Russian Venture: What was it like in 2021 and where is it going?

How the study was conducted

An annual survey of Russian-speaking experts who takes an active part in the development of the venture industry aimed at analyzing market dynamics, investor activity, key events that affect the development of the industry, and making a forecast for the next year.

Like the subsequent report, the questionnaire reveals the current state of the market and investor sentiment through indicators of their investment activity and market conditions, such as fundraising, investment strategy, investment activity, exits, incentives and barriers, and the role of the state, initiatives essential for growth.

Funds

Half of the respondents among the representatives of funds manage one fund (49%), another 40% of participants manage two or more funds — this figure has grown by few percent over the year.

This picture reflects the market's mature structure and suggests that more than a third of the market players have a good track record of getting subsequent funds under management. Fundraising in new funds is impossible without successful investments in the past portfolio.

The average size of a fund in Russia is $11-50 million. Funds larger than $100 million are found among 16% of their total, and more than $200 million are found only in less than a dozen percent.

The distribution of the average check looks ordinary; all capital needs in the market are closed. As the evolution progresses, the size of the funds grows, and the average check grows. Among the first funds, about half invest with average checks up to $500,000, which are angel checks rather than funds ones. Large and medium checks are most often found in subsequent funds.

New funds appeared under the management of almost 40% of the representatives of the funds — this is a fairly positive indicator, reflecting both the availability of capital and the fact that they can effectively manage capital in Russia and bring profit to their investors. In 2022, almost half of the managers intend to launch new funds. Thus, we state that the market is actively developing and growing.

Business angels

Even 3-4 years ago, venture investors expected an increase in the activity of angel associations, but the low activity of HNWI and distrust to investments for 8-10 years limited the opportunities for market growth. Contrary to the hopes placed on them by the venture capital market, wealthy people were not ready for high-risk investments in projects in the early stages. But in 2020, private investors have become a new source of capital for the Russian venture capital market. The low yield of traditional investment instruments and the desire to diversify their portfolio, coupled with the emergence (or rather, the formation) of convenient syndication tools, have led wealthy people to business angel clubs, where they have the opportunity to participate in transactions with experienced investors and top Russian and international funds.

For the second year in a row, we have identified a trend towards the growth of business angel investments — now angel clubs invest amounts commensurate with the amounts of funds, and are not bound by the venture fund cycle — there is simply no upper bar for the number of transactions and their total volume for the year.

More than half of the business angels among our respondents are newcomers — they started investing in startups two years (31%) or a year ago (28%). This confirms that since 2020, an influx of private investors into the market for investment in technology projects has begun. We also noticed an increase in the number of angels in terms of the number of participants in the study — there were twice as many angels among them this year. The most experienced investors who have been making angel investments for 8-10 years accounted for 8% of all those who participated in the survey.

The average investment check for most of the surveyed business angels is $20-50 thousand (67%), which, of course, is less than the traditional average angel check in Russia — about $300 thousand. However, the members of the syndicates invest with such checks, which allows them to enter a larger number of projects with smaller checks.

As active players and early-stage investors, business angel clubs have firmly taken their place in the venture capital market.?

Investment activity

Over the past 12 months, 89% of investors have made new investments, excluding follow-on rounds. This indicator illustrates the market activity from year to year, which means that Russian investors continue to invest, and the market is growing steadily.

There was no bias in the number of projects towards a certain category of investors. Almost a third of investors have invested in 10 or more projects in 2021. At the same time, if you look at the distribution by types of industry players, then almost all categories of players equally noted that they managed to invest a dozen start-ups.

With optimism, investors are also making plans for 2022: 41% intend to increase the total amount of investments. Another 34% expect that the amount will increase slightly compared to the outgoing year. Only 9% of investors will reduce the amount of investments in the coming year.

Investment strategy

The highest conversion of getting into the pipeline of investors is provided by the recommendations of colleagues in the market and project founders (75%). Personal connections, offers from other investors, and acquaintances of the founders help investors, in their opinion, find the most suitable targets.

