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Факторы интернационализации российских стартапов и использование краудсорсинга для привлечения ресурсов

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Данная работа посвящена поиску стимулов и барьеров для российских небольших инновационных предприятий (стартапов) к расширению на рынок США. Рынок инноваций США является ключевым для компаний по всему миру, поэтому так важно сфокусировать на нем, а определение драйверов к появлению стартапов в России позволит в дальнейшем выработать систему мер для увеличения количества инновационных предприятий в нашей стране. Для получения данных был выбран подход, состоящий из трех ключевых компонентов 1) обзор уже имеющейся литературы по данному предмету; 2) проведение интервью с лидерами подобных предприятий для получения качественных результатов; 3) проведение опроса для получения количественных результатов. Используя данную методику, мы синтезировали ключевые стимулы для российских стартапов к интернационализации. Среди них: размер рынка, размер и уровень развития индустрии венчурного капитала, неудовлетворительная среда для предпринимателей в России, сильный и привлекательный бренд Кремниевой долины, а также уровень зрелости потребителей на рынке. Все перечисленные факторы являются внешними по отношению к собственной среде компаний, так как они обусловлены силами, находящимися вне непосредственного влияния компаний. Это наблюдение можно рассматривать как весьма удивительное, так как, большинство исследований показывают, что мотивация к интернационализации лежит внутри фирм. Мы делаем вывод о том, что предприниматели, активно работающие на международном уровне, больше ориентированы на внешнюю среду, чем на свои внутренние факторы, а внутренние особенности рассматривают не как стимулы, а как само собой разумеющиеся предпосылки. Кроме того, мы проанализировали новое поколение компаний, которые полагаются на краудсорсинг как альтернативный способ привлечения ресурсов и выхода на международные рынки и считаем, что данный инструмент способен стимулировать возникновение компаний нового поколения.
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Russian and global
venture markets
in 200713
3
1Russian and global venture markets in 2007–13 |
Contents
Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Methodology of research . . . . . . . . . . . . . . . . . . . . . 4
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Global venture market in 2007—13 . . . . . . . . . . . . . . . . 9
Key venture markets . . . . . . . . . . . . . . . . . . . . . . 21
Government incentives and VC funds: best practices . . . . . 29
Tendencies in the role changes
of the key venture market players . . . . . . . . . . . . . . . 32
Russian venture market. . . . . . . . . . . . . . . . . . . . . 33
Russian venture market executive summary. . . . . . . . . . 35
History of the Russian venture market . . . . . . . . . . . . . 36
Russian Government and the new economy . . . . . . . . . . 38
Russian venture market in 2007–13 . . . . . . . . . . . . . . 42
Afterword . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Foreword
2| Russian and global venture markets in 2007–13
At EY, we believe that venture capital (VC) investments are one of the
key drivers behind the global economy shift. The unprecedented change
in the ways in which people communicate and share information, and how
businesses go global and reach out to their customers would not be possible
without major innovations. The innovations themselves, however, are the
result of continuous effort by entrepreneurs and governments alike to
develop a clear vision of the high-tech future and a path toward it.
We believe it is crucial to keep fast-growing enterprises in the loop to
understand the most recent and relevant trends, and support entrepreneurs
offering the world their disruptive ideas and technologies. As technology
advances and the global economy searches for a breakthrough to rebound
from the difficulties of the past few years, the business environment around
us changes rapidly, and EY reflects these changes in its thought leadership.
Our recent studies suggest that the problems of greenfield financing,
regulatory challenges and public-private partnership issues do not fade away.
Businesses and governments therefore need to continue their discussion and
exchange views and ideas.
As can be seen from our report, produced in collaboration with RVC, the
venture investment industry is still going through difficult times coming out
of the severe financial crisis. In these circumstances, the rapid rise of the
Russian venture market suggests that stakeholders continue to believe that
the efforts of the Government and market players will result in a transparent
business ecosystem and that the way to the prosperous future lies in building
the innovative economy.
The more challenges we face, the more will appear. In tomorrow’s rapidly
changing world, EY, as ever before, will be there to help businesses navigate
their way toward sustainable growth and success.
Alexander Ivlev
Country Managing Partner
for Russia, EY
3Russian and global venture markets in 2007–13 |
Within the last seven years, one of the most important goals of development
institutions created in Russia was to build the Russian innovation economy
on the basis of the public-private partnerships. Specific attention was paid
to the establishment of the VC industry in Russia, considered not only as
a source of capital and business competences, but also as one of the key
elements of the innovation ecosystem.
Several years ago, the VC market was virtually absent in Russia. But now
things have changed. Joint efforts from the Government, development
institutions, the business community, science and education have shown high
efficiency in terms of creating a national VC industry in Russia.
An important stage for the Russian venture market was completed in 2013.
The main goal of RVC, a government fund of funds and a development
institution of the Russian Federation, was to create a self-developing
venture market (in collaboration with other development institutions) and to
stimulate innovation in the development of innovative entrepreneurship.
As a result, RVC activities in previous years have been focused on supporting
the involvement of the private VC into the innovative entrepreneurship
development, while ensuring the creation of institutional and sectorial
venture infrastructure. These tasks are considered to be almost completed
at this point.
Over the past three years, the Russian venture market has increased several
times. But a more important fact is that now the growth of the Russian VC
industry does not depend on state financing alone.
Of course, like any other growing market, the Russian VC industry needs
further development. However, one could say that the Russian venture
market has been established and it is becoming more attractive for Russian
and foreign investors.
Until recently, the world’s leading research agencies have not paid a lot of
attention to the Russian venture market. But now the situation is changing.
Authoritative international organizations acknowledge the positive outcomes
of the Russian VC industry. Moreover, the interest in analytical studies that
reflect the dynamics of the Russian venture market and its potential are
growing all over the world.
We hope that this report presented by EY will facilitate the integration
of foreign investors and corporations into the Russian venture market
and increase international cooperation in the key areas of technological
development.
Igor Agamirzian
CEO and Chairman, RVC
4| Russian and global venture markets in 2007–13
In this report, an investment is considered a venture investment if
it is a cash-for-equity transaction with a company at seed, start-up
and other early stages of development made by a special-purpose
venture fund. Hence, Rusnano investments or similar equity-
based transactions, including debt-to-equity acquisitions through
convertible loans, are considered venture investments.
The following transactions are not accounted for in the statistics:
Venture investments of an undisclosed volume or investments
of a volume that cannot be reasonably estimated
Grants
Special-purpose R&D financing
Investments made by business angels
Investments made by companies that are not managing
a special-purpose venture fund
Investments made by funds that are targeted at real estate
and development, i.e., investments in construction projects
and objects (although the statistics do include investments
in companies involved in the provision of engineering and
architectural design services, production of construction
materials and construction work)
The Russian market section of this report is based on the
statistical data for 2007 to mid-2013 provided by the Russian
Venture Capital Association (source: RVCA), processed data of
RusBase and EY data for 2011 to the first nine months of 2013
(source: RusBase, EY). Due to the lack of detailed data, some
sections of the report contain conclusions only for 2011 to the
end of Q3 2013.
The global market and key venture markets sections of the report
rely on the data provided by the Dow Jones VentureSource
database.
Each recorded transaction was classified by an industry group,
the investee development stage and the investee financing
round according to the adjusted Dow Jones classification. The
key quality characteristics of the classification are described
below; however, each particular transaction was subject to expert
judgment.
Company development stages
Start-up (no revenues)
A company in the early, formative stage of development being
run by founders and possibly a few developers. Often, the start-up
stage coincides with seed funding. A company generally goes
from the start-up phase to the product in development phase very
quickly.
Product in development (no revenues)
A company is considered to be in the product development stage
when it is developing an initial product and has no product or
service revenues. Companies that provide a service rather than a
product are considered to be at this stage while developing their
business strategy, prior to actually marketing the services and
receiving revenues.
Product in beta test (no revenues)
For information technology (IT) companies, this is an intermediate
period between product development and product shipping. The
company is technically still in product development, but a prototype
is being tested by select customers prior to market introduction.
In the global market section, companies at the product in beta test
stage are included the product in development stage.
Shipping product or revenue
This indicates that at least one product is being shipped for
which revenues are being received, regardless of the number of
other products still in development, beta test or clinical trials.
For service companies, this stage indicates that the company is
providing services to a customer base and receiving revenues for
those services.
Profitable
This stage indicates that a company is shipping products or
providing services from which it derives revenues, and the
company has reported that it is profitable on an ongoing basis.
Restart
Infrequently used, this stage indicates that a company is
reformulating its business plan and is restructuring. Since the
restart period is generally brief, many restart companies will
subsequently return to their stage of product in development or
shipping product.
Later stages
Investments are used for debt re-financing, acquisition of
distributors or suppliers, preparation for exit or other activities
aimed at short-term capitalization growth.
On some graphs, the start-up and product in development stages
and product in beta test and shipping product or revenue are
combined so that the data obtained from different sources can be
compared.
Methodology of research
5Russian and global venture markets in 2007–13 |
Venture round types
The venture round is a stage at which a company is financed by
an investor. When determining the type of venture round,
a company’s development stage is taken into account, together
with the total funding to be raised and the volume of the
transaction in question.
Seed
A cash-for-equity transaction made by venture investors in very
early-stage companies. Typically, seed rounds have historically
been US$1m or less, but may be larger. Usually, seed financing
comes within a year of the company’s start date and is used to
open an office, buy hardware and hire key personnel.
Round A and round B
A cash-for-equity transaction typically made by venture or private
equity investors in companies that ship products and have a track
of positive financial results.
Round C and further rounds
A cash-for-equity transaction typically made by venture or private
equity investors into companies that are shipping product and
have a track of positive financial results.
Exit
An equity-for-cash transaction and a disposal (partial or
complete) of holdings by a venture fund. Two major types
of exits are IPO and M&A.
Industry classification overview
Each company is assigned to one of the industry groups
consisting of 27 industry segments. Industry codes are assigned
with regard to the actual product or service the company
provides, rather than how the company provides it. For example,
if a company is a social network website operator, it will be in the
consumer information services segment of the consumer market
group, rather than the IT group.
Industry group Industry segment
Business and financial
services
Business support services
Construction and civil engineering
Financial institutions and services
Wholesale trade and shipping
Consumer market —
consumer goods
Food and beverages
Household and office goods
Personal goods
Vehicles and parts
Consumer market —
consumer services
Consumer information services
Media and content
Retailers
Travel and leisure
Energy and utilities Non-renewable energy
Renewable energy
Utilities
Health care Biopharmaceuticals
Health care services
Medical devices and equipment
Medical software and information services
Industrial goods and
materials
Aerospace and defense
Agriculture and forestry
Machinery and industrial goods
Materials and chemicals
IT Communications and networking
Electronics and computer hardware
Semiconductors
Software
6| Russian and global venture markets in 2007–13
Glossary
CVC Corporate venture capital
EBRD European bank for reconstruction and development
GDP Gross domestic product
GP General partner
IP Intellectual property
IPO Initial public offering
IT Information technology
LP Limited partner
M&A Mergers and acquisitions
MNC Multinational corporation
MOED Russia’s Ministry of Economic Development
OECD Organization for Economic Co-operation and Development
OJSC Open Joint Stock Company
PE Private equity
RVC OJSC Russian venture company
RVCA Russian Venture Capital Association
SME Small and medium-sized enterprises
SPO Secondary public offering
VAT Value added tax
VC Venture capital
YTD Year to date (in this report — end of Q3 2013)
7Russian and global venture markets in 2007–13 |
Global venture market
8| Russian and global venture markets in 2007–13
9Russian and global venture markets in 2007–13 |
Amid the fragile economic recovery and highly volatile capital
markets of the last few years, the VC sector is becoming
increasingly globalized. As the economic pendulum swings toward
the rapidly developing economies, the VC sector is experiencing
its own paradigm shifts.
The globalization of VC is assuming many forms, ranging from
global fund-raising and cross-border investment to exits on foreign
stock exchanges or by foreign acquisition, as well as VC firms
opening offices overseas and helping their portfolio companies to
access markets in new regions.
A shift toward the emerging markets can be seen in the
geographic VC patterns and the growth of new global VC hotbeds.
Although the US will likely remain at the leading edge of VC-
backed innovation for many years to come, US VC fund-raising
continues its decade-long decline. Elsewhere, in China, India
and other emerging markets, vibrant innovation hotbeds and
entrepreneurial talents are emerging, and investors are focused
on less risky, later-stage deals, at least for now.
Global VC market 2007–13 YTD
49.6 50.7
35.1
46.1
54.2
46.8
33.2
5,797 5,424
4,732
5,311
5,756 5,612
4,011
0
1,000
2,000
3,000
4,000
5,000
6,000
0
10
20
30
40
50
60
2007 2008 2009 2010 2011 2012 9M2013
Number of rounds
Amount invested (US$b)
Amount invested during the year (US$b)
Number of rounds during the year
Source: Dow Jones VentureSource
In 2013 YTD, as at 30 September, 4,011 VC deals were
announced globally, with an aggregate value of US$33.2b. These
VC investments have been made across a range of different
countries, sectors and stages, from the very early-stage seed
and angel financing to the larger growth capital and later-stage
investments.
Exploring markets of VC investment over the period 2007-2013
YTD, the picture has not changed across all the leading countries:
the US, Europe, Israel, China and India. The sharp decline in 2009
clearly demonstrated that the VC industry was not immune to the
2008 financial crisis.
Then there was over two years of growth, and the global VC
industry reached record highs in 2011, followed by a downward
trend in 2012 and 2013. Mirroring the investment trends, the
total number of the VC funds closed and the dollar amounts
closed rose in 2010 and 2011. In 2012, the trend reversed
sharply, with the number of fund closings declining by 13% year
on year to 280 in 2012 from 323 in 2011, and the value falling
from US$46.8b to US$33.2b — a year-on-year decline of 30%.
These show that widespread global economic uncertainty weighed
heavily on VC investment in the last two years, demonstrating
also that limited partner (LP) investors are showing a preference
for the most successful “brand name” funds, seeking depth of
experience and a track record.
Globally, the share of investment directed to all fund-raising
stages has decreased; as mentioned earlier, investors stayed
devoted to companies in the revenue stage, showing the least
interest in start-up stage companies.
Both the amounts raised and the number of rounds continued
to decline in 2013. Apparently, 2013 seems to be the second
challenging year in a row for VC investments. In 2013, the overall
market sentiment was still affected by the continuing slow pace
of global economic growth, which inevitably was reflected in the
VC investments in all markets. The amount of financing in the
seed and first-round stages dropped across all regions. However,
even in the volatile equities markets of the past five years, the
average one-day, post-IPO return of VC-backed entities in the US
was 19%, and a recent EY report published in February 2013,
Right team, right story, right price, confirmed that about 40% of
the institutional investors believe rapid-growth markets offer the
highest valuations.
