national innovation system. RVC’s charter capital stands at over RUB 30 billion. The Russian Federation Federal Agency for State Property Management (Rosimuschestvo) holds a 100% equity stake in RVC. RVC has formed 18 funds with a combined value of RUB 26 billion. RVC's own share in these funds comes to RUB 16.1 billion. RVC-backed funds boast a portfolio of 168 companies. Invested capital totals more than RUB 15.2 billion.
Publication of the MoneyTreeTM: Venture Market Navigator report is a crucial step in supporting the development of the infrastructure that Russia's innovation-venture environment requires, with RVC participating as a development institution.
The Venture Database provides statistics on the Russian innovation-venture market. Professionals can access the latest analytical information on new deals, projects and investors on the market, while corporations can tap into potential business development models.
Summary methodology of the MoneyTreeTM: Venture Market Navigator report
The MoneyTreeTM: Venture Market Navigator report is a regular survey of the Russian venture industry, issued by PwC in strategic partnership with RVC and based on the Venture Database. The survey reviews venture deals (cash investments in the equity of fast-growing start-ups) announced from 1 January through 31 December 2014. The survey also focuses on key financial components of the Russian venture environment, such as investments in infrastructure, grant financing, investor exits and large deals (excluded from the market size assessment and not shown separately).
For over 15 years, PwC has been issuing venture market reviews on leading high-tech markets such as the United States and Israel. For many global venture market players, these reports serve as a barometer of current market conditions and recent trends.
The MoneyTreeTM: Russia contains information provided by the Venture Database and summarised by PwC.
In analysing the data, we consider venture investment actually received during a single round of financing from business angels, investment companies, and private, corporate and public venture funds not exceeding USD 100 million. If a company has received investment in two or more rounds, each round is viewed as a separate deal. This study considered deals which were formally concluded between 1 January and 31 December 2014. Deals worth more than USD 100 million due to their one-off nature are presented separately to avoid distortions in the market size assessment.
The term "venture investment" is understood here to mean the acquisition of an equity stake or charter capital share in new or growing companies, but less than a controlling share. Funds invested are primarily directed toward growing the business, and not toward the purchase of shares owned by a company's existing shareholders (founders). This report covers companies active in Russia's IT, biotechnology and industrial technology sectors.
Please note that this report does not include information about outbound deals involving Russia-based investors oriented toward the foreign market.
In addition, as non-market sources of funding, grants have not been factored into the total market volume and are presented separately.
This report also covers deals related to investor exits. However, similar to grants, these transactions are not factored into the total market volume.