The Russian market for venture capital investments in startups began to take shape back in the 90s. In a little over 20 years, it has experienced ups, downs and new ups. Now it is an actively developing sector, since both the state and state corporations and private companies are interested in innovations. We understand how the startup market in Russia works and who its main players are.
Portrait of a Russian startup
A typical Russian startup is a 37-year-old Muscovite with a technical education and work experience in a top or smaller company, or with the practice of running his own business. These are the conclusions reached by the authors of the study "Startup Barometer"... At the same time, according to their analysis, people at a younger age are rare in the industry. For example, the share of student development is only 5% of the total number of projects on the Russian start-up market. This age distribution can cause a mixed reaction, but many experts note that startups with corporate experience have a greater potential to create a viable product, assemble a team, and correctly assess risks. Often, a young entrepreneur rushes into a new business rather recklessly and, as a rule, is defeated.
In Russia, as of 2020, there wereabout 700 tech startups. Most are focused on developing artificial intelligence or big data analytics solutions for large and medium-sized enterprises. According to statistics , 80% of startups are potentially ready to deepen cooperation with corporations, but they are not always willing to sacrifice their independence.
Today, the total turnover of venture investments in Russia is almost 22 billionrubles is twice as much as in 2019. Prior to that, against the backdrop of the 2014 sanctions and the ensuing crisis, Russian startups were going through hard times in terms of funding. However, the pandemic, which has exposed the need for digital innovation, has rekindled investor interest in the industry.
So far, Russia is inferior to foreign countries in terms of the segment's development rates. In particular, in terms of the number of projects, it is dozens of times behind Western Europe, Singapore and the United States.
If we talk about financing research and development in Russia, then the volume of gross domestic expenditures on R&D is only 1.1% of GDP, which is 2-4 times less than in developed countries.
Where can I get the money?
As a rule , in the early stages, startups are financed from the own savings of their founders, who often combine project work with alternative activities or with another business.
A recent survey among startups showed that the majority (49%) need investments, the rest - in connections (23%), partners (13%) and employees (10%). Only 2% of the total number of interviewed entrepreneurs are interested in mentoring and expertise.
Now, with the growing interest from private or corporate venture funds, business angels, more opportunities for Russian startups are opening up for obtaining funding. Also, money can be raised through startup accelerators or by selling a project.
Accelerators, incubators, technoparks
As for intangible support, business incubators provide it to entrepreneurs: they provide benefits for the office, expert assistance in working with documents and paying taxes.
The first incubators appeared in Russia in the 90s, but they became a mass phenomenon in the 2000s, when the state actively took up a program to support small and medium-sized businesses. There are now over 250 private and public incubators throughout the country. Many function at large universities.
Business accelerators are also called upon to provide support to startups, however, such assistance is targeted and aimed at intensive development, often organized in the form of training acceleration programs that end with a demo day allowing startups to tell investors about their project As a rule, companies conducting acceleration receive a share in a startup and exercise stricter control over the spending of invested funds.
It is worth noting that in recent years in Russia the volume of investments from accelerators has been noticeably decreasing. In 2020, their funding amounted to 89 million rubles, which means a two-fold decrease. If in 2019 45 startups becameobject of financing accelerators, then a year later only 16 projects were awarded support. At the same time, it is paradoxical that the number of accelerators is only growing, especially among state corporations.
For startups that have successfully overcome the difficulties of the initial stages of development, cooperation with technology parks - scientific and industrial associations that can provide offices, production facilities, infrastructure and expert support on preferential terms. In Russia, this format is popular, not only in the capital, but also in many other regions, including the Novosibirsk region, Tatarstan, Nizhny Novgorod region and others.
Venture Investors
In Russia, the structure of investments in high-risk projects that are looking for scalability is generally in line with international experience.