VC investment is strongest
in the US and Europe
The year 2012 saw a considerable fall in the US dollar value of
VC investments compared with 2011. VC investments dropped
by more than 10% in both the US (from US$35.8b to US$32.1b)
and Europe (from US$7.3b to US$6.2b), while Israel (US$1.9b
to US$1.1b) and China (US$6.4b to US$4.9b) reported drops of
more than 42% and 23% in the value of investments, respectively.
In India, however, this indicator remained unchanged for 2011
and 2012 at US$1.6b.
Israel and Europe showed good growth for the first three quarters
of 2013, while Israeli indicators of the amount invested have
already exceeded the figures for the entire period of 2012.
The number of deals and the average deal size in 2012 fell
significantly across all countries, excluding China (although
the number of deals decreased by 40%, the average deal size
increased by 26%).
The slowdown in China’s GDP growth rate led to a decline in VC
investment by more than 20% in both the number of deals and the
total value. However, recent improvements in the forward-looking
Global venture market in 2007–13
10 | Russian and global venture markets in 2007–13
indicators of Chinese economic activity point to a more optimistic
outlook for 2014.
The US and Europe will likely remain at the leading edge of VC-
backed innovation for many years to come, accounting for an
average of 82% and 85% of global VC investment in the period
from 2007 to 2013 YTD in both the amount invested and the
number of deals, respectively.
Countries’ share in global VC investment by number of deals
100%
10%
1%
0%
US
Europe
Israel
China
India
Russia
2007 2008 2009 2010 2011 2012 9M2013
54% 56% 58% 59% 60% 62% 61%
30% 27% 27% 26% 22% 22% 25%
1%
1% 1%
2%
3% 3%
5%
Source: Dow Jones VentureSource
Countries’ share in global VC investment by amount invested
100%
10%
1%
0%
US
Europe
Israel
China
India
Russia
2007 2008 2009 2010 2011 2012 9M2013
69% 66% 69% 63% 66% 67% 69%
15% 16% 16% 15% 13% 13% 14%
0%
0% 0% 0%
1% 2%
3%
Source: Dow Jones VentureSource
Global VC investment by sector
Over the last seven years, most of the investment value and
the number of rounds have been concentrated in four sectors
(IT, health care, consumer services and business and financial
services), with a specific share of 86% and 88% on average,
respectively. The IT sector held the leading position with 28% and
32% in the average amount invested and the number of rounds,
respectively. The software subsegment was the most active.
Global VC investment by sectors — average for a period of
seven years (2007–13 YTD)
IT
Health care
Consumer services
Business and financial services
Energy and utilities
Industrial goods and materials
Consumer goods
28%
25%
18%
15%
8%
3% 3%
32%
21%
19%
16%
4%
5% 3%
By rounds Billion US$
Source: Dow Jones VentureSource
Since 2010, the sectors of business and financial services and
consumer services have attracted growing VC market interest.
The largest number of VC rounds in China in the last seven years
was in the consumer services sector. In Israel, however, a larger
number of rounds was concentrated in the IT and health care
sectors.
From 2007–13 YTD, the IT sector continued to lead in all markets
except India, where it has held the second position since 2008.
The graph of behavior of all sectors during the seven-year period
shows that two sectors — IT and consumer services — clearly have
a similar trend, with a decrease between 2007 and 2009, then
an increase to 2012, when the growth rate began to slow down
again.
11Russian and global venture markets in 2007–13 |
VC investment in sectors during the period from 2007 to
2013 YTD
IT
Consumer services
Energy and utilities
Consumer goods
Health care
Business and financial services
Industrial goods and materials
2,050
1,850
1,650
1,450
1,250
1,050
850
650
450
250
50
2007 2008 2009 2010 2011 2012 9M2013
Source: Dow Jones Venture Source
Amount invested (US$m)
Consumer services continued to dominate the deal volumes
in Europe and India, with the consumer information services
subsegment as the most popular. In 2013 YTD, this segment
accounted for 20% and 45% of the total deals in the sector in
Europe and India, respectively.
According to the data analysis of Venture One, the highest
average deal throughout the period reviewed in this report was
in 2008 in the energy and utilities sector (US$22.3m), while
the lowest average deal was in 2009 in the industrial goods and
materials sector, with US$5.4m.
Another interesting fact about sector behavior: business and
financial services, consumer services and the health care sectors
show an increasing trend in the number of years required to
exit via IPO. However, the IT sector has continued to show a
fluctuating trend in the last year.
IT
The IT sector continues to lead with 32% of the total number
of rounds for 2013 YTD. This sector has kept its leadership in
the last seven years, with 30% of the total number of rounds
annually. This sector also prevails in the annual average of the
total investments category. After an annual decline of 2% to 3%
in the amount invested and the number of rounds from 2007
to 2011, 2012 and 2013 saw a rise associated with the rapid
development of mobile communications, cloud servers, big data
and such terms as “the Internet of Things” and “bring your own
device.” The increase was also associated with the attractiveness
and reputation of the sector relative to others.
The IT sector continued to lead not only on a global level, but
particularly in the US, Europe and Israel, between 2007 and
2013. The sector attracted a major share of VC investment in
the US, accounting for 77% of the total amount invested in this
sector in the last two years (2012–13 YTD), and shows an upward
trend in the share of the number of investment rounds, from 56%
(2007) to 65% (2013 YTD). This is in line with the long-term
trends observed. The software subsegment was the most active,
while in China, the IT sector showed a downward trend from
2007, with a minor recovery in 2011.
IT sector by the amount invested and the number of deals
(2007–13 YTD)
16,735
14,293
9,533
11,607
12,000
13,377
8,386
2,046
1,812
1,488 1,608
1,795
1,171
16,000
14,000
12,000
14,000
10,000
8,000
6,000
4,000
2,000
02007 2008 2009 2010 2011 2012 9M2013
Amount invested (US$m)
Total amount invested
Total number of rounds
1,725
Source: Dow Jones VentureSource
Investments in IT by country
(average over the period 2007–13 YTD)
US
Europe
Israel
63%
23%
5%
1%3%
5%
72%
14%
5%
1%1%
5%
China
India
Russia
By rounds Billion US$
Source: Dow Jones VentureSource
12 | Russian and global venture markets in 2007–13
Health care
In addition to IT, in terms of dollar value, health care attracted
a large number of VC investments across the market during the
same period; it accounted for 25% of the total amount invested
and 21% of the number of rounds, with an average value of
US$10.1m — the second highest among all sectors.
One more interesting fact about the health care sector compared
with others: it continues to account for a larger percentage of
corporate VC investing at the product development stage in the
case of IPO as well as M&A exits.
Health care sector by the amount invested and the number
of deals (2007–13 YTD)
14,290
12,120
10,539
10,920
12,121
9,990
7,469
1,267
1,190 1,126 1,153 1,005
738
19,000
17,000
15,000
13,000
11,000
9,000
7,000
5,000
3,000
1,000
0
2007 2008 2009 2010 2011 2012 9M2013
Total amount invested
Total number of rounds
1,139
Source: Dow Jones VentureSource
Average investment in health care by country (2007–13 YTD)
US
Europe
69%
16%
2%
1%0%
2%
66%
26%
3%
1% 1%
2%
India
Russia
Other
10%
1%
By rounds Billion US$
Source: Dow Jones VentureSource
Israel
China
Consumer services
Another attractive sector for the VC investment market is
consumer services, with 14% and 19% of the average value in the
amount invested and the number of rounds, respectively. The
consumer services sector continued to lead in India and China
last year. China and India have a larger VC deal volume in the
consumer services sector compared with other sectors.
Even in a difficult economic situation, the consumer services
sector was the only one to see activity in IPO during 2009.
Consumer services investments have been on the rise since 2010
due to the growth in the number of smartphones, enabling the
increase in businesses built on Facebook and Twitter’s distribution
platforms. As for category observations, e-commerce and
consumer services command the largest share of investments,
while media and gaming seem to have particularly high fund-
raising opportunities.
The median time to the next stage throughout the different
rounds of VC investment has remained relatively stable and is in
the range of 14 to 15 months for the consumer services sector in
2011, 2012 and 2013 YTD.
Consumer services sector by the amount invested and
the number of deals (2007–13 YTD)
6,073
7,407
5,116
9,432
12,602
9,712
6,289
892 910
778
972
1,282
835
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
2007 2008 2009 2010 2011 2012 9M2013
Amount invested (US$m)
Total amount invested
Total number of rounds
1,244
Source: Dow Jones VentureSource
13Russian and global venture markets in 2007–13 |
Business and financial services
In the case of the business and financial services sector, 73% of
the total deal amount is accounted for by US-based companies.
In the US, median pre-IPO valuations over the last three years
have been significantly higher for the business and financial
services sector compared with other sectors.
In Europe, business and financial services had the highest share
of proceeds in the quarter. A total of 81 deals in the sector raised
US$388m in 3Q 2013. Out of these deals, 70% were made in the
business support services subsegment.
Amount invested and number of deals in the business
and financial services sector (2007–13 YTD)
2007 2008 2009 2010 2011 2012 9M2013
Amount invested (US$m)
Total amount invested
Total number of rounds
6,541 7,244
4,575
5,961
8,485
7,317 6,188
861
786
716
848
964
858 810
0
1,000
3,000
5,000
7,000
9,000
11,000
Source: Dow Jones VentureSource
Investments in the business and financial services sector by
country (average over the period 2007–13 YTD)
65%
11%
2%
6%
0%
9%
59%
21%
3%
4%
1%
5%
7% 7%
By rounds Billion US$
Source: Dow Jones VentureSource
US
Europe
India
Russia
Other
Israel
China
Global trends in the distribution of
VC investments
VC funds are adjusting their investing strategies, preferring to
invest in companies that are generating revenue and focusing less
on product development and pre-revenue businesses. Companies
at the revenue generation stage continued to dominate VC activity
by the number of rounds and by the amounts invested across the
markets. Globally, the revenue generation stage accounted for
more than 60% of the amount invested across all geographies,
apart from in India. During the last seven years (2007–13 YTD)
in the US and Europe, VC rounds in revenue generation and the
product development stages constituted 85% and 91% of the total
number of rounds, respectively. The share of investment directed
to the revenue generation stage has increased from 56% prior to
the crisis in 2007 to 69% in 2012 in terms of the number of deals,
and has risen from 56% to 74% in value terms. Conversely, the
share of investment directed to the product development stage
has declined from 31% to 22% in the number of deals and from
32% to 17% in deal value. These indicators will remain almost
unchanged in 2013, with no significant decrease.
VC investments by development stage 2007–1H2013
(by number of deals)
US Europe China Israel India
Startup stage
2007 2008 2009 2010 2011 2012
188
65
21
13
11
239
76
714
2
225
77
15
12
4
216
68
9
45
260
69
15
7
5
220
42
6
24
49
19
6
2
1H2013
Source: Dow Jones VentureSource
US Europe China Israel India
Product development stage
2007 2008 2009 2010 2011 2012 1H2013
1,083
536
23 127
18
1,041
405
39 111
26
938
343
24 70
14
1,059
346
29 64
10
1,023
274
34
47
18
887
255
16 36
22
379
134
8
817
Source: Dow Jones VentureSource
14 | Russian and global venture markets in 2007–13
US Europe China Israel India
Revenue stage
2007 2008 2009 2010 2011 2012
1,644
1,042
216
131
65
1,597
908
185
148
80
1,486
816
164
93
63
1,735
914
225
83
92
2,129
867
288
102
149
2,295
884
195
92 191
1,112
475
64
75
54
1H2013
Source: Dow Jones VentureSource
US Europe China Israel India
Profitable stage
2007 2008 2009 2010 2011 2012
203
107
139
10
5
183
79
133
10
7
121
40 111
2
14
128
64113
8
7
147
76
46
36
136
55
16
7
7
64
31
6
2
1H2013
4
Source: Dow Jones VentureSource
Investment levels in start-up stage companies have not changed
significantly since 2008, except for the fall in the amount invested
in 2012 (47%). The profitable stage continues with its downward
trend since 2007, with the two-year exception for 2010 and
2011, when the number of deals stayed stable or even grew in
some markets.
We see evidence of money flowing into companies that appear
to present less risk. For example, there is a shift away from social
media toward enterprise — the companies that are attracting
greater VC interest are those that provide a service and are
getting paid for it, rather than those that have an idea that is
good, but difficult to monetize.
Median round size declining
in the US and Europe
As investment shifts to the later stage, the median round size
typically increases as the quantum of risk decreases. In the US,
however, VC funds are deploying smaller amounts of capital in the
later-stage investments. Over the last seven years, the US median
round size in the revenue stage has dropped significantly from
US$7.9m to US$5.0m, reflecting the VC investment being used
to supplement operating cash flows as a bridge until an exit. The
median size decreased from US$2.5m to US$2.1m in Europe in
both revenue and product development stages.
Median investment volume
2007 2008 2009 2010 2011 2012 1H2013
US$m
US Europe China Israel India
7.0
7.0
5.0
4.0
4.8
3.0
3.0
3.6
3.5
3.5
3.3
1.3
1.2
4.0
2.6 5.0
5.0
5.9
2.1 4.4
4.4
4.6
3.8
2.0
2.0
2.1
0.5
2.6
2.5
2.74.5 6.3
4.0
3.8
5.2
Product development stage
Source: Dow Jones VentureSource
5.0
5.0
6.0
2.4 8.8
10.0
7.7
9.5
2.2
5.5
2007 2008 2009 2010 2011 2012 1H2013
US$m
US Europe China Israel India
7.9
7.0
5.0
5.0
4.7
10.0
4.5
9.6
4.4
2.4
4.9
2.1 7.3
4.6
4.8
5.0
2.1
2.4
3.0 7.6
6.0 9.0
8.0
5.0 7.8
Revenue stage
Source: Dow Jones VentureSource
2007 2008 2009 2010 2011 2012 1H2013
US$m
US Europe ChinaCanada Israel India
7.0
7.2
7.9
8.0
8.0
9.5
2.4
3.1
2.8
3.6
10.3
4.9
5.2
5.7
7.3
7.8
8.5
5.0
9.0
4.0
20.0
9.0
6.3
6.0
10.0
20.0
6.7 31.6
4.0
4.2
9.6
101.9
2.6
5.6
14.6
6.9
Profitable stage
Source: Dow Jones VentureSource
15Russian and global venture markets in 2007–13 |
Out of all the geographical regions, the round size for the
profitable stage has been the highest in India over the last two
years. Profitable stage investment levels have been rising in India
since 2011, increasing from US$9.0m to US$101.9m as a result
of two large deals, i.e., Flipkart, India’s largest online retailer,
previously known as the “Amazon of India,” has raised US$200m
and another US$160m from the existing investors during 2013,
with the final round E of US$360m the largest ever to be raised by
an internet start-up in India. India saw an increase in the median
round size for profitable stage investments in 1H13, indicating an
improving investor appetite for risk in VC investments.
