22 June 2012, St Petersburg — According to the first issue of MoneyTree: Venture Market Navigator, a publication focusing on the Russian venture capital market in 2011, jointly issued by the PwC Centre for Technology and Innovation (CTI) and RVC, in 2011 venture investments in the Russian IT sector amounted to USD 237 million in a total of 139 deals.
2011 MoneyTreeТМ: Venture Market Navigator (MoneyTreeТМ: Russia) is fully focused on venture investments in the IT sector, which is the most dynamic and transparent sector of the Russian market. According to the overview, this segment of Russia's innovation market attracted the absolute majority of venture investments.
E-commerce and projects related to entertainment and social networking are among those areas that brought in the most investment:
Russia's venture market is characterised by its diversity: on the one hand, it involves a large number of small private investments in innumerable early-stage start-ups, and, on the other hand, it has also seen several major deals between established, successful companies. Thus, our review did not include most transactions worth under USD 50,000 or major deals over USD 50 million, which are not currently a regular occurrence. This review also excludes non-market grants to fund innovative companies.
We believe our findings are an accurate reflection of the level of investment activity in the IT sector. Moreover, according to various estimates, data on up to 50% of the market may be unavailable given the confidential nature of the deals involved.
In terms of investor geography, although investors of Russian origin, as expected, represent the driving force behind the development of the Russian market (participating in 74 deals), it is interesting to note the significant number of deals involving foreign participants, including from the United States (14 transactions), Germany (8), and France, Canada, Sweden and Switzerland (a combined total of 6).
Analysis of venture investments in the IT sector in 2011 (by sub-sectors): Investment volume and number of deals
Projects related to e-commerce attracted the most investment in 2011. This sector saw 33 deals raising investments worth approximately USD 107 million.
Trailing the leader by the number of completed deals, venture in entertainment and social networking saw 31 deals worth USD 57 million. Projects related to the development and application of cloud computing technologies ranked third by the number of completed deals at 29. Although investor activity in this sub-sector was high, venture investment in these deals only amounted to USD 17 million. Projects related to the development of data services and distance learning raised about USD 33 million in 21 deals in 2011.
Venture investment in the IT sector by project stage
If we analyse venture investment in 2011 by investment project implementation stage, projects at the seed stage accounted for over half (77) of the total deals and projects at the start-up stage made up nearly a quarter (34) of all deals, raising USD 30.6 million and USD 38.8 million, respectively.
Early-stage companies and projects attracted most of the investments — USD 94 million going into 16 deals. These figures are characteristic of young innovation-driven Russian IT companies, a segment that got up and running only several years ago and, thus far, has experienced the need primarily for "start-up" investment.
The outlook for venture investment in Russia's IT sector
We anticipate that, providing the positive trends in the Russian and global economy continue, 2012 will see the Russian venture market continue to grow and achieve new records. According to our estimates, the volume of venture investment in the Russian IT sector in 2012 could increase by over 50% to exceed USD 450 million.
"A great number of projects that received seed investment in the past 12-18 months have already shown growth, and now need further financing to reinforce the successes already achieved, enter the market, and scale up their business. Against the background of extensive activity among Russian and international venture investors in Russia, and the emergence of a great number of new players, many of these companies stand a good chance of attracting subsequent interest in the larger investment rounds as soon as this year,” noted Anton Abashkin, who heads the PwC Accelerator at CTI Russia.
"Further growth in the Russian venture market will be driven by both an increase in the number of investors on the market and an expansion in their areas of focus", said Igor Agamirzian, CEO at RVC. "As the market continues to take shape, we anticipate seeing more qualitative changes, specifically greater transparency, as well as investment and corporate governance standards that approximate the level seen in developed countries."
An increase in the number of investors on the market and an expansion of the areas they work in will boost the further development of Russia's venture market. We expect to see sustained qualitative change in the market, in particular, the market becoming more transparent and investment and corporate governance standards coming into line with those in developed countries.
