Pwc and RVC present The Money TreeTM: Venture Capital Market Navigator for 2013

The PwC Centre for Technology and Innovation and Russian Venture Company (RVC) present the 2013 Russian venture capital market report MoneyTreeTM: Venture Capital Market Navigator.

According to the report, in 2013, fast-growing companies, working in the Russian biotechnology, industrial, and information technologies sectors, received venture capital investments of USD 653.1 million. These investments were received as a result of 222 deals. The number of investor exits almost doubled from 12 to 21, while investors’ proceeds from these exits grew more than fivefold, from USD 372 million to an unprecedented USD 2 billion.

The MoneyTreeTM: Venture Capital Market Navigator is a regular survey of the Russian venture capital industry, prepared by PwC in cooperation with RVC and based on Venture Database and RusBase data.

The survey reviews venture capital deals (cash investments in the equity of fast-growing startups) announced from 1 January through to 31 December 2013, with a value of USD 50,000 up to USD 100 million. The survey also focuses on key financial components of the Russian venture capital environment, such as investments in infrastructure, grant financing, major deals, and investor exits.

The report shows that the number of venture capital deals in 2013 exceeded the 2012 results by 18% (222 deals vs 188 deals in 2012), while the total investment decreased by 28% (USD 653.1 million in 2013 against USD 911.9 million in 2012) as a result of the average deal value dropping from USD 5.6 million to USD 3.1 million. At the same time, total venture capital deals on the Russian market, including grants, large deals worth over USD 100 million, investor exits, and investments in venture capital infrastructure, grew from USD 1.98 billion in 2012 to USD 2.89 billion in 2013.

The survey shows a decline in the average deal value for almost all stages of project development. This was primarily driven by the maturation of the market and, as a consequence, the fact that the average indicators for transactions have approached that of developed markets like Europe where the average deal comes to USD 1.4 million, ranging between USD 800,000 and USD 2.9 million in various countries. This trend has been driven by growing outbound investments by Russian investors who usually act in consortiums with more experienced foreign partners and draw on their expertise. As investors enrich their experience, they can better assess projects and inherent investment risks. This results in stricter requirements for project development on the part of entrepreneurs and stricter terms for deals.

Gulnara Bikkulova, Director of RVC’s Department for Capital, Industry and Innovation notes: «The MoneyTreeTM report supports that the extensive development of the Russian venture capital market will give way this year to a more mature stage. Positive trends are the dramatically growth of the number of investor exits, the increase of syndicated deals, the appearance of the professional management companies in the market that establish new funds. Market maturity factors include a lower average for deal values and a new focus on the part of private investors on later project stages, while public funding is becoming more available for early stages.»

As in 2012, the IT sector is leading in terms of investment funds raised: in 2013, it accounted for almost 87% of deals (193 deals) and 93.5% of total investments (USD 611 million). Thus, the IT sector’s market share grew compared to the last year, when it accounted for 83% of deals and 87% of total investments, respectively. The number of IT deals increased by 23.7%, while total investment fell by 22.8% (against USD 792.1 million in 2012) since the average deal value decreased from USD 5.6 million to USD 3.3 million.

The unquestioned leader among IT sub-sectors is the e-commerce segment, which accounts for the greatest number of deals (28) and the largest share of investment (USD 172.8 million). The advertising technology segment, with total investment of USD 25.8 million, ranks second in terms of the number of deals (27), while there were four projects in the telecom and IT outsourcing sector (USD 105.9 million) coming second in terms of investment funds raised. In 2013, investors were especially interested in IT projects focused on educational services, financial technology, medical and lifestyle services, as well as games.

According to Anton Abashkin, Director at the PwC Centre for Technology and Innovation: «Projects related to IT, the Internet, and mobile solutions are still top ranked among investors, because these areas have huge potential for successful business development. While the first wave of Russian venture capital projects was focused on ‘virtual’ problems faced by customers, these days, entrepreneurs are more and more looking for opportunities to build business around long-term needs in traditional industries, such as finance, telecoms, retail, media, education, and healthcare. These industries are best positioned for implementing innovations, they also have high capitalisation, which helps investors with significant monetisation potential to offer in-demand products to the market based on proven business models. These businesses attract investors largely because the relevant market risks are highly predictable.»

The industrial and biotechnologies sectors remain rather small in terms of both the number of deals and investment funds raised. The 2013 results indicated 16 deals worth USD 29.1 million in the industrial technology sector, which is one deal less than in 2012. In addition, the average transaction size in the industrial technology sector shrank from USD 8.3 million to USD 2.2 million while the average transaction size in the biotechnology sector remained almost unchanged at USD 1.3 million compared to USD 1.1 million in 2012.

Grants still remain the main source of financing for small enterprises in these sectors (in accordance with this report’s methodology, such grants are not considered venture capital investments). At the same time, the total number of deals in the industrial technology and bio-technology sectors has decreased even as the total number of grants has increased. For instance, we recorded 1,693 grants in 2013, 74% of which went to the industrial technology and bio-technology sectors, compared to 702 grants in 2012. At the same time, the average grant size, as with the average size of venture capital transactions, decreased in 2013, from USD 207,000 in 2013 to USD 61,000 in 2013. This was primarily driven by the rising share of organisations financing projects in their initial stages within the overall structure of grant allocations. Thus, total grants in 2013 came to USD 102.8 million (compared to USD 145 million in 2012).

In terms of investment stages, it is worth noting that in 2013 investors continued to shift their attention from projects’ «seed» stage to later phases such as the «startup», «early» and «expansion» stages. For instance, in 2013, we noted 12% less deals in the «seed» stage compared to 2012 while «early» and «start-up» stages saw total number of deals increase by 50% (from 31 in 2012 to 46 in 2013) and by 37% (from 63 to 86), respectively.

Apart from total venture capital deals, there was over USD 100 million in major transactions straddling the line between venture capital financing and classic direct investment, which was tapped for latter development stages. Thus, and based on the report’s methodology, such transactions are not viewed as venture capital deals. In comparison with 2012, which saw three major transactions on the Russian market worth a combined USD 516 million, there was only one deal of a similar magnitude in 2013 when Lamoda raised a record USD 130 million in investment for the Russian e-commerce sector.

Based on the main trends in the development of Russia’s venture capital sector in 2013, the following conclusions may be reached about this sector’s maturation. Firstly, the professionalism of the players on this market is growing and, as a result, there is demand for quality in project implementation. Secondly, investors are cautious in their selection of companies and, since they are eager to mitigate risks, they are putting less money into projects at each financing stage. In order to secure investors, companies, even at their earliest stages of development, now need to have a tested business model and an experienced team, as well as a product that has proven itself on the market.

Furthermore, the report notes that many players in the sector, who had started their operations four to five years ago, are reaching the end of their initial investment cycle. Now, their efforts are more focussed on managing portfolios, reading companies for sale, assisting in business development and dealing with non-profit investments. At the same time, new players are appearing on the market, including institutional and private investors, as well as fund managers who saw their first successes in 2010-2012. Furthermore, new funds are springing up, fostering further growth in investment and deepening the competition for quality projects.

In addition to the overall increase in the quality of projects, investors also note a deficit on the market which, even with a growing number of players and more capitalisation, has not only sparked a drive for «good deals», but also has resulted in a rising number of syndicated deals and more active cooperation between market players, thereby spurring on further accumulation, a boost in market transparency and greater ease in tapping capital for entrepreneurs.