The trend toward later and smaller investment in less risky
companies is being accompanied by a move toward tougher
terms. LPs are demanding better terms from the VC funds, while,
in turn, the funds are requiring portfolio companies to meet
stricter milestones and tighter time frames.
VC funds landscape
Roles of major groups in VC financing 2007–13 YTD
Mirroring the investment trends, the total number of the VC funds
closed and the dollar amounts closed recovered in 2010 and
2011. In 2012, the trend reversed sharply, with the number of
fund closures declining by 13% to 280 from 323 in 2011 and the
amount closed falling from US$42.2b to US$29.0b, a decline of
31%. As of 2013 YTD, 133 funds closed and the amount closed
was US$19.4b. The US continued to dominate global VC fund-
raising activity, accounting for 63% of the total number of funds
closed (84) and 72% of the amount raised (US$14b) in 2013
YTD.
Amount closed by US VC funds 2007–13 YTD (US$b)
12.3
8.5
14.0
12.8 7. 3 6.2 5.4 5.4 7.0
3.2
1.6 1.3 5.4 4.5 3.4
12.9
7.5 8.9 5. 8 10.4
3.6
2007 2008 2009 2010 2011 2012 9M2013
Early-stage Late-stage Multistage
Source: Dow Jones VentureSource
US$b
Number of final closures of US VC funds 2007–13 YTD
0
20
40
60
80
100 96
57
17 12 7512 12 6
54
30 29 29
19 16
96
54
63
52
69
62
2007 2008 2009 2010 2011 2012 9M2013
Early-stage Late-stage Multistage
Source: Dow Jones VentureSource
VC fund-raising activity in Europe continues its downward
trajectory in 2013, with the total number of funds closed down
from 101 in 2007 to 37 in 2012, and to just 20 YTD in 2013.
The decline in the level of VC fund closures was most pronounced
in the Asia-Pacific region, where there was a trend toward a
greater number of funds closed for early-stage investment rather
than multistage funds from 2010 to 2011 — a trend that reversed
in 2012 and 2013. After strong VC fund-raising activity in 2011,
the Asia-Pacific region has shown a consistent decline. There
was a year-on-year fall of 41% in volume and 72% in the amounts
raised in 2012. Activity slowed down further in 2013 YTD, with a
16 | Russian and global venture markets in 2007–13
total of 20 VC funds raising a combined total of US$1.9b. Despite
this softer activity in 2013 YTD, the average fund size across the
categories was higher than the 2012 levels, indicating that the
situation was stabilizing.
Amount closed by Europe VC funds 2007–13 YTD
5.2 5.0
2.7
0.2 0.7
0.1
1.3 1.4
0.2 0.2
2.4 1.1
0.3
3.9 3.9
2.3
1.2 2.4 0.6 1.3
2007 2008 2009 2010 2011 2012 9M2013
Early-stage Late-stage Multistage
Source: Dow Jones VentureSource
US$b
Number of final closures of Europe VC funds 2007–13 YTD
0
20
40
60
2
46
53 48
41
72 3 0
21 15 18
27 25
11 9
10
1 1
18
25
2007 2008 2009 2010 2011 2012 9M2013
Early-stage Late-stage Multistage
Source: Dow Jones VentureSource
Amount closed by Asia-Pacific VC funds 2007–13 YTD
2007 2008 2009 2010 2011 2012 9M2013
Early-stage Late-stage Multistage
2.7 1.0 0.1
1.5
8.4
1.8
0.2
0.81.1
3.3
2.0
2.9
5.3
2.4
4.5
2.6
2.0
1.1
Source: Dow Jones VentureSource
US$b
Number of final closures of Asia Pacific VC funds 2007–13 YTD
0
20
40
60
0420
710
11
9
17
22
54
38
35
30
35
25
24
36
30 31
2007 2008 2009 2010 2011 2012 9M2013
Early-stage Late-stage Multistage
Source: Dow Jones VentureSource
It is interesting to note the continued decline in the number of
active investors in the US, Europe and China — a shift to fewer but
stronger players, reflecting consolidation in the market.
Today, general partners (GPs) raising capital from LPs located
outside their home country also invest in portfolio companies
abroad. Limited partnership investors are showing preference to
the most reputable funds LP (those that are well known and have
a high reputation), seeking depth of experience and a good track
record. A VC’s reputation is a valuable asset. A high-reputation
VC is more likely to have its term sheets accepted, and it can pay
lower prices (10% to 14% lower) for shares than low-reputation
VCs do. Top-tier VCs earn their reputation with superior
investment performance, and many of these top-tier firms raise
their carried interest to 25% or even 30%. Nevertheless, there is
excess demand among potential LPs looking to invest in such top-
tier VCs, even at these higher prices. This excess demand allows
VCs to maintain long-run relationships with the LPs, minimize
the time needed for fund-raising, and maximize the chance of
maintaining their high reputation. This reputation is valuable
not only for striking better deals with the portfolio companies,
but also for increasing the value added to these companies.
This value is added through monitoring activities, such as
board membership, corporate governance, human resources,
matchmaking and strategy.1
Global VC fund-raising 2003–13 YTD (includes all funds
focusing on Asia-Pacific, Europe and the US)
Investor Amount
closed
(US$m) since
2003
% over the
past decade
Cumulative
%
Sequoia Capital 9,983.1 2.64% 2.64%
New Enterprise
Associates
8,907.9 2.36% 5.00%
Insight Venture Partners 5,975.4 1.58% 6.58%
Kleiner Perkins Caufield
& Byers
5,801.4 1.53% 8.11%
TCMI Inc. 5.300.0 1.40% 9.51%
Accel Partners 5,159.8 1.36% 10.88%
Oak Investment
Partners
4,810.0 1.27% 12.15%
Bessemer Venture
Partners
4,185.0 1.11% 13.26%
Battery Ventures 3,750.0 0.99% 14.25%
Matrix Management
Corp.
2,875.0 0.76% 15.01%
Total of top 10 56,747.7 15.01% 15.01%
Grand total amount
closed
378,108.7 100% 100%
1 Andrew Metrick and Ayako Yasuda, Venture Capital and the Finance of
Innovation, Yale School of Management, 2011.
17Russian and global venture markets in 2007–13 |
The increasing role of corporate VC
In the current market, institutional investors are responding
favorably to well-positioned deals. It was found that 82% of
institutional investors had invested in pre-IPO or IPO stocks in the
past two years. Those that have done so have strongly favored
companies that come to the market well prepared, are priced
right, are run by the right team and have a compelling equity
story to tell.
Angel investors and crowd-funding platforms continued to step
up their involvement, filling the gap at the start-up stages left
by VC firms, which had moved toward later-stage, high-growth
ventures. A higher percentage of VC deals in companies backed
by organized angel investors means less risk for the VC funds
investing in start-up companies. The percentage of VC deals in
companies backed by organized angel investors has increased in
Europe, Canada, Israel and China for 1H13 compared with 2012.
However, VC funds in India saw a decline in angel-backed deals
from 11% in 2012 to 7% in 1H13. In the US, the level remains
approximately the same as 2012.
Percentage of VC deals in companies backed by organized
angel investors (by countries)
3.2%
United States
4.8% 4.3%
5.6%
7.4 %
6.5% 6.4%
8%
6%
4%
2%
0%
2007 2008 2009 2010 2011 2012 1H2013
Source: Dow Jones VentureSource
2.7%
Europe
4.5% 4.3% 4.1% 4.8% 5. 4%
6.1%
8%
6%
4%
2%
0%
2007 2008 2009 2010 2011 2012 1H2013
Source: Dow Jones VentureSource
1.7%
Israel
1.3%
2.7% 3. 4%
7.4 %
1.2% 1.7 %
8%
6%
4%
2%
0%
2007 2008 2009 2010 2011 2012 1H2013
Source: Dow Jones VentureSource
China
0.8% 0.5% 0.9%
3.7%
4%
2%
0%
2007 2008 2009 2010 2011 2012 1H2013
Source: Dow Jones VentureSource
3.2%
India
3.6%
2.1%
0.9%
3.0%
11.1%
7.0 %
12%
10%
8%
6%
4%
2%
0% 2007 2008 2009 2010 2011 2012 1H2013
Source: Dow Jones VentureSource
In 2013, corporates cemented their important role in the VC
market. Where they chose to make an investment (typically, it
would be a later-stage project in the US), the valuation of the
business in that round was usually greater compared with similar
companies without corporate investors.
Helping to offset the weaker IPO market to some extent,
corporate venture investment is rising and, in 2012, surpassed
the pre-dot-com levels. Corporates are now an important part of
the VC market. Between 2005 and 2013 YTD, Intel Capital and
Google Ventures were the two most active sources of VC in any
sector, with 606 and 180 transactions respectively.
IT has witnessed both the largest number of corporate venture
investments and the highest number of acquisitions. Activity in
the IT sector is being driven by a combination of healthy corporate
cash balances and the rapid pace of technological change, as the
rise of mobile, big data and cloud computing creates a disruptive
business environment.
Corporates are keen to invest in and acquire venture-backed
companies to fill the gaps in their strategy and innovation
capability.
18 | Russian and global venture markets in 2007–13
When corporate investors enter into a deal, the valuation of
the business is typically greater than that of companies with no
corporate investor at a similar stage. Over the last decade, the
median valuation premium, created by corporate investors, was
54% in the US.
The link between corporate investment and ultimate acquisition,
however, is weak. For example, in 2012, in all sectors in the
US, only 2% to 3% of the companies involved in M&A deals were
acquired by an existing corporate investor. Also, the valuation
premium evident at later-stage investment made by a corporation
does not consistently translate into a similar premium at the
moment of acquisition.
Lack of exits hampers the investment cycle
The decline in activity partly represents an understandable pause
in the face of uncertainty, following two strong years (2010 to
2011) of growth. There is also, however, the constraining factor
of a tough exit environment. With general partners finding it
harder to exit their portfolio company investments, the flow of
capital being returned to LP investors is slowing, which in turn
restricts those investors’ ability and willingness to reinvest in
new funds. The poor performance of many VC funds relative
to benchmark indices, such as S&P 500, also does not help the
reinvestment case.
Exit landscape
For much of the past 10 years, exits have been challenging for
VC-backed companies. First, there was the dot-com bubble that
started in the late 90s and lasted until 2004, when Google went
public. And then the financial crisis struck, which means the IPO
markets have been difficult to access for approximately half of the
past 10 years.
In the last few months of 2012, global market uncertainties may
have held back VC investments. This is suggested by a drop in the
number of VC-backed IPOs and M&A exits, and VC funds again
reduced activity in early-stage investment. However, an improved
IPO environment and robust M&A activity in 2013 are expected to
support VC investment in the coming quarters.
Over the past few years, there have been fewer VC-backed IPOs
in Europe, where the number of IPOs and the amount they raised
has also fallen. However, over the same period, VC-backed IPOs
have increased in the US.
IPOs remain the most lucrative exit vehicle for VC-backed
companies, although it is becoming increasingly difficult to fully
exit via a public listing, and the time taken to exit via an IPO has
increased since 2007, especially in the US and Europe.
In contrast, we are beginning to see a clear trend of decreasing
time taken for M&A exits in the US and Europe. The median time
to exit through M&A in the US has fallen sharply to 4.4 years,
suggesting that the new generation of post-bubble companies is
coming to the market.
Another trend is that VC funds are starting to hold on to the
shares in their investments even after an IPO — retaining an
interest, as shareholders, in the performance of companies they
once controlled.
Global VC-backed IPOs
In the last three years, the amount raised via IPOs has declined
globally by 38%, from US$26.3b in 2010 to US$16.1b in 2012.
For IPOs, 2013 seems to have been a challenging year. With 65
deals and US$5.3b for 2013 YTD, the year saw levels close to
those of 2009. In terms of a deal count globally, IPOs declined by
more than 46% from 214 in 2010 to 115 in 2012. This decline
was most severe in China, where there was a more than 50% drop
in the number of IPOs. Despite this, the number of companies
that have gone public in China is the highest in the world. The US
bucked the global downtrend and saw the doubling of proceeds
against 2011, albeit largely due to the US$6.8b raised by the
Facebook IPO.
19Russian and global venture markets in 2007–13 |
Global venture-backed IPOs, 2007–13 YTD
(numbers of deals and total money raised, US$b)
14.9
1.4
5.5
26.3 22.1
16.1
5.2
163
33
56
212
115
65
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0
2007 2008 2009 2010 2011 2012 9M2013
163
Amount r aised during t he year
Numbe r of IPOs durin g the year
Source: Dow Jones VentureSource
Amount raised (US$b)
The US continued to dominate global VC-backed IPO activity,
accounting for 94% of the amount raised and 89% of the deal
volume in the last months of 2013, primarily due to strong
activity in its biopharmaceuticals sector; there were 28 new
listings that were valued at US$2.4b — up from US$1.9b raised
through 23 IPOs in the corresponding quarter last year.
IPO activity was comparably subdued in other regions. India and
Canada saw no activity during 3Q 2013, while other markets,
including Europe, China and Israel, reported a single deal each
during the quarter.
In the US and China, investors can expect to generate early
returns compared with other geographies. A relatively high
proportion of companies in these markets, which raised initial
funding in 2007, are now publicly held or were acquired by
corporations.
The IPO outlook seems promising in the coming quarters, with the
recent momentum seen in valuations along with very supportive
global monetary conditions, which are expected to support
ongoing growth in venture-backed exits.
Global VC-backed M&A declining despite recovery in some
markets
VC-backed M&A activity continued its decline from the 2010
post-financial crisis peak of 856 deals to 722 deals in 2012,
decreasing by more than 15%. Activity in the US and Europe,
which comprises over 90% of VC-backed M&A deals, fell by about
20% between 2010 (752) and 2012 (597), returning to the level
of 2009 (591). So far, 2013 seems to be without any significant
changes (403 deals, YTD), offsetting an increase in M&A in India.
The third quarter of 2013 saw 169 venture-backed M&A deals
(with a total deal value of US$14.6b). This was the strongest
quarter by deal value in the last 12 months. The average disclosed
deal value during the period was US$86.3m — the highest in the
last six quarters. As a result, gains in proceeds outpaced growth in
volumes in 3Q2013, up 3% and 1% respectively, when compared
with the corresponding quarter of last year.
The US led the pack with a share of close to 70%, both in terms
of the volume of M&A deals and the amount raised, in 3Q 2013.
M&A exits are still the preferred exit route for companies in the US
and Europe.
Outside the US, Europe and China were in the lead, with strong
activity seen in both markets during the quarter, although at
considerably lower levels than the US. In Europe, total proceeds
jumped by a factor of 3.2, while in China, they were up by a
factor of 7.4, as compared with 3Q12. Consequently, 3Q 2013
was the strongest quarter in China since 2008, with the market
generating US$885m in five deals.