For business angels, the top sources of the pipeline are recommendations from other VCs, clubs, communities, and venture partners. Interestingly, venture partners as sources of transactions gained only 15% last year. This year, they entered the top 3 effective sources of the pipeline for all investors, gaining 34% of votes on a par with clubs and overtaking incoming applications. Both funds and angels equally chose this source of projects. This suggests that there are more and more venture partnership formats, and one of the most popular, including for angels, is scouting. For several years now, dating at events has been in last place as a pipeline source, although they are an integral part of the innovation infrastructure.

Almost half of the respondents noted the most popular stage for Russian investors is the seed stage. And the pre-seed stage was named the most preferable by only 8% of investors. However, let's look at the choice of stages by categories of investors. We will see that business angels invest mainly in the early stages (70% chose seed as the primary investment), while funds invest primarily in the later Series A.

The four leaders of the top attractive niches for investors do not change. It is extraordinary to see FinTech in the first place — obviously, investors see the potential in developing financial technologies. Despite the absence of a significant number of transactions in the segment, it may be all about the exits – according to Dsight, there were seven exits in the FinTech segment in the first half of 2021 – and investors believe that it is time to enter the next circle.

SaaS solutions and B2B Software are still popular with investors, and fairly large transactions confirm this: investments in Electroneek for $20 million, JustAI from MTS and Sovcombank for $9 million, and others.

Since 2018, EdTech has been holding the position of one of the most popular industries among investors; however, after the end of the pandemic effect, interest gradually begins to decline. Within Russian EdTech we noticed another trend towards the export of technologies and proven business models to foreign markets. This trend is confirmed by investments in an online school of digital professions in the Latin American market from the Russian founders of EBAC Online for $11 million led by Baring Vostok, the Coding Invaders deal is an educational project in the Indian market, and the purchase by Skillbox of the Brazilian school of additional professional education Mentorama. Fueling the burning fire of sustained interest in EdTech is the news of new mergers and acquisitions, allowing you to observe the balance of power among the leaders of educational subsegments.

And if the EdTech export trend is still growing, then the FoodTech export trend, namely the On-demand-delivery models from Russian founders, seems to be declining. By the end of the year, fast-food delivery companies from dark stores managed to open their branches in New York — FridgeNoMore, California — FoodRocket, London — Jiffy, Berlin — GetFaster, Stockholm — Vembla, and Canada — Tiggy. It is already too late for venture investors to jump on the outgoing train — all that remains is to see if companies manage to grow at the declared pace.

Interestingly, in the post-pandemic year, BioTech and MedTech projects dropped out of the ranking of attractive niches. It seems that investors turned their eyes towards medical technologies for a while but did not find investment-attractive projects. The only major deal in the segment in the first half was the $26 million BestDoctor round from Uniqua, Winter Capital Partners, and VNV Global.

What else is worth paying close attention to:

— Creator Economy. Though these niches were not on the list, it is worth noting the growing interest of venture capitalists worldwide in Creators Economy. More than 50 million people around the world consider themselves creators. The Creator Economy is already a separate economy segment that, combined with a $13.8 billion influencer marketing industry in 2021 and hundreds of new startups, is valued at a total of $104.2 billion and is growing on such a fast trajectory that future market valuation reaches trillions of dollars.

— Social commerce: commerce generated through social interactions leading to direct product sales.

— Web3 is also gaining momentum. This concept is focused on developing Internet technologies through the use of blockchain technology, which will allow professionals to create high-quality content and services with the help of professionals. So far, it is not massively visible on the radars, but this will change in the next two years.

Exits

In 2020, 36% of investors did not have exits, and this year this figure rose to 51%. Considering that half of the business angels among the respondents started investing only this or last year, the drop in the number of exits in the overall data is understandable.