For over 15 years, PwC has been issuing MoneyTreeТМ reports on leading tech markets such as the United States and Israel. For many global venture market players, these reports serve as a litmus test of current market conditions and recent trends. As the Russian venture investment market develops, new issues of MoneyTreeТМ: Russia will cover developments in the existing trends and the emergence of new trends in the IT sector, as well as other segments of the Russian innovation and technology market.
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2. PwC Russia (www.pwc.ru) provides industry-focused assurance, tax, legal and advisory services. Over 2,000 people work in our offices in Moscow, St Petersburg, Yekaterinburg, Kazan, Novosibirsk, Krasnodar, Yuzhno-Sakhalinsk and Vladikavkaz. We share our thinking, extensive experience and creative solutions to deliver practical advice and open up new avenues for business.
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PwC Russia refers to PwCIL member-firms operating in Russia.
4. RVC (www.rusventure.ru) is a government fund of venture funds, a development institute of the Russian Federation, and one of Russia's key tools in building its own national innovation system. RVC was established by Russian Government Order No. 838-r of 7 June 2006.
RVC’s authorised capital stands at over RUB 30 billion. It is 100% owned by the Federal Agency for State Property Management.
As of June 2012, RVC-backed funds boast a portfolio of 118 companies. Invested capital totals more than RUB 10.2 billion.
RVC's main goal is to stimulate the creation in Russia of a domestic VC investment industry, and significantly increase venture funds' financial resources.
An important area of RVC's work is creating and supporting a special-purpose service infrastructure for VC market players, to increase transparency of investee funds and companies, to ensure Russia has an environment in this area that is conducive to international investors and entrepreneurs, and to optimise legislation affecting the development of innovative business.
The publication of the report MoneyTree: Venture Market Navigator is a crucial step in supporting the development of the infrastructure that Russia's innovation-venture environment requires, with RVC participating as a development institute.
The MoneyTree: Russia report used data from the RVC project to maintain a database on Russian innovation-venture ecosystems. This contains information on innovation-venture market transactions collated and compiled by the StartupPoint company.
StartupPoint is the first, and largest, ru-net community for professional search for venture investment funds and projects to invest in; the company has been active since 2008.
StartupPoint evaluates the investment attractiveness of start-ups and maintains a quality stream of projects in its database. StartupPoint offers projects the opportunity to get noticed and gain access to investment, while also helping investors to find worthy projects in which to invest.
This report was compiled using The MoneyTree™Report methodology (www.pwc.com/globalmoneytree). MoneyTree™: Russia contains information from RVC, StartupPoint that was used by PwC in establishing an overview of the situation.
In analysing the data, venture investment actually received from business angels, investment companies, private, corporate and public venture funds not exceeding USD 50 million in the first round of financing were taken into consideration. If a company received investment in two or more rounds, then each round is viewed as a separate transaction. This study incorporated deals that were formally concluded in the period from 1 January to 31 December 2011.
The term "venture investment" is understood here to mean the acquisition of a stake or capital in new or growing companies, acquiring less than a controlling share. Resources invested are primarily directed to business development, not to the purchase of shares owned by existing shareholders (founders) of the company. The company receiving the investment is active within the Russian Federation and is related to the IT sector.
The IT sector includes the following subsectors: eCommerce; data exchange and communication, development of cloud computing, telecoms, advertising technology, entertainment and online gaming mobile apps, services and apps related to the creation and development of social networks and online communities.
Stages in the life cycle of a project/company, and their definitions:
Seed stage: The company has a concept, idea for a product, but no final product; work is under way on a prototype.
Start-up stage: The company has a pilot version of the product, or an initial demonstration version; testing is under way.
Early stage: The company has a product ready to enter the market, demand is being tested.
Expansion stage: The product is available on the market, sales and demand growth can be observed.
Later stage: The company is becoming a major organisation, showing signs of a public company.