Key regions by number of M&A deals (3Q13)
9,867
3,279
885 35 420 101
115
40
5252
140
120
100
80
60
40
20
0
12,000
10,000
8,000
6,000
4,000
2,000
0
Amount raised (US$m)
Number of M&A deals
US Europe China India Canada Israel
Proceeds
Numbe r of deals
Source: Dow Jones VentureSource
The IT sector led in venture-backed M&A deals, with 71 out of the
total 169 deals (42%) reported in the quarter. The sector also
accounted for 40% of the US$5.9b in capital raised. Software
deals dominated in the sector, with 56 transactions raising close
to US$4b.
The median time for exit in Europe fell sharply to 4.8 years, with
faster M&A suggesting that the new generation of post-bubble
companies is coming to the market.
M&A activity is expected to accelerate in the coming quarters to
catch up with the recent solid trend in VC-backed IPOs.
20 | Russian and global venture markets in 2007–13
Global venture-backed M&A deals 2007–13 YTD
(number of deals and amount invested, US$b)
69.1
42.8
34.2
54.8
65.4
56.3
38.2
909
762
698
894
722
479
100. 0
80.0
60.0
40.0
20.0
0
2007 2008 2009 2010 2011 2012 9M2013
834
Amount r aised during t he year (US$b)
Numbe r of M&As durin g the year
Source: Dow Jones VentureSource
Amount raised (US$b)
Median years from initial VC financing to IPO and M&A exit
falling
In 2012, the lack of momentum in the IPO market was reflected in
the median time it took to go from initial financing through to IPO.
In the US, it takes longer, on average, for companies to go from
initial VC investment to IPO than it does for them to get to M&A.
This means that companies reaching an IPO in the US are typically
more mature and can command a higher valuation than those
exiting via M&A.
It is interesting to consider whether changes should be made to
the existing typical VC fund life term of 10 years, given that the
time to IPO is now around seven years. A longer fund term may
encourage greater levels of early-stage investment.
The median years from initial financing to exit in 2013 across
China and European regions reflect the lack of momentum in
the capital markets, leaving minor changes in the median year
period of M&A since 2008. At the same time, its downward trend
continued in the US since 2007, with a sharp decline in 2013.
Median time to liquidity via IPO and M&A
Europe
2007 2008 2009 2010 2011 2012 1H2013
0
2
4
6
8
10
6.4
8.3
0
3.8
9.2
6.2
7.8
6.6 6.7
5.6 5.8 5.5 6.0 6.1
Source: Dow Jones VentureSource
IPO M&A
years
China
2007 2008 2009 2010 2011 2012 1H2013
0
2
4
6
1.9
3.0
2.3 2.6 2.5 2.4
NS
4.5
3.8 3.4 3.8 4.0 3.7 3.5
Source: Dow Jones VentureSource
IPO M&A
years
United States
8.7
7.9 8.0
6.4
8.7
6.5
5.8 5.5 5.3 5.3 5.2
4.4
2007 2008 2009 2010 2011 2012 1H2013
0
2
4
6
8
10
6.8 7.3
Source: Dow Jones VentureSource
IPO M&A
years
However, shortening the time to exit will help VC funds to return
capital to their investors, show a track record of success and
thereby start the process of opening, raising and closing a new
fund. It has also helped liquidate the older companies in their
portfolios, allowing them to focus on companies that have a better
option of exiting, either via IPO or M&A, and repatriating those
investment returns back to the fund.
21Russian and global venture markets in 2007–13 |
United States
United States VC investment 2007–13 YTD
8.0 9.1 4.7 5.3 7.9 7.5 7.1
8.9 8.4
6.3 8.0
9.2 9.0 7.9
8.6 9.0
6.0 6.2
10.4 7.8 8.1
7.5
9.7
8.3
7.8
3,129
3,076
2,781
3,154
3,577 3,601
2,462
739 723 677 740 936 893
806
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
0
5
10
15
20
25
30
35
40
2007 2008 2009 2010 2011 2012 9M2013
Number of rounds
Amount invested (US$b)
Amount invested during Q1 (US$b) Amount invested during Q2 (US$b)
Amount invested during Q3 (US$b) Amount invested during Q4 (US$b)
Number of rounds during the year Number of rounds during Q3
8.8 6.7
Source: Dow Jones VentureSource
Activity declines, Silicon Valley still dominant
The US and Europe continue to receive the largest amount of
VC investment, with 88% of the total dollars invested and 87% of
the total number of rounds during the beginning of 2013. US VC
investment activity declined by 15% to US$29.7b in 2012 against
2011. The number of investment rounds also fell, but the drop
was not as pronounced, declining by 4% to 3,363. This tendency
of a slight decline remained in 2013 as well. On a cumulative
basis, the US VC-backed industry remains very substantial. As
of January 2013, US$167.9b was invested in 8,288 companies
and is still heavily weighted toward Silicon Valley. Since 2000,
cumulative equity raised in the Silicon Valley of US$62.2b exceeds
the total raised in all other US VC hotbeds combined.
For the period 2007–13 YTD, the IT sector was the most
attractive for VC investors.
3Q13 US VC Investment by Sector (amount invested, US$m)
IT
Industrial goods and materials
Health care
Energy and utilities
Consumer services
Consumer goods
Business and financial services 2,163
137
1,347
189
1,840
147
2,292
Source: Dow Jones VentureSource
Tradition with some new spirits
Start-up VC funding declined from 262 rounds in 2011 to 224
in 2012. There has also been a decline in product development
funding rounds over the last four years. The three-year increase in
funding for companies at the revenue generating stage has been
slightly declining in 2013. Traditionally, companies at the revenue
stage continued to dominate US VC activity. However, another
trend for the US for 2013 YTD is new investments in early-stage
companies. This suggests investors are taking some “bigger bets”
in some of these firms.
3Q13 US VC Investment by Stage of Development
1%
16%
78%
5%
Source: Dow Jones VentureSource
Product developmentStart-up Revenue generation Profitable
Start-up funding size squeezed
Median round sizes fell in the product development stage from
US$5m in 2011 to US$3m in 2012, and to US$2.7m in 2013
YTD, reflecting VC funds’ efforts to more carefully use the lower
amount of the capital being invested in this stage. Lower round
sizes also partly reflect lower capital requirements, particularly
in the early stage, as companies increase their proportion of
variables relative to fixed costs, for example, through software
as a service (SaaS) and more flexible real estate and staffing
options.
US VC exit landscape through IPOs and M&As
Companies exiting via IPO are typically more advanced than
those exiting via M&A. The median amount raised prior to IPO
of US$100.92m and the exit time of 6.96 years far exceeds the
respective figures of US$10.91m and 4.88 years for M&A. There
was a slight increase in these numbers in 3Q 2013.
Longer-term trends
Consolidation is continuing in the VC industry. LP investors are
showing a preference for the most successful “brand name
funds, which suggests that this trend will continue. US VC
investment is expected to continue to become more international,
with the growing realization that the US does not have a
monopoly on innovative ideas. US firms are showing an interest in
investing in rapid-growth markets, often preferring Israel and the
relative proximity of South America to Asia.
22 | Russian and global venture markets in 2007–13
Europe
Europe VC investment 2007–13 YTD
1.6 2.2 1.1 1.5 1.9 1.4 1.4
2.1 1.8
1.1
1.6 1.8 1.9 2.2
1.7 2.0
1.3
1.4
1.7
1.4 1.5
2.1 ,
2.1
2.5 1.8
1,755
1,473
1,282
1,398 1,300
1,270
995
368 352 292 284 298 298 319
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
0
1
2
3
4
5
6
7
8
9
2007 2008 2009 2010 2011 2012 9M2013
Number of rounds
Amount invested (US$b)
Amount invested during Q1 (US$b) Amount invested during Q2 (US$b)
Amount invested during Q3 (US$b) Amount invested during Q4 (US$b)
Number of rounds during the year Number of rounds during Q3
1.8
1.5
Source: Dow Jones VentureSource
Shift toward later-stage investment
European VC investments declined in 2012, but in 2013, they
showed signs of recovery. In 3Q 2013, VC activity in Europe
increased by 4% in terms of the proceeds raised and 7% in terms
of rounds when compared with the corresponding quarter of last
year. The increase, although marginal, suggests that the recent
declining trend is stabilizing. However, the VC fund-raising activity
in Europe continues its downward trajectory in 2013, with the
total funds closed down from 101 in 2007 to 37 in 2012 and
just 20 YTD in 2013. Importantly, the 2013 YTD results show
fund sizes are steadying, which suggests that activity could be
stabilizing as well.
European VC funds 2007–13 YTD
(amount closed — US$ billion)
2007 2008 2009 2010 2011 2012 9M2013
Early-stage Late-stage Multistage
0.2 0.7
0.1
0.3 0.2
0.2
5.2 5.0
2.7 1.3 1.4 2.4 1.1
3.9 3.9
2.3 1 .2
2.4
0.6
1.3
Source: Dow Jones VentureSource
Amount invested (US$b)
The UK maintained the largest number of active VC firms over
the last six years across Europe’s hotbeds, primarily driven by
investments in the IT sector.
Within the overall total, the focus on later-stage investment
remained. The revenue generation stage of investment dollars
declined slightly compared with 2012. In Europe in 3Q 2013, the
median deal size of profitable companies was higher than that
for companies at the revenue generation stage. Across all stages,
investors still demand to see evidence of the concept or business
revenue generation stage in terms of turnover and clients before
committing an investment.
The average round size for Europe remained small in 2013,
suggesting that VC investors will continue to be cautious about
making larger investments in the region. Since 2008, the average
round size remained in the range of US$4.7m to US$5.4m across
the three key hotbeds — the UK, France and Germany.
In Europe, business and financial services were in the lead by
their share of proceeds in the quarter. A total of 81 deals in the
sector raised US$388m in 3Q 2013. Out of the total number of
investments, 70% were made in the business support services
subsegment. Consumer services continued to dominate deal
volumes in Europe, with the consumer information services
subsegment being the most popular. In 3Q 2013, the segment
accounted for 20% of the total deals in the sector in Europe.
Regulation and economic uncertainty squeezing VC
The principal reason for the decline in activity in 2012 was
the ongoing economic uncertainty produced by the Eurozone
sovereign debt crisis and its negative impact on investor
sentiment. The continuing trend toward tighter regulation of the
European financial services industry through legislation, such
as Solvency II and Basel III, has contributed to the decline, as
tougher regulation and higher capital requirements have reduced
appetite, or ability, to invest in the VC funds. In specific instances,
changes in tax regulations have also played a part. In France, for
instance, a reduction in the tax advantages that individuals enjoy
from investing in VC vehicles has weighed on investor inflows and,
ultimately, on investment in portfolio companies.
VC-backed IPOs hold steady
The number of VC-backed IPOs in Europe declined (Q3 2013 —
only five IPOs). In 2010–12, the number of IPOs in Europe was
relatively stable (18, 15 and 16), the capital raised continued its
sharp descent, reaching US$143m in 3Q 2013 within the total,
and the vast majority of IPOs were in the health care sector. For
technology companies, we anticipate companies will increasingly
look to the developed VC ecosystem in the US and a possible US
listing — a trend that will be facilitated by the reduced compliance
burdens on SMEs introduced in the US JOBS Act. Median pre-
money valuation in Europe has been relatively low since 2007.
The energy and utilities sector in Europe has had a relatively
higher median pre-money valuation historically compared with
other sectors because of investments in the renewable energy
companies.
23Russian and global venture markets in 2007–13 |
US investors to fill the gap in Europe
The US investment in European-based businesses is expected to
increase, particularly for companies requiring more than US$10m
in capital, which the European VC market struggles to provide.
Corporate and family venturing set to rise
Increased US investment is one of the ways we expect the gap left
by the lower number of European institutional investors in the VC
market to be filled. Two other types of investor are also likely to
help fill the gap.
First, with less competition from bancassurers, family offices
are expected to look at opportunities in the VC market. Second,
corporates, which need to drive growth through innovation, but
face a reduced pipeline of VC-backed candidates, are expected to
increase their direct participation through corporate venturing.
European growth will remain very subdued, with the trend toward
tighter regulation firmly in place. The latter is contracting VC
investment activity in the region and, despite the slight recovery
in 2013, this trend of cautious investment will remain.
24 | Russian and global venture markets in 2007–13
Israel
Israel VC investment 2007–13 YTD
2007 2008 2009 2010 2011 2012 9M2013
Number of rounds
Amount invested (US$b)
Amount invested during Q1 (US$b) Amount invested during Q2 (US$b)
Amount invested during Q3 (US$b) Amount invested during Q4 (US$b)
Number of rounds during the year Number of rounds during Q3
0.4 0.8 0.2 0.2 0.3 0.2 0.3
0.5
0.6
0.9 0.6 0.6
0.5
0.5
0.3
0.2
0.4
0.3
0.3
0.5
0.2
0.5 0.6
0.3
281 286
177
160
165
140
111
69
58 41 33 48 39 37
0
50
100
150
200
250
300
350
0
0.5
1.0
1.5
2.0
2.5
0.3
0.2 0.2
Source: Dow Jones VentureSource
Innovation continues to drive VC activity
In Israel, deal activity in 3Q 2013 remained similar to that seen
in 3Q12. The number of rounds declined from 39 to 37 in 3Q
2013, and the amount invested increased by a mere 3% compared
with the corresponding quarter in the previous year. The amount
invested so far in 2013 YTD exceeds the overall total invested in
2012, which is a clear sign of stabilization and improvement.
3Q2013 VC Investment by Sector (by number of deals)
Source: Dow Jones VentureSource
8
0
5
0
7
1
16
IT
Industrial goods and materials
Health care
Energy and utilities
Consumer services
Consumer goods
Business and financial services
3Q2013 VC Investment by Sector (by amount invested, US$m)
Source: Dow Jones VentureSource
56
0
33
0
50
65
104
IT
Industrial goods and materials
Health care
Energy and utilities
Consumer services
Consumer goods
Business and financial services
By the number of rounds, the IT sector continued to lead in Israel
in 3Q 2013 and attracted a major share of VC investment (34%).
In terms of the amount raised, industrial goods and materials,
business and financial services, and health care held the major
shares.
Across markets, companies at the revenue generation stage
continued to dominate VC activity by the number of rounds and
by the amounts invested. In 3Q 2013, VC activity at the product
development stage showed improvement (increasing from 30% to
32% of the investment rounds compared with 3Q12).