The volume of venture capital is growing , including with the participation of foreign capital. One of the most impressive in this segment was the $ 50 million deal with the start-up Miro, which has domestic roots but is registered abroad. Corporate investment is also growing rapidly. Recently, they have doubled and amounted to 5.2 billion rubles. Investments from private investors, or so-called business angels, amounted to 3.7 billion rubles in 2020, and 2.3 billion rubles were received from private venture funds, an amount 65% more than last year.
The Russian venture capital market emerged on the initiative of Western investors in the 90s, when the European Bank for Reconstruction and Development founded 11 regional venture funds. Its development peaked in 2012, when the volume of investments reached almost $ 1 billion and brought Russia to the 5th place in the world. However, after the events of 2013-2014, the situation changed and for several years there was an outflow of money.
In 2017, the authorities ordered state corporations to develop venture capital funds. As a result, the corresponding structures appeared under Rostec, Rusnano, Roskosmos, United Shipbuilding Corporation, etc.
Despite the overall positive dynamics in the industry, some of its participants believe that it is now about 3 times more difficult to attract investment in a project than it was 10 years ago.
Venture builders
As a percentage, the probability of a startup's success, according to various sources, ranges from 1 to 10%. Young companies lack the resources to scale up, and corporations interested in “growing” startups within their structures lack entrepreneurial spirit and speed.
A way out of this paradox was found in 1996, when the world's first startup studio Idealab appeared in the United States - a company that grows startups either for a specific request or with an eye on market trends. The main goal of startup studios, or venture capitalists, is to create and sell startups.
This practice came to Russia relatively recently.- in 2012, so at the moment there are not many companies of this profile - just over 10. True, even now the industry can boast of high-profile deals and projects. For example, the i-Free studio has already founded 12 startups (including the first b2b foodtech in Russia “on Lunch” and the service for accounting CoinKeeper, in which MTS invested 125 million rubles), and also conducted more than 14 investment transactions, including sale of the Wallet service to Tinkoff Bank. Kirill Gorynya, co-founder of i-Free and CEO of Wallet, noted in an interview with Forbes that “initially we thought that Wallet would be a modest part of a mobile phone, but then we wanted to put all the best financial services into the application”.
At the time of the sale, experts estimated the startup from 700 million to 7 billion rubles: it had 20 million registered users and 300 million digitized cards. Official details of the deal were not disclosed.
Another of the oldest start-up studios in Russia, Technospark, has more than 30 projects in the field of medicine, sports and robotics in its portfolio and cooperates with such giants as SAP, and hundreds of millions of people download health applications from Palta studio around the world.
Venture builders spendworking with startups in the early stages of their development (before MVP), providing them with resources and specialists, helping to improve business processes, and then helping to attract an external investment round or selling to corporations. Sometimes buyers come up immediately with a request for technology. In this case, startup studios either come up with an idea themselves, or adapt the ideas of foreign developers.
On average, this approach can increase the viability of a startup up to 45%, says Denis Kovalevich , co-founder of the Technospark startup studio .
Currently, work is underway to open such startup studios at Russian universities. According to the RF Government, such ecosystems are already functioning in 40 universities. In the future, it is planned to open 10-20 startup studios per year.
Development prospects
Today, most Russian startups are focused on the domestic market. Europe accounts for 22%, the US 16% and Asia 13%. Investors, for their part, are more willing to consider projects that seek to enter the international market and are less dependent on the ruble. However, there is still a high demand for innovations from such large players as Sberbank, Yandex, VTB, X5 Retail Group, MTS, Rostelecom, etc., which may become an additional incentive for the start-up market.
The market is expected to grow in 2021. The main trends are a decrease in the share of accelerators and an increase in initial investments from business angels, the study experts note. Russian Venture Market in 2020. Among the promising areas are tourism, which is trying to return its performance to the level before the outbreak of the virus, and transport. From the point of view of markets, Asia is of the greatest interest and is characterized by significant demand and the absence of prejudices regarding Russian projects.