There have been significant changes in the list of strategists compared to last year: most often, large Russian ecosystems (for example, Sberbank, VK, Yandex, MTS) bought startups this year, although last year they took the last line in this list. They became exit sources for investors as often as Western strategists (31% of exits each). In second place are funds of later stages — a quarter of investor exits.

State-owned companies or companies with state participation (except for Sberbank) bought startups and, accordingly, a source of exit for investors only in 2% of cases. This tells us that state-owned companies are in no hurry to buy innovations directly, despite the digital transformation. The tasks of the national program "Digital Economy" are implemented through the tools of software procurement and orders for the development of complex projects, the executors are a chain of players from system integrators, vendors, suppliers.

Accordingly, large Russian IT companies should be interested in buying technologies, but they have become sources of exit for only 4% of investors so far.

Market

In this section of the questionnaire, survey participants were asked to name the main positive and negative events that affected the Russian venture investment market in 2021.

This year, investors were more willing to share their opinions on positive market developments. Respondents massively noted the development of professional communities of business angels and their activity in the venture capital market. The last year’s growing trend for syndicated transactions continues with ever larger amounts. Thanks to such a tool for entering the venture capital market as business angel clubs, there is an influx of capital from HNWI.

Since 2019, when HeadHunter, founded in 2013, became the first Russian company to go public, the trend for IPOs in Russia has begun. For three years in a row, investors have called IPOs a positive event for the venture capital market. The completed IPO of Ozon and Cyan added optimism to the market and confirmed the possibility of exit through this instrument. The revival of the market, the activity of various players and the growth in the transaction number was also noted by several investors.

One of the trends of this year was the success of Russian startups abroad. This is a signal that we have learned how to create technologies for export and enter new markets with a proven business model.

Investors continue to highlight the effect of the pandemic, which has become a driver for the development of online services and the outflow of employees to remote work. As a factor, the pandemic has both positive and negative consequences for the market and therefore takes places in both ratings.

For the third year in a row, criminal cases against representatives of the innovation ecosystem and IT companies remain among the main negative events. We are talking about the arrest of Ilya Sachkov, the founder of Group-IB, the conviction of Michael Calvey, the house arrest of Alexander Povalko. Other factors that negatively affect the development of the market are also mostly external: political and economic conditions, government actions, uncertainty due to the pandemic.

Regarding the issue of state assistance to the market, investors have been saying for several years in a row that the state should create infrastructure and stimulate the exit market, instill a culture of buying innovations, and not make direct investments.

Against the backdrop of the activities of law enforcement agencies, investors would rather not want state intervention and are asking to remove the "logic of the prosecutor" and to develop the environment, for example, optimize taxes, develop a competitive environment, and provide support measures to the most dynamic companies.

Conclusion

This year, the survey results prove some dynamic changes: the growth of investment activity, the revival of the market, the influx of private capital and new players, the work of investors in international markets, and the export of Russian technologies and business models. I would like to share with you my key takeaways from our 2021 survey:

— For the first time since 2015, the share of Russian companies in the portfolio of investors is changing, which means that investors of Russian origin, thanks to their experience and reputation, feel free in the international market and are already serial players, raising capital for the following funds and competing for the best deals.

— There has been a strengthening of the importance of private capital in the venture capital market in 4 forms: in the form of angel investments directly in a startup, in the form of angels in syndicates, in the form of presence as an LP in funds and co-investment with funds as an LP. Business angel clubs played an important role in the inflow of private capital — although syndication of transactions existed before, now this tool has become more accessible: the market has matured, legal innovations have reached us, angel investments have been popularized, and in general, the hype associated with future technologies is growing. Angel associations are already investing along with funds, and not just in the early stages.

— The role of the state in the venture business has changed. On the one hand, the state's direct participation as an active investor and the number of players have decreased. On the other hand, actively investing state participants (RDIF, Skolkovo, Veb Ventures, VTB Capital and some others) are becoming more and more like private investors in terms of speed of work, approvals, processes within their investment divisions — in this sense, the boundaries are also blurred.