3Q2013 VC Investment by round class (US$m)
3.3
NS
6
8.1
Seed
First round. Start-up
Second round
Later stage
Source: Dow Jones VentureSource
3Q2013 median deal size by stage of development (US$m)
NS
Source: Dow Jones VentureSource
3
8.1
0
Start-up
Product development
Revenue generation
Profitable
25Russian and global venture markets in 2007–13 |
Israeli VC firms have shown their continued ability to raise follow-
on funds, and market fundamentals remain solid because of the
continued determination of Israeli companies to innovate. This
innovation has been bolstered by the implementation of the
Government’s Comparative Advantage Program for technology
companies, which is already showing signs of success.
Foreign investment on the rise
The current vintage of Israeli VC funds has not yet raised the
same amounts as previous ones, such as those operating in the
period from 2005 to 2008. As a result, there were not enough
funds available in 2012 to support both the existing portfolio
and new investments to the levels seen in the run-up to 2009.
However, the decline in overall VC investment has been, to some
degree, offset by the continuing upward trend of foreign VC
funds investing in Israeli companies. In 2013 YTD, both local and
foreign investments have been increasing, but are still far from
the record levels of 2008. The Israeli VC sector is more reliant
on foreign investors than local investors, so any new government
plans should specifically relate to foreign investors. When foreign
investors increase their allocation to Israeli VC Funds, Israeli
institutions will likely follow.
Those foreign VC funds investing in Israel used to be
predominantly mainly from the US, but in 2012–13, funds from
other countries were also active in Israel.
Israeli best practices — start-up program for early-stage
companies to fill the gap left by VC for early investments
The Office of the Chief Scientist (OCS) in the Ministry of Economy
is charged with executing government policy for support of
industrial R&D. The goal of the OCS is to assist in the development
of technology in Israel as a means of fostering economic growth,
encouraging technological innovation and entrepreneurship, and
leveraging Israel’s scientific potential. Unfortunately, the budget
of the OCS has been reduced by over 40% in the past decade. OCS
programs have proven to be effective and have boosted hundreds
of companies, and the decrease in the funds available has had
direct repercussions on the Israeli start-up scene.
Strong showing in M&A exits
Acquisitions remain the most viable exit option for Israeli
companies and their investors, who remain attracted to the
innovative nature of many Israeli businesses. Although median
valuations dipped, 2012 saw VC-backed M&A exits similar to the
levels of recent years.
In 2012, there were no IPOs, and M&A remained on a par with the
past two years.
Cybersecurity: the sector to watch
Additionally, 2012–13 saw significant VC interest in cybersecurity,
which is shaping to be a renewed Israeli trend. In line with global
trends, there was increased investment last year in big data
analytics, cloud and SaaS companies, as well as health care.
For historical and geographical reasons, Israel has always been
a leader in developing defense technologies. This sector can be
expected to receive continued investment, along with a rise in VC
interest in smart mobility and health care, as part of a long-term
trend focusing on technology (cybersecurity in particular).
To survive, innovation must power transformation2
As many organizations have learned, sometimes the hard way,
cyber attacks are no longer a matter of if, but when. Hackers
are increasingly relentless and often politically motivated. At the
same time, technology is increasing an organization’s vulnerability
to attack through increased online presence, broader use of social
media, mass adoption of mobile devices, increased usage of cloud
services, and the collection and analysis of big data.
Over the last year, many organizations have made improvements
to their current information security programs to better protect
themselves from known cyber risks. Budget allocations toward
security innovation are inching their way up, enabling VC firms,
governmental companies and organizations to channel more
resources and efforts toward innovation solutions that can protect
them against the great unknown.
2 Global Information Security Survey 2013,EY, 2013.
26 | Russian and global venture markets in 2007–13
China
China VC investment 2007–13 YTD
Amount invested during Q1 (US$b) Amount invested during Q2 (US$b)
Amount invested during Q3 (US$b) Amount invested during Q4 (US$b)
Number of rounds during the year Number of rounds during Q3
Source: Dow Jones VentureSource
Number of rounds
Amount invested (US$b)
0.5 1.2 0.5
2.4 1.7
1.1 0.5
0.8
1.7
0.7
1.1 1.7
1.4
0.5
1.3
1.4
0.7
0.9 1.5
0.9
0.8
1.2
0.7
0.9
1.6 1.5
1.6
393
360
310
372
393
239
175
100 84 76 93 109
53 77
0
50
100
150
200
250
300
350
400
450
0
1
2
3
4
5
6
7
2007 2008 2009 2010 2011 2012 9M2013
VC activity slows from record high
For the second consecutive year, VC activity dropped from the
record levels of 2011. In 2012, US$3.7b was invested in 202
rounds, a year-on-year decrease of around 40% for both figures.
Despite this, the median deal value of US$10m was significantly
higher than that in other parts of the world thanks to substantial
investments in profitable companies.
In China (mainland), the revenue generation and profitable
stages have historically been the two most popular stages of VC
investment. In 1Q13, there was only one round of investment
in the profitable stage, compared with three in the product
development stage. The start-up stage did not see any investment
in China in the first quarter of 2013. In 3Q 2013, revenue
generation accounted for 91% of the total amount raised in China.
China VC investment by stage of development 2007–2013 YTD
(amount invested US$m)
1%
Source: Dow Jones VentureSource
Product developmentStart-up Revenue generation Profitable
12% 56% 31%
M&A continues to be the preferred exit for VCs globally, but not
in China, where IPOs are favored. Following the 2008 recession,
China’s IPOs surpassed all other countries in 2010 and 2011,
both in the deal volume and value. However, 2012 witnessed a
steep decline in the number of VC-backed IPOs and the amount
raised. By the number of rounds, the IT sector took the top spot
in China for the first time, after holding second position since
4Q09. The software segment was the most active. By the amount
invested, however, the consumer services sector continued to
lead, although the sector’s share decreased from 64% in 3Q12 to
55% in 3Q 2013.
Economic and political factors having an impact on VC
To some extent, the drop in VC activity reflects a broader
slowdown in the Chinese economy, which has seen a drop in
domestic consumption and a drop in GDP growth rates.
External factors, such as the US fiscal cliff and ongoing
uncertainty in the Eurozone, contributed to a decrease in global
demand, and this weighed heavily on China’s manufacturing
activity, as evidenced by the declining numbers of the country’s
monthly HSBC purchasing managers’ index (PMI) in 2012.
However, market sentiment is improving: the index rose in early
2013, pointing to a promising outlook for VC investments in the
remaining year.
With 2012 as the last year of the previous Chinese administration,
investors were in a wait-and-see mode as they awaited the
announcement of the next five-year plan, which would show the
industry sectors that will benefit from government policy.
IPOs set to rebound
Since 2010, in spite of the dropping number of VC-backed IPOs
in the country, China has been the global leader in terms of the
amount raised and the number of exits, with investors attracted
by the rapid time to exit and the high returns on offer.
In 2012, however, China experienced more than a 50% decline
from 2011 in the number of IPOs and a drop of over 70% in the
amount of capital raised, pushing the country into second place
behind the US. This was due to China’s IPO processes coming to a
halt in the second half of 2012.
Under the current rules for public share sales, the China
Securities Regulatory Commission’s listing committee must
examine each application and determine whether the company
is suitable for listing. The committee has not authorized an IPO
since October 2012, in an effort to reduce the pressure on China’s
stock markets caused by the drainage of funds to the IPOs.
Despite all this, in 2012, China still had two of the top 10 largest
IPOs by funds raised.
Consumer industries continue to attract VC
Unlike in most of the other geographies, consumer services
remains the most prominent VC sector in China and is set to
remain so, followed by the IT sector. E-commerce is one subsector
that continues to struggle, with many businesses still in the
consolidation phase and yet to make a profit. Other industries
that are attracting the interest of VCs include education-related
companies and health care.
27Russian and global venture markets in 2007–13 |
India
India VC investment 2007–13 YTD
Number of rounds
Amount invested (US$b)
2007 2008 2009 2010 2011 2012 9M2013
Amount invested during Q1 (US$b) Amount invested during Q2 (US$b)
Amount invested during Q3 (US$b) Amount invested during Q4 (US$b)
Number of rounds during the year Number of rounds during Q3
0.3 0.2 0.2 0.2 0.3 0.5 0.4
0.3
0.9
0.1 0.2
0.4 0.3 0.6
0.2
0.4
0.2 0.3
0.5 0.5
0.4
0.2
0.2
0.4 0.3
0.4
0.3
100 119 96 116
181
224
160
11
39 20
28
56
63
66
0
50
100
150
200
250
0
0.5
1.0
1.5
2.0
Source: Dow Jones VentureSource
Investment rounds increase in India
The total capital invested through 3Q 2013 almost reached the
levels of investment seen in 2011 and 2012. India saw a large
number of VC rounds in the consumer services sector, followed
by the business and financial services and consumer services
sectors. The levels of reported VC investment also probably
understate the true level of activity, because of the unreported
deals not captured in the data.
Economic development is supporting VC industry growth
The growing wealth of the Indian economy and the accompanying
increase in consumerization are underpinning the growth of
the VC industry. The two predominant themes from a demand
perspective are:
Companies addressing changing consumer behavior patterns —
the largest proportion of the total pool of VC-backed companies
is in consumer services
The introduction of new technology, particularly internet-based
applications, such as cloud and mobile
From a supply perspective, rising economic prosperity has
increased the pool of entrepreneurs willing to take a risk in VC
investment. Some of these high-net-worth individuals have
already made money as successful entrepreneurs prior to
becoming VC or angel investors. The entrepreneurial environment
in India is becoming more developed as the availability of higher
education has spread to third- and fourth-tier cities, with a
corresponding increase in the number of engineering and medical
schools. VC firms and private equity players have demonstrated
their faith in the growth of e-commerce in the country.
This is amply substantiated by the significant increase in the total
investments (US$305m in 2011 against US$55m in 2010).
The e-commerce market in India has enjoyed phenomenal
growth — almost 50% in the last five years. Although the trend of
e-commerce projects raising funds in India has been around for
15 years, the appropriate ecosystem has started to fall in place
just now. The level of online transactions has been increasing, and
is expected to reach US$35m in 2015, up from US$11m in 2011.
Online travel has traditionally been the largest e-commerce
subsector (by revenue) in India. Nevertheless, online retail is
catching up fast and is expected to match online travel revenues
in 2015.
Later-stage investment dominates
Since 2011, the Indian VC industry has been heavily weighted
toward later-stage investment. Fifty-six percent of the capital
raised in 2013 was invested in later-stage deals. The reason for
the predominance of later-stage investment is that, compared
with Silicon Valley, Indian companies are focused less on
innovation and more on application development and efficient
delivery models, which means they take less time to develop into
the revenue generating stage.
Number of deals in India by round type (number of rounds)
9 6 10 9
22
66
45
84
57
30
0
20
40
60
80
100
2007 2008 2009 2010 2011 2012 1H13
Seed round First round Second round Later
Source: Dow Jones VentureSource
28 | Russian and global venture markets in 2007–13
More deals, but smaller in size
The median round size decreased in 3Q 2013, almost equaling
that of 2012.
Number of deals from 2005–1H13
Intel Capital
Qualcomm Ventures
eBay
SAP Ventures
Info Edge (India) Ltd.
Cisco Systems
Capital18
BlueCross BlueShield Ventures
Naspers
Applied Ventures LLC
30
14
5
4
3
3
3
2
2
2
Source: Dow Jones VentureSource
M&A is a more popular exit than IPO
Strategic buyers are a more likely exit route for Indian VC-backed
companies than IPOs. The very low level of IPO exits (two in both
2011 and 2012) reflects the absence of a junior stock market,
such as London’s Alternative Investment Market (AIM). The most
common exit routes are through fresh investment by new VC
funds and strategic M&A, with a bias toward the latter because
strategic deals tend to command higher valuations.
The growth of India’s investor community and the resulting
increase in the amount of capital being invested in purely
domestic opportunities provides India’s VC industry with a degree
of insulation from global shocks, and the outlook for the coming
year is therefore relatively positive.
Conclusion
It is worth recalling that over 50% of
today’s Fortune 500 companies were
created during an economic downturn,
so it is not surprising that competition
for high-quality deals remains fierce, with
VCs competing against each other and
against alternative sources of capital.
The challenge for VCs is to prove their
worth as accretive and value-added
investors offering good terms and post-
investment support. As funds continue to
build this capability, the cost of investment
rises, which VC funds hope will be offset
by attractive returns. Establishing
a robust VC value proposition for investee
companies is a must-do strategy.
Looking forward, 2014 is expected to be
a better year for VC. Steadying economic
conditions will bolster investor confidence
and generate increased risk appetite.
29Russian and global venture markets in 2007–13 |
The global VC industry is undergoing a period of significant
transition in which the number of industry players is shrinking
because of poor returns in the post-dot-com bubble period and
the resulting increased selectivity of LPs. Actually, this transition
has been slowly underway for a decade, but the arrival of the
global downturn, coinciding with the end of the 10-year term
of VC funds raised in 2000, has accelerated the process. The
consequences of this trend can be clearly seen in the downsizing
of the US VC industry.
This transition is creating a VC environment with fewer players
and generally smaller VC funds (though leading global firms
will still be able to raise and leverage large ones). It is also
encouraging the development of capital-efficient business models
with a short path to profitability, which has led some to liken
the current investing environment to that of the early 1990s.
These models will probably benefit such sectors as social media,
consumer services and SaaS, where scale can be achieved
quickly and inexpensively. In sectors such as renewable energy
and life sciences, where the time lines are longer and the capital
requirements are high, it will be important for specialist firms,
those with an in-depth knowledge of the risks and opportunities,
to continue to make investments. And, in these sectors, corporate
venturing and partnerships, as well as strong government
support, will undoubtedly also play an important role. One of the
elements that has changed as a result of the above-mentioned
industry shift and other macroeconomic parameters is the VC
funds’ approach toward government funding. More than ever
before, investors are seeking complementary funding resources
to mitigate their risk. Funds have become more aware of
government incentives and, as a result, portfolio companies are
more active today in using such tools. If, in the past, different
government regulations and restrictions related to receipt of
government financing were considered unacceptable, today, the
funds are evaluating the effect of the regulations on their model.
Another evolving initiative is the Government’s cooperation
with VCs. The lack of private money for innovation has forced
governments to look for solutions to assist private funds to raise
money. Different models have been developed, for example:
a) Direct government investment in funds that are operated by a
private general partner
b) Government security for the fund’s losses up to a predefined
percentage of the fund’s assets
c) Direct government investment in companies together with
private investors, giving the investor, in the future, an option to
buy the Government’s shares in the company as well as paying
the historical price
d) Tax incentives for foreign investors in local VC funds
VC in Singapore
When Singapore’s high-tech industry was first developing,
multinational corporations (MNCs) provided the investment that
drove the sector. Venture financing for this sector is, in fact,
relatively weak in Singapore, despite the Government’s efforts to
strengthen it. In the 1990s, VC funds began to grow in Singapore,
both in numbers and in value. Many of these funds were co-
founded by the Government, either through holding companies or
direct investment.
Toward the end of the 1990s, the Technopreneurship Investment
Fund (TIF) was established with US$1b. The aim was to establish
Singapore as a regional hub for VC, capable of attracting foreign
funds to establish themselves there. The initiative, though, was
regarded as only a moderate success.
Angel investment is also a fairly weak component in the
innovation ecosystem in Singapore. To address this, the Start-up
Enterprise Development Scheme (SEEDS) was introduced in 2001
as a co-investment program to strengthen this component. Similar
co-investment programs include Business Angel Funds (BAF)
and the Business Angel Network (BANSEA), which advises the
Government on how to structure programs such as these.
Today, many VC funds have regional headquarters in Singapore,
which they use to manage deals in the region. However, most of
the funds managed in Singapore do not invest there, but rather
in other regional countries, meaning that it has done little to
strengthen the R&D economy in Singapore.
Main considerations for government
support
As mentioned above, the VC approach toward government
support has changed. Having said that, where government
support comes with conditions detrimental to VC funds, investors
have made sure that their portfolio companies have not accepted
the help.
A good example of that was the Israeli R&D law. Until 2005,
the law forced companies that received funds from the Office
of the Chief Scientist to keep the IP developed in Israel without
the option to move it abroad. This obstacle, in some cases,
prevented investors from selling their companies to foreign
parties that wanted to use the IP abroad. Because of this, most
VC funds would not allow their portfolio companies to access this
government support. Eventually, the Government altered the
law and enabled IP transfer abroad with a predefined payment
mechanism.
The lesson learned from this process is that, in the technology
sector, governments should be aware of the industry players’
needs and should shape the support mechanisms in a way
that supports companies, but also takes into consideration the
businesses’ needs.
Government incentives and VC funds:
best practices
30 | Russian and global venture markets in 2007–13
Israel — the Yozma Program
In an effort to encourage the creation and development of the
VC industry, the OCS created Yozma in 1993. Yozma was a fund
of funds that established 10 dropdown funds in three years,
each capitalized at US$20m. Competition between the 10 funds
prevented a monopoly from being formed in the new sector.
The program succeeded by offering 40% of the funding to VCs
that were willing to establish branches for investing in Israel.
The money was drawn from a US$120m government pot and
was capped at US$8m per fund. The VC funds were managed
privately, with the option to buy the Government’s shares at cost
plus 7% annual interest when privatized within seven years. Each
VC fund was required to include an experienced foreign partner
and a local financial institution. The state was a passive investor in
order to allow for market-oriented decisions to be made; this also
cut down bureaucracy, allowing the funds to be managed more
smoothly.
By 1998, all the funds had been privatized. Private investors felt
more confident, knowing that the Government’s involvement
would be limited to a short period of time and that a specific exit
date was already determined.
In an effort to attract foreign investment, the Yozma Program
required the involvement of experienced foreign partners in the
funds. This meant that the Israeli market benefited not only from
foreign investment, but also from foreign experience, know-how
and training. The companies receiving investment also benefited
from the international networks that foreign VCs brought with
them.
One of the factors that led to the success of Yozma was the
situation in the local high-tech sector. The availability of good deal
flow and strong market needs conformed to the new financial
resources presented to the market by the Yozma-backed VCs. This
brought success stories that helped to create the VC industry in
Israel and form dozens of new VCs.
The success of the Yozma Program is in sharp contrast to the
failure of its complementary program, Inbal, which sought to
provide insurance against losses for VC funds to encourage their
establishment.
While the Inbal Program had far greater bureaucratic and
reporting requirements, it would seem from these contrasting
examples that positive incentives can be more effective than
negative (insurance against loss) incentives.
The 10 main criteria for successful
programs
Many case studies show that there are common factors within
successful programs, initiatives and incentives. They are:
1. Addressing the industry’s needs
2. Sufficient number of potential beneficiaries
3. Pre-defined program goals
4. Coherent and clear evaluation process
5. Manageable and balanced bureaucracy
6. Suitable rules and regulations
7. Sufficient government budget
8. Continuing long-term visibility
9. Active market feedback mechanism
10. Central government guidance and overview
Governmental tools to support
the VC ecosystem
Usually, VC plays a critical role in the commercialization phase of
early-stage companies, and matching governmental grants add to
the chance of success.
The same issue arises in other stages of company development.
Matching grants programs are likely to work when support for the
latter stages of the innovation process is available. Companies
will be able to work better with the commercialization of R&D
activities, using the relevant support instruments available
with governmental support. In countries with a developed
VC industry, such as the US, Israel, Australia and Canada,
there are governmental support programs at all stages of the
31Russian and global venture markets in 2007–13 |
innovation life cycle: from grants to VC support programs. For
example, Australia has the R&D Start Program to provide grants
for the commercialization of innovations by SMEs, which is
complemented by its Innovation Funds Program to encourage VC
investment in innovative SMEs.
Due to limited VC financing in the middle-income countries,
such large multinational corporate investors as General Electric,
Siemens and IBM are suited even more than VC investors to
provide access to financing innovation. MNCs usually co-invest to
form public-private funds locally, particularly to finance projects in
the vertical sectors of the economy in which MNCs are interested
in developing new technological companies or start-ups to
strengthen the supply chain. The corporate VC (CVC) industry is
a significant player in the VC ecosystem and plays a critical role in
the development of the local and global economies of innovation.
The success of the local and national VC industries depends on
the maturity of the VC fund teams. Based on statistics from the
OECD, the success of the most prominent VC funds relies on three
aspects:
Investment expertise. VC fund managers should bring
management and commercial expertise to ensure success and
exert influence over the company’s management decisions.
VC investment analysts are highly specialized, with a good
understanding of different technologies and their markets.
Risk profile. It is important to manage risk as part of the
VC strategy in order to define the risk profile, depending
on the fund’s business model: for example, managing a
distributed portfolio with very high returns from the successful
investments, which compensates for the expected failure of the
rest of the investments (cross-subsidization).
Deal flow. This is one of the most important criteria – a supply
of high-potential companies emerging from the earlier stages of
business, technological or innovation start-ups.
The US and Israel exemplify the financial model for early-stage
companies, including internal funding, angel investors, VCs and
government-supported grant financing.
Not all models can work; they depend on the maturity of the local
ecosystem. State-owned and state-managed VCs, in particular,
should be carefully defined to meet local needs and the needs of
the business environment. Typically, government officials do not
have the desired VC and technical expertise or risk-taking mindset
to support the innovation process at the commercialization stage.
In addition, VC funds managed by government entities usually
operate with commercial success and a minimum risk profile,
and largely invest in small, more mature companies with less
risky product lines. It should be noted that a business-oriented
approach should be followed, and that the private sector’s
participation is critical for success.
A number of markets, such as Israel, Taiwan, mainland China
and the US, have established successful models of government
support of the VC industry.
These activities led to the development of a private VC
industry, and the governments have played a significant role
in the development of the local VC ecosystem. Actually, the
governments have provided “seed money” to establish the VC
industry by investing in privately managed funds. Governments
share some of the risk of investing in technology-oriented SME
start-ups, and the VCs provide commercial and managerial
expertise. This approach gives funds the option to graduate from
government support to avoid restrictions placed on them from the
beginning. There are a number of tools to form that:
Direct co-financing. Government lends credibility to the
privately managed fund and actually acts as the primer LP
and catalyst for other potential LP investors (e.g., the Yozma
Program). It can work only for developed LP models and
suitable legal forms of funds.
Leveraged returns. Government acts as a subscriber for
ordinary equity shares or for providing grants, acting as co-
investor with other private investors, with only a small part
of the return as a result of “leveraging” the upside potential
for private investors. For example, the Australian Innovation
Investment Fund (IIF) program provides up to two-thirds of
the capital for the VC funds, but takes only 10% of the return.
The remaining 90% is allocated to private investors and the
management team. In exchange, fund managers are required
to invest a portion of their fund in SMEs and early-stage
companies and start-ups.
There are more or less similar programs in other countries, such
as the US Small Business Investment Company program. Please
note that these programs are successful only in countries that
offer opportunities to achieve high returns.
Guarantees. In regulated and financially developed economies
with a risk evaluation approach, there are models of guarantees
against losses. Such models have been used successfully to
promote investments in VC funds. Actually, a government
significantly lowers the downside risk by guaranteeing a
certain return to investors. In some cases, the government
protects investors against major losses of principal, taking a
subordinated position in the distribution of the funds’ profits.
32 | Russian and global venture markets in 2007–13
Roles and relationships between governments, venture funds
and investees in the VC industry have changed over the past five
years. These changes were driven by a number of major issues:
the situation within the venture industry after the VC bubble
period and the unprecedented size of funds and investment
activities of VC and PE funds up to 2007; the ensuing crash and
the liquidity pressure suffered by the majority of LPs; and the
unexpectedly poor performance of many VC funds due to the
global economic crisis and waves on the IPO markets from a near
freeze in the global IPO market, especially on NASDAQ (2008–
09), with the highest peak in 2010 with US$26.2b.
In general, the period of economic crisis characterized by risk and
lack of transparency is leading to massive involvement and control
of the financial sector by governments, directly or indirectly,
including the VC and PE industries.
One of the lessons learned from this period is that government
investment in national innovation and the VC ecosystem over
time is one of the key success factors for stabilizing the economy
and initiating a rapid recovery from the crisis and a return to
sustainable growth. The level of this type of investment has
become one of the major factors for measuring a country’s
attractiveness for investors in the local VC industry. As a result,
the creation of knowledge-based capital has emerged as an
important driver of investment, innovation and growth in national
economies, which was illustrated during the aforesaid period.
In addition, globalization trends and the influence of the BRIC
markets have led to new forms of venture industry operations,
from global fund-raising and cross-border investment to exits on
foreign stock exchanges or foreign acquisition, and to VC firms
opening offices overseas and helping their portfolio companies to
access markets in new regions.
Because of the lack of private money during the above-mentioned
period, local governments became more important as a
major player in supporting national innovation infrastructure,
especially in sectors with heavy capital requirements and
longer development periods, such as life science and clean
tech. In addition, the governments started to strengthen their
collaboration with the VC market, assisting in raising private
money and creating new forms of operation to support the new
business environment.
This period of significant transition to a VC market with fewer
and smaller VC funds has had a serious impact on the level of
funds available for start-up companies (investees), as has been
shown in this report. Because of the lack of available capital from
private VC funds, this period is characterized by the influence of
angel and super angel funds at the early stages, and CVC at the
later stages, as well as the importance of government incentives
and grants. For example, in order to support the VC ecosystem
and overcome the lack of seed money from VC in the market, the
Israeli Government initiated, in 2011, the so-called “angel’s law,”
which provides significant tax incentives for angels.
During this period, governments became far more important
players in the VC market as potential LPs and as complementary
investors (to mitigate risk), as well as a source of economic
incentives for funds and portfolio companies.
As an LP in the funds and an active VC player, government-
related institutions and banks have an interest in financial return
and, in addition, are motivated by the desire to encourage
entrepreneurship, national economic development and the
development of the VC ecosystem.
CVCs, including those in traditional industries, are assuming
far more significant roles in investment and the acquisition of
innovative companies as part of the global strategy involving
market penetration and as an internal corporate venturing
process to support innovation internally. Historically, large MNCs
have worked very closely with the government sector and have
benefited from the government incentives supporting local
innovation and the local VC ecosystem. During the said period,
corporates aggregated a significant amount of cash. For example,
US corporates alone are now sitting on over US$3t of cash
reserves, over half of which is held overseas, according to market
estimates. Over US$1t of this is held by technology companies
who are looking to acquire VC-backed companies.
Tendencies in the role changes of the key
venture market players in 2007–13
33Russian and global venture markets in 2007–13 |
Russian venture market
34 | Russian and global venture markets in 2007–13
35Russian and global venture markets in 2007–13 |
Market size
Russian technological innovation has come into full swing.
The Russian venture market is growing in terms of:
Volume — from US$108m in 2007 to US$1,213m in 2012
Number of venture funds
Number of incubators
Number of angel investors and angel clubs
Number of start-ups
Number of early stage deals
The record-breaking volume of deals in 2012 made the Russian
venture market the second largest in Europe and the fifth largest
in the world. Investors are showing trust in the Russian venture
market.
Market segments
IT and the consumer market are the preferred market segments:
Venture industry growth is driven primarily by investments in IT
and the consumer market.
Investment in the consumer market segment is being driven by
the shift to online retail.
Private venture funds tend to invest in internet companies,
while state-operated funds prefer science, materials and
chemicals.
In Russia, as well as in other countries, the IT and consumer
market segments are easier to innovate in in than other segments
and provide a shorter return on investments.
Market maturity
The Russian venture market is in the early stages of its maturity:
There are relatively few exits: Russian corporations have not
actively pursued M&A, and international exits are not common
yet.
There is a large and growing number of small funds on the
market. Consolidation is yet to begin.
The ecosystem and access to information on investors and
centers of excellence are fragmented.
The Russian market is risky yet exciting for VC investors.
Macroeconomic factors
Global trends affect the Russian market:
Global monetary policies contribute to the increasing availability
of funds for Russian companies going global.
US markets have a significant pull over Russia due to their size
and experience.
Certain macroeconomic factors make the Russian venture
market unique.
The Russian Government plays a significant role as the provider
of the infrastructure, creator of the ecosystem and the endorser
of the venture market as a whole. In the venture market, the
key institute responsible for this is RVC.
The Government should continue its efforts to support technology
innovation and the VC industry.
Russian venture market executive
summary
36 | Russian and global venture markets in 2007–13
It is common to connect the birth of the venture investment
market in Russia with the activities of the European Bank of
Reconstruction and Development (EBRD). However, there had
been earlier attempts to invest according to the classical venture
investment model in the USSR. Examples include the operations
of cooperatives and the “youth R&D centers,” ANT, RostInvest and
some other organizations in 1988-93. Unification of the functions
of a fund and those of a management company into one entity
was a characteristic feature of such cooperatives.
The market began to develop more systematically in 1993.
Privatization of industrial enterprises promoted the emergence of
an equity investment market, and foreign investors could access
the Russian market when some trade and financial barriers were
removed.
The EBRD was the most active investor at that time. Between
1994 and 1996, the bank established 11 regional venture funds
in Russia, with capital ranging from US$10m to US$30m. The
EBRD investment program was targeted at supporting operational
medium-sized enterprises with total employee numbers ranging
from 200 to 5,000, but it did not invest in the high-tech sector.
The EBRD investment funds were particularly interested in
the consumer goods sector, as their mandate prevented them
from investing in the financial and insurance sectors. These
investments were structured as VC deals because of the high risks
associated with investing in the country. The financial results of
the one-off investments depended on the amount invested and
were hard to project.
Around that time, participants in the new VC market were joined
by the International Finance Corporation (IFC), which is a member
of the World Bank Group and focuses on investment in the
private sector of developing countries. The US-Russia Investment
Program was initiated, and the US-Russia Investment Fund, with
US$440m of capital, was established under the auspices of this
program. According to the estimate made by The Financial Times,
by the end of 1997, there were 26 investment funds operating
in Russia and they had a combined total capital of approximately
US$1.5b.
In March 1997, the management companies of 10 out of the 11
EBRD investment funds operating in Russia at that time signed an
agreement establishing the Russian Venture Capital Association
(RVCA). The RVCA became the first professional association of
Russian investment funds to declare the objective of establishing
and developing an equity and venture investment market in
Russia.
The first VC funds began to access the Russian market after
1997. Most of them were associated with participants in the
banking services market and major holding companies. The
economic crisis of 1998 pushed the young VC market back
several years. More than half of the investment funds operating in
the Russian market at that time did not survive the crisis.
The 1998 financial crisis hit the EBRD investment funds just
as hard. Because of management changes, restructuring and
liquidations, most of them did not survive. Only three made it to
the next century: Quadriga Capital, Eagle and Norum.
At the end of 1999, the Government Commission on R&D and
Innovation Policy approved the main directions of development of
extra budgetary financing of high-risk projects, which set out the
Russian Government’s policy on R&D for the years 2000–05. This
strategy aimed at making the Government a key player as both a
participant and an enabler in the VC market.
The establishment in 2000 of the Venture Investment Fund (VIF),
a non-profit organization funded by the Government, was one
of the first steps in the strategy. The VIF’s main objective was to
establish an organizational structure for the VC system that would
both align with the Government’s strategy and would encourage
investment in high-risk and R&D-intensive projects.
In 2000, the RVCA initiated the annual Russian Venture
Investment fairs, which became notable events for participants
in the Russian VC market. The fairs provide an opportunity for
companies seeking investment for business development to
present their projects to investors and to establish professional
contacts with VC experts, businessmen and representatives of
government agencies.
The results of the joint efforts of market participants and the
Government were already apparent by 2001: the Russian VC
market began to grow again. This growth occurred during the
economic recovery after the crisis and during the dot-com boom,
which hit Russia somewhat later. Yandex, Rambler and Ozon
received the first investments and became the leaders of the
Russian internet industry for many years to come. The main
trend in the Russian VC market had already become clear: IT and
consumer products were the sectors receiving the most financing.
History of the Russian venture market
37Russian and global venture markets in 2007–13 |
At the same time, the total equity and venture investment taken
as a share of the total economy remained minimal. Nevertheless,
the market participants’ strategy progressed toward the classic
venture investment model, and 2001 was marked with the first
investment fund exit by a portfolio company. The sale of the
investment by a regional EBRD investment fund yielded the
investor a 100% return on invested capital.
In 2005, Russia’s Ministry of Economic Development (MOED)
realized the program for the establishment of regional investment
funds support VC in small R&D companies. Within the program
over 20 public-private VC funds in different regions have been
established.
OJSC Russian Venture Company (RVC) was established by a
government directive in 2006, and the investment funds of the
MOED were placed under its control.
Russian business still does not generate much demand for R&D.
But on the whole, the domestic and foreign nanotechnology
markets are growing day by day. In 2012, the domestic market
was 11% over 2011, amounting to about RUB 230b. Although
this is not a bad result, there is potential for much more. What
should be done? First, there should be less state presence in
the economy. State corporations and companies with state
participation make up a very large portion of GDP. And a market
controlled by state business is always less competitive. Second,
we need to improve the system of technical standards and
regulations. These two measures could increase the demand
for nanotechnology in Russia. Among the positive signs in
the last few years, I would point to the large companies’; even
budget organizations’ turn to nano products. These products
are nothing if not innovative, and demand for them says a lot
about an increasing interest in R&D as a whole. We collaborate
with the largest state corporations from various industries:
Russian railways, Gazprom, Transneft, Avtodor, Russian Post,
Avtovaz, federal state reserve and federal space agencies,
and companies in the defense sector. Last year’s growth on
the nanotechnology market had to do with this involvement
of the Russian consumers. As for what I think should be
done, the Government definitely needs to make the system of
technical standards friendlier. The Government has to work
to convince state corporations that they can make use of
innovations and that the risks are taken care of. We also need
innovation efficiency controls for procurement organizations,
for management of state corporations and for companies with
state participation. The Government should protect innovators,
because global competition is very high. Now that Russia is a
World Trade Organization (WTO) member, it is time to start
introducing innovations, nanotechnology included, to prop up
the economy’s traditional mainstays. WTO members widely use
high-tech monitoring of products to protect home industries.
Simply put, you can only put pork on the market if the meat
has a government-approved electronic passport with its entire
“biography.” For example, as a sanitation safeguard, every one
of a slaughtered animal’s diseases and the drugs used to cure it
must be recorded there. Introducing such requirements would
stimulate Russian agriculture to explore high-tech solutions,
including nanotechnology, and would protect our breeders
from competition with foreign exports. Every industry that
is traditionally strong in Russia could benefit from similar
innovations protecting the home market.3
Alexander Morozov, Director,
Program Promotion Department, Rusnano’s Fund
for Infrastructure & Educational Programs
3 Hereinafter, expert views styled this way are quoted from the public analytical
report on the implementation of the Strategy for Innovative Development of
the Russian Federation for the period until the year 2020; Russia: Focus on
Innovation, RVC, 2013.
38 | Russian and global venture markets in 2007–13
The Russian Government plays a significant role in developing the
innovation economy in Russia. At the early stages of the history of
the Russian VC market, particularly in 2004–09, the Government
set up several innovation-oriented institutions (RVC, Rusnano
and Skolkovo) that catalyzed and endorsed the interest in the
new economy, in innovations and in entrepreneurship in both the
society and the business community.
At the same time, significant efforts to make the tax environment
friendlier for new businesses were made. A batch of incentives
was introduced, such as the special tax status of Skolkovo
residents, VAT exemption for software licensing, reduced social
security rates for IT companies and others.
These changes were acknowledged both by local business and
foreign investors.
Russian Government and the new economy
To my mind, in the next few years, talking about Russia, it will
be the IT projects that will show the best growth. The support
infrastructure for innovations is still not very far along, but IT
companies do not need much of it. As far as other industries are
concerned, the Government needs to focus on the fundamental
sciences and keep improving the educational system. For
business, it is necessary to decrease administrative barriers and
to stimulate state interest for R&D. “Exercises” with various
programs, subsidies and grants are obviously useful, but not
too important. Unless administrative barriers go down and the
Government itself becomes an active consumer of innovations,
setting an example for others on the domestic market, it is hard
to expect private business to be interested in the innovative
projects. Procurements could be an effective tool for innovation
development. Another important tool is to make all government
funding instruments (both grants and investments) work
through private-public partnerships. Government financing
alone does not show high efficiency. For the same reason, the
physical parts of the “infrastructure” — e.g., technoparks and
incubators — should be in private hands. The Government can
only subsidize them for a limited time.
Konstantin Fokin, Head of the Moscow Center for
Innovation Development
The Government’s efforts are also recognized by the World Bank’s
Doing Business rankings. Recent positive legislation changes have
moved Russia up 19 positions, ranking it 92nd out of the total of
189 countries.
Although Russia still remains very much a resource-based
economy, the new economy is starting to take hold. The share of
high-tech and innovation-driven enterprises grows at a higher rate
than the country’s GDP. A significant part of this growth can be
attributed to the institutions created by the Government.
The key institute responsible for venture market development is
RVC. The role of RVC in setting the market environment can be
illustrated by the following graph:
Share of investments made by funds with RVC’s participation
on the Russian venture market
6
14
26
54
91
121
143 160
140
120
100
80
60
40
20
0
3,600
3,200
2,800
2,400
2,000
1,600
1,200
800
400
0
2007 2008 2009 2010 2011 2012 9M2013
Amount invested (US$m)
Total volume of RVC investments Total volume invested by other funds
Number of RVC investments
Source: RVCA, RVC, RusBase, EY
The percentage of investments made by funds with RVC support
in relation to the total investments made since 2007 has dropped
from 39% in 2010 to 13% in 2013 YTD. Although the annual
volume of investments made by the RVC funds remained almost
the same throughout the period, the share of these funds in the
annual volume of new investments on the market decreased from
58.9% to 8.5% in 2012.
Thus, it can be concluded that the state development institutions
have achieved their objectives. The majority of the investments
on the market are now made by private Russian and foreign
investors.
39Russian and global venture markets in 2007–13 |
EY G20 Entrepreneurship Barometer 2013:
coordinated support
G20 country Ranking
Russia 1
Mexico 2
Brazil 3
Indonesia 4
India 5
China 6
Turkey 7
South Africa 8
Argentina 9
Germany 10
France 11
Saudi Arabia 12
EU 13
South Korea 14
Australia 15
Canada 16
United Kingdom 17
Japan 18
Italy 19
United States 20
It is important to note that this
pillar is based only on survey
responses about the extent
to which specific initiatives
and services have improved
or deteriorated over the past
three years. In short, it reflects
the current trend across these
countries, not the base level of
support available.
EY believes that boosting entrepreneurship is
one of the most powerful things the Government
can do to support the economy. To compare the
business environment in the top economies, EY
issues the G20 Entrepreneurship Barometer,
which ranks each of the G20 countries by the
level of support it provides for entrepreneurs.
It does so by looking at the five pillars that are
vital to a robust entrepreneurial ecosystem:
access to funding, entrepreneurship culture,
tax and regulation, education and training, and
coordinated support.
The Barometer captures the voice of the
entrepreneurs, surveying more than 1,500 of
them across the G20. The survey covers the
insights of entrepreneurs concerning the rate of
progress within each country’s entrepreneurial
environment, and identifies the key enablers
and barriers that are faced by entrepreneurs.
The Barometer also uses a range of quantitative
indicators to measure the level that each
country’s ecosystem has attained.
The most recent Barometer ranked Russia
number one in the G20 in terms of coordinated
support provided by the Government. Russia’s
impressive performance in improving the
coordinated support it offers entrepreneurs
is notable, and it highlights the strongly
positive sentiment on these grounds. Business
incubators, dedicated industrial parks and other
forms of support are all on the rise, and they have
helped Russia secure the number-one position
for this aspect of the ecosystem.
40 | Russian and global venture markets in 2007–13
At the same time, the Government still accounts for most
investments made into the capital-heavy segments, such as
science, materials and chemicals, and plays an important role
there by supporting qualified specialists and the level of expertise.
Private investors are not yet ready to invest in the sophisticated
and innovative segments of the economy that do not guarantee
positive financial exits. By doing this, the Government executes its
social functions and allows innovative companies to develop early
stage products in such a way that they will be suitable for private
funding at the later stages of their development.
There is an obvious positive dynamic in infrastructure for R&D.
There is a good supply of new instruments to support small
enterprises, and earlier conditions and incentives also remain.
The Moscow Development Fund of Venture Capital Investment in
Research and Technology for Supporting Small-scale Businesses
has started a credit program for companies in the early stages
of development. That is clearly the area where instruments
are needed the most. We have already approved around 17
projects, and six of them have already received funding. My
own experience confirms the idea of public-private partnerships
is right. State bodies should follow private investors’
expertise when distributing investments or grants. For the
Moscow innovations ecosystem, I can mention the success of
technoparks. The Strogino Technopark is an excellent example
of a park where companies are growing, attracting investments,
and starting regional and global expansion. The park’s residents
include successful projects, such as Lingualeo, Your tutor and
others. No doubt, the state is supporting infrastructure the
right way. For some instruments, it is too early to say whether
they will work. Innovations in the country can’t “spring up” in
a year or two, or even five. The game rules of the innovations
market should not change too often. To support R&D more
effectively, we need coordination between the existing programs,
rather than inventing something else.
Alexey Kostrov, Executive Director, Moscow Seed Fund
There are still a lot of barriers preventing innovative businesses
from enjoying faster growth. The most significant ones relate
to the quality of state infrastructure and the unavailability of
certain legal and financial instruments that are crucial for deal
structuring. Market performance, however, shows that investors
believe in the Russian VC market and are ready to get involved,
regardless of any difficulties.
Venture funds with RVC’s participation
Fund Tot al
number of
investments
Number of
exits
Projected
fund volume,
US$m
VTB Venture Fund 15 099.0
Maxwell Biotech 9 0 99.0
Bioprocess Capital
Ventures
9 0 97.0
Leader Innovations 10 097.0
Innovative Solutions 5 0 64.7
RVC InfraFund 17 064.7
RVC Seed Fund 56 364.1
S-Group Ventures 8 0 58.2
RVC BioFund 8 0 48.5
RVC IVFRT LP 4 0 38.8
RVC I LP 3 0 32.4
Civil Technologies, Ltd. 0 0 32.3
New Technologies 2 0 19.8
The players in the Russian young innovation market still
need more experience of modern business models focused
on fast-growing companies. There isn’t enough experience in
going to global markets as well. Practice is always the best
teacher. However, it would be careless to rely on the trial-and-
error method only, because it could slow down development
of innovations in the long run. To stimulate this market, its
players need to be “trained” — not just the businessmen, but
also the investors. Without mentoring processes, we will have
to wait several times as long for an economically noticeable
change. Strategic planning, product image creation, business
models usage within the global labor division — these are the
competencies that Russia needs most from its innovative
individuals.
Albina Nikkonen, Executive Director, RVCA
41Russian and global venture markets in 2007–13 |
RVC is a government fund of funds and is one
of the key government tools for establishing a
national innovation system. RVC plays an integral
part in the development of the venture market
in Russia. It is a kind of a coordinator of the
innovation development process and a discussion
platform for all members of the innovation
process: the Government (in its capacity as the
regulator of the modernization process in Russia
and as the founder of RVC), R&D organizations
(including Skolkovo), venture funds, investors,
business angels, innovation start-ups and the
relevant infrastructure providers.
RVC is widely recognized as the trigger that set
off the Russian venture market. Since 2007, RVC
has been facilitating the money supply within the
public-private partnership projects. By November
2013, the number of public-private funds formed
with the aid of the RVC has reached 13 (including
two funds incorporated outside Russia). The total
volume of these funds is RUB27.7b.
RVC believes that its efforts in building the
venture ecosystem have provided an outcome for
the Russian economy that is no less significant
than other investment vehicles. Currently, RVC
considers its initial mission to be completed
and is shifting its focus to non-financial vehicles
crucial for VC environment, such as developing
“smart money” investors and infrastructure,
endorsing the innovations and supporting the
global expansion of Russia’s innovations industry.
This change is reflected in the RVC’s current
main objectives and mission.
Initial objectives and mission
RVC’s main objectives include the promotion of a
VC industry in Russia and a substantial increase
in financing available through venture funds. The
company acts as a government fund of venture
funds by means of which the Government
creates incentives for venture investment and
provides financial support to the high-tech
sector in general. It also acts as a government
development institution in the venture
investment sector of the Russian Federation.
RVC’s mission is to ensure the development of
an effective national innovation system that will
be competitive in the international market. It
aims to do this through the establishment of a
self-developing venture industry — in cooperation
with other development institutions — by
mobilizing private VC, developing innovative
entrepreneurship and hi-tech business expertise,
and by using Russia’s human potential.
New objectives and mission
RVC feels that it has achieved its initial goal of
establishing a Russian venture market and is
thus expanding its focus to include non-financial
investment vehicles. RVC’s new goals are:
increasing volume, encouraging growth and
adjusting the development lines of Russia’s
venture market, subject to such government
priorities as greater competitiveness of Russia’s
innovation sector in the international market.
As of 2014, RVC’s main objective will be to
provide, on the basis of an effective public-
private partnership, a balanced structure of
Russia’s venture market, broken down by stages
and industries, and its sustainable growth and
globalization, subject to government priorities.
42 | Russian and global venture markets in 2007–13
The Russian venture market in 2007–13
The Russian venture market has shown explosive growth in recent
years. The most conservative estimates suggest that, in 2007–12,
the Russian venture market experienced at least a four-fold
increase, both in terms of the volume and number of deals. In
2007, RVCA estimated that the venture market in Russia hosted
a total of 34 deals, which were together worth US$108.3m. By
2009, the annual value of investments had increased by 49%,
while the number of deals doubled. The global financial crisis of
late 2008 affected market performance in 2009, but the recovery
was quick, and more growth followed as 2010 saw a 24% increase
in volume over 2009.
The accumulated efforts of the market players and the
Government resulted in US$746.2m of investments in 2011.
Although a direct comparison of 2010 and 2011 may seem
incorrect since different data sources were used for these years,
such large growth cannot be attributed to entirely different
methodological approaches. The market underwent a qualitative
change throughout the period, and for the first time ever, it would
be true to say that private funds became interested in the venture
market and trusted it.
In 2012, a new market record of US$1,213m (63% year-on-year
growth) was set. During this period, two hundred and sixty-seven
venture deals were recorded, which is 34% more than for 2011.
By the end of 2012, the aggregate volume of investments made
since 2007 has reached US$2,506m. In other words, the value
of investments in 2012 was almost the same as that of the five
preceding years combined.
It is clear now that the market volume in 2013 will be higher
than in 2011. As of 1 October 2013, there have been 118 deals
accounted for, worth US$628.2m in volume. It would be safe to
say that the total volume and number for 2013 will increase by
at least 25%, as we are aware of several large deals that occurred
in 4Q13 and were not included in the statistics presented in this
report. In addition, full 2013 data will only become available
in April–May 2014. This is because, in the Russian market,
there is usually a gap between the execution of a deal and its
The Russian VC industry has shown
triple-digit growth since 2007,
reaching the record-breaking volume
of US$1,213m in 2012, making it
the world’s fifth largest.
announcement. It would be wrong, however, to expect the market
to demonstrate over 60% year-on-year growth in the future. The
market is becoming more mature. The growth of 2010-11 was,
to a great extent, driven by the activities of new funds collecting
portfolio companies. In the coming years, the existing funds will
shift their attention to managing portfolio companies, which
will have a negative effect on the market dynamics in terms of
volume.
In January 2013, Dow Jones VentureSource published a study
that ranked the Russian venture market fourth in Europe for high-
tech investments. In related comments, VentureSource experts
and The Wall Street Journal analysts noted that, in recent years,
VC investments were booming in Russia. Throughout the past four
years, the amount of VC investments in Russia has grown almost
tenfold, making Russia the fastest-growing market in Europe. Just
two years ago, Russia lagged behind Ireland, Finland, Spain, the
Netherlands and Sweden in terms of venture market size, but in
2012, it stormed into the European top five.
These positive conclusions can be regarded as conservative.
The Russian VC market is not yet fully transparent, and a large
number of deals occur that are not accounted for by analysts
and researchers. There are a large number of deals for which not
just the value, but also the existence of the deal, is kept secret.
Moreover, Dow Jones’s report was focused on deals in specific
segments, such as IT, internet, telecommunications, e-commerce
and internet-backed tourism services. Our data covers more
market segments than the Dow Jones report did. Looking at the
market from a Russian perspective gives us the ability to include a
large number of deals previously unaccounted for.
43Russian and global venture markets in 2007–13 |
Number of deals in the Russian venture market 2007–13 YTD
34
67 48
81
199
267
118
300
250
200
150
100
50
0
2007 2008 2009 2010 2011 2012 9M2013
Source: RVCA (2007—10), RusBase, EY (2011—3Q 13)
Number of deals
Volume of deals in the Russian venture market 2007–13 YTD
1,400
1,200
1,000
800
600
400
200
0
2007 2008 2009 2010 2011 2012 9M2013
Source: RVCA (2007—10), RusBase, EY (2011—3Q 13)
Amount invested (US$m)
Start-up and product in development Product in beta test and shipping product
108.3 161.8 123.8 153.3
746.2
1,213.2
628.2
Aggregate value and number of VC deals since 2007
900
800
700
600
500
400
300
200
100
0
3,600
3,000
2,400
1,800
1,200
600
0
2007 2008 2009 2010 2011 2012 9M2013
Volume of investments, (US$m)
Start-up and product in development Product in beta test and shipping product
Number of VC deals
Source: RVCA, RusBase, EY
34
101
149
230
429
696
814
In robotics today, I do not see one Silicon Valley-type center,
as there is in the online industry. We are keeping an eye on
everything that happens in the industry in Europe, the US,
Asia and Russia. They all have their interesting projects and
strong points, which is good because it means our country
stands a decent chance of finding a place in the multibillion
and fast-growing global robotics industry. As far as the
Russian robotics market is concerned, most start-ups appear
in robotics software. That is no surprise, given Russia’s strong
programming tradition. Without quality software, successful
projects in this sector are impossible, so we have here a
potential advantage that we should explore. Grishin Robotics as
an investor is mostly interested in robotics products for the end
consumer. It is in that sector that we see the most breakthrough
potential and possibilities for global growth. But, regrettably,
there are few Russian start-ups in that field now. The robotics
companies we have now mostly make components for military
and space products on state contracts. How can the number of
quality start-ups in consumer robotics be increased? I believe
we should think in broader terms — how to help develop an
entrepreneurial culture in the country. There are many ways:
making incorporation easier, granting tax incentives and so on.
Better availability of qualified investors in the sector is also
important. I am happy to see that, with Grishin Robotics on
the market, many Russian VC funds are taking more interest in
robotics start-ups and have a better opinion of them.
Dmitry Grishin, co-founder and CEO,
Mail.ru, and founder, Grishin Robotics
44 | Russian and global venture markets in 2007–13
Russian VC market highlights
2012 venture pipeline
136
101
30
US$69.8m
US$343.4m
Start up
Product
in development
and product
in beta test
Shipping
product
Top VC markets in 2012
US$800m
• There have been a few exits.
• Market consolidation is yet
to begin.
• Silicon Valley has a significant pull
over the Russian VC market.
Information technology, consumer goods and consumer services
are the key market segments
As of the first 6 months of 2013, there were 173 funds in Russia,
managing a combined total of US$5.2b
Consumer
market
(goods and
services)
53%
e-commerce
Cloud services
Media
Tourism
2011 to 3Q13 average
Telecommunications
IT
34%
Other
13%
• Certain macroeconomic factors
make the Russian VC market unique.
• Some Russian companies are seeking
global funding.
Number of seed
and start up
deals is growing
The record-
breaking value
of deals in 2012
made the Russian
venture market
the second largest
in Europe and
the fifth largest
in the world
Average seed
round and C+
round size' size
decline
US
US$32.1b
UK
US$1.8b
Russia
US$1.2b
Germany
US$1.0b
India
US$1.6b
China
US$4.9b
Israel
US$1.1b
45Russian and global venture markets in 2007–13 |
Russian VC market highlights
2012 venture pipeline
136
101
30
US$69.8m
US$343.4m
Start up
Product
in development
and product
in beta test
Shipping
product
Top VC markets in 2012
US$800m
• There have been a few exits.
• Market consolidation is yet
to begin.
• Silicon Valley has a significant pull
over the Russian VC market.
Information technology, consumer goods and consumer services
are the key market segments
As of the first 6 months of 2013, there were 173 funds in Russia,
managing a combined total of US$5.2b
Consumer
market
(goods and
services)
53%
e-commerce
Cloud services
Media
Tourism
2011 to 3Q13 average
Telecommunications
IT
34%
Other
13%
• Certain macroeconomic factors
make the Russian VC market unique.
• Some Russian companies are seeking
global funding.
Number of seed
and start up
deals is growing
The record-
breaking value
of deals in 2012
made the Russian
venture market
the second largest
in Europe and
the fifth largest
in the world
Average seed
round and C+
round size' size
decline
US
US$32.1b
UK
US$1.8b
Russia
US$1.2b
Germany
US$1.0b
India
US$1.6b
China
US$4.9b
Israel
US$1.1b
The most active VC funds of 2012–13
Fund Number of
investments
Number
of exits
Approximate average
investment value,
US$m
Aggregate value
of investments,
US$m
Runa Capital 35 21.5 >75
Ru-Net Holdings >25 1* >1 Tens of US$m*
TMT Investmens 21 31Tens of US$m*
Bright Capital Energy 21 3>1 144.4
Prostor Capital 15 01.5 20
Phenomen Ventures 15 *5— 7 Tens of US$m*
Life.Sreda 14 01.5—3 30
Leta Capital 13 1110
Pbf 12 2682
VEB-Innovations 12 00.5 6.5
Bright Capital Digital 11 1>1 20
iTech Capital 11 0>2 Tens of US$m*
Frontier Ventures 10 11—5 Tens of US$m*
Almaz Capital 8 1 2—4 Tens of US$m*
Maxwell Biotech 9*1—5 Tens of US$m*
Kite Ventures 6 4 1—10 60
Russia Partners 50* 5—7 Tens of US$m*
* – Unavailable, unconfirmed or approximate information Source: Firrma, RVC
Top five seed funds of 2012–13
Fund Number of
investments
Altair 60
RVC Seed Fund 52
IMI.VK 41
Moscow Seed Fund 17
Softline 15
Source: Firrma
Top five foreign funds of 2012–13
Fund Number of
investments
Intel Capital 4
Mangrove Capital
Partners
4
Ventech 4
Kreos Capital 3
Accel Partners 2
Source: Firrma
46 | Russian and global venture markets in 2007–13
The number of funds present on
the market grew rapidly, reaching
a total of 155 by 2013 and showing
no signs of consolidation
The Russian VC market has been demonstrating good
performance not only in terms of the funding raised, but also in
terms of the volume of funds managed. According to RVCA, as of
the first six months of 2013, cash in the amount of US$5,211m
was under the management of 173 funds. These statistics do
not include the VC activity of PE funds, and thus may differ from
other market estimates. The record-breaking level of capital
inflow that was achieved in 2012 — more than US$1.3b — was
driven both by the recapitalization of existing funds and the
establishment of new ones. This outcome is quite the opposite of
the challenging results of 2012 on the world’s other key venture
markets. At the same time, 2012 showed a significant decrease in
the average value of a fund.
Each year, throughout the period 2007–13, the number of newly
set up funds significantly exceeded the number of terminated
funds.
The Russian market is still far from being consolidated. Although
there are several management companies with a positive track
record that continue to raise new funds successfully, none of
them managed to grab a significant market share. This is a clear
indicator of a developing market with the consolidation phase still
to come. In the coming years, larger players with a better record,
well thought-out strategy and superior market insight should
emerge and consolidate (at least partially) the funds going into
the market.
Total amounts of financing raised by active VC funds (US$m)
6,000
5,000
4,000
3,000
2,000
1,000
0
1,600
1,400
1,200
1,000
800
600
400
200
02007 2008 2009 2010 2011 2012 9M2013
Amount invested (US$m)
Amount invested (aggregate, US$m)
Value of new funds Value of terminated funds
Aggregate value of funds raised
Source: RVCA
1,625
2,408
2,687 2,854
3,449
4,557
5,211
Number of active VC funds
200
180
160
140
120
100
80
60
40
20
0
70
60
50
40
30
20
10
0
2007 2008 2009 2010 2011 2012 9M2013
Number of funds
Number of funds (aggregate)
Number of new funds Number of terminated funds
Aggregate number of active funds
Source: RVCA
64
80 87 91 97
155
173
There is no doubt that the Russian internet market has grown
up. This can be seen in the high number of online campaigns
and the increasing activity of domestic and Western investors.
In the global business community, the Russian online segment
is rightly considered as one of the most promising, both for
businessmen who want to build a successful company and for
investors eager to get involved in a growing industry to secure
rapid returns on their investments. Fastlane Ventures has today
become a kind of entrepreneurs’ club. Our strategy is based on
the idea that founders and key team members must themselves
be experienced businessmen with impressive success stories.
They use their experience and knowledge to help young people
fulfil their dreams. We are not a regular kind of investment fund,
because we help our partner teams in new companies with both
funding and advice. Our goal is to help new leaders turn a good
idea into a successful online company that can compete with
the top companies in various online segments. We expect the
internet market to keep expanding in every direction now. We
think there will be at least 1,500 new online projects appearing
every year in Russia, 10 to 15 of which will become new stars on
the local market and maybe on the global market, too. Of course,
competition in practically every niche is already quite intense,
so it is important to seize the day and start putting ideas into
practice now. We believe that our business model gives serious
advantages to those who are beginning start-ups, allowing
them to make use of all our collected experience when building
a business model and saving them a lot of time and resources
by giving them a proven development course or using tried and
tested tools. How a business idea is put into practice is still a
key factor in how successful it will be, and it is also central to the
company’s chances of taking a leading position in its industry.
Marina Treschova, CEO, Fastlane Ventures
47Russian and global venture markets in 2007–13 |
The most developed projects
collect most of the funding
supplied
Similar to the trend observed in other key VC markets, the
Russian venture industry is heavily weighted toward the later
stages, rather than the seed and start-up stages. In 2011,
the funding raised by companies at the stages of product in beta
test and shipping product was US$474.7m or 63.6% of the total
investments made. This imbalance further increased in 2012,
with these stages accounting for US$827.9m or 68.2%
of the total funding supplied.
In terms of the number of deals, the situation is quite the
opposite. In 2012, there were 136 start-up deals and 90
investments into companies at the product in beta test stage,
amounting to 50.9% and 44.8% respectively of the total number
of investments. This proportion remained almost the same as in
2011. The 2013 data is not yet complete, and so it is too early to
draw any firm conclusions, but there are unlikely to be significant
changes in these figures.