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"Less like a casino" - The future of the world's 5th biggest venture sector

0 14 February 2014

EY Russia and the Russian Venture Company (RVC) have teamed up to produce a detailed report on the Russian venture market from 2007-2013. The report tracks the growth of the sector during this period and includes a breakdown of the sector by segment, a list of major exits and an overview of the most active funds. It also features comments from many of the sector’s most important individuals.  

You can read the whole report here, but if you want a summary of the main points, read on. 

The current state of the Russian VC sector

In 2011 and 2012 the Russian venture sector boomed, with the number of deals increasing threefold, and the total invested went up by 790%. 

This was enough to make Russia the 5th largest VC market in the world in 2012. However, the slightly lower level of venture activity in 2013 means that it may not have maintained that position. 

The Russian VC sector, like much of the rest of the world, is strongly weighted towards IT, consumer goods and consumer services. In 2011 they accounted for 95.8% of all investment, and 88.4% in 2012. 

The most popular segment was consumer services (e-commerce, travel and media) which received more than 50% of the total invested in 2011-2013. Indeed, this sector alone accounts for the ‘spike’ in 2012, when there were a number of big investments in e-commerce projects. 

The report's authors reckon that the market’s strong B2C focus is because, as Russia’s internet audience rises and matures every year, the consumer services sector has the most feasible monetization possibilities. However, they predict that B2B services will become more important as “connected” business continues to grow. 

Problem #1 - Not many exits

Another feature of the Russian market highlighted in the report is the comparatively small number of exits, with just 10 - 20 per year, compared to 500+ per year in the US. 

The experts surveyed for the report came up with a number of reasons for this. Dmitry Alimov, founder of Frontier Ventures and, explains that 

“there is practically no local IPO market in Russia, and the entry barrier to holding an IPO on a foreign stock market is considerably high. Therefore we will see several IPOs per year at best, and M&A (merger and acquisition) will be the principal exit method for the funds.”

The problem with this, however, is pointed out by business angel Igor Ryabenky:

“Russia has practically no major hi-tech players of its own who would be able to buy start-ups. IT start ups are not a subject of interest for the majority of big companies, with the only exception, perhaps, being projects in telecommunications.”


Alexander Galitsky, managing partner at Almaz Capital, questions whether even these big companies are likely to really improve the situation, pointing out that

There are almost no acquisitions of Russian innovation companies. Only a few companies are sold a year and the size of the deals is not so impressive. The «Big Three» telecommunications and internet giants prefer to grow with their own research instead of buying companies.”

This makes it very difficult for investors to exit via merger/acquisition. However, Lawrence Wright, Director of the Skolkovo Startup Academy thinks that things might be changing, albeit slowly.

“The bigger Russian companies have begun to understand that if they want to expand into the global markets they have to become more innovative. They realize that innovations are needed for survival, but they must be able to finance new technologies from an open market. Russia is not very far along in this.”

Problem #2 - Incompetent startups

Another problem highlighted by a number of investors surveyed is the naivete that characterizes many startups. According to Sergei Yeremin, managing director of the Microsoft Seed Fund in Russia 

“another feature of Russian projects is, in many cases, a vague notion of the niche for one’s product and an absence of feedback from the market. Very often, start-ups begin product development before they talk to their potential customers, and they see no point in such communication. And this situation has to be rectified, because too much effort and energy is put into unwanted products, resulting in failure and disappointment.”

Renat Garipov, co-founder of the greenfield project, goes further. He believes that the worst problem facing the Russian venture sector is 

“incompetent startups. Most of them have great teams and excellent ideas, but they imagine their product audience to be like themselves. They do not understand how the market they want to conquer really works.”

Problem #3 - Unprofessional VCs

Founders, however, are not the only ‘incompetent’ ones. Dmitry Chikhachev, Managing Partner of Runa Capital, points out that while the Russian VC market seems to have solved the problem of money supply, 

“there is still a shortage of professional investment teams. Members of the existing teams are either entrepreneurs retrained as investors or specialists who came into the VC sector from the direct investments sector. A qualitatively new generation of investors will appear on the market in the next 5 to 10 years, as soon as the young professionals grow up.”

Dmitry Alimov (Frontier Ventures and adds that 

“the ecosystem of venture financing is still underdeveloped, and many investors are not experienced enough… In the course of time, some of the funds with unsatisfactory portfolios and ill-considered strategies will disappear, and the projects supported by them, without getting new rounds of financing, will cease to exist. The surviving market players will acquire experience, learn to build investment teams and make more-balanced investment decisions. This will lead to consolidation in the market: more than half of the funds will cease to exist, thus making the market look less like a casino and more like a professional environment.”

Solution #1 - Education, Education, Education!

While most of those who were critical of the current state of the sector believed that many of the problems would sort themselves out as the venture sector matures over the next 5-10 years, many also suggested that the government has an important role to play in speeding up this process. 

Interestingly, in EY’s 2013 G20 Entrepreneurship Barometer, which ranks each of the G20 countries by the level of support provided by governments for entrepreneurs Russia was ranked number one for coordinated support. This suggests that new business incubators, technoparks and other forms of support are having a positive impact. 

However, more still needs to be done. Albina Nikkonen, Executive Director of the Russian Venture Capital Association (RVCA) commented that 

“To stimulate the innovation 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.”

In addition to specific entrepreneurship education, a number of leading investors emphasised the importance of science education for the venture sector. Dmitry Chikhachev says that

“Responsibility for the training of qualified specialists in the most promising directions lies completely with the Government… the most important events in the Russian VC sector in the last two years are the observed practical efforts of the Government to carry out reforms in higher education and academic research. This will give Russian specialists an opportunity to retain their competitive strength on the global scale and will enable Russian companies to develop new technologies, not only in the IT sector. This is the most useful thing that the Government can do to develop the VC sector.”

Alexander Galitsky also believes that the government’s main role is to educate.

“The Government cannot stimulate corporate interest in start-ups directly. But it can invest in education for the corporate and business environment. And this counts… We will not have good ideas for start-ups without subject knowledge. This makes raising the level of scientific activity one of the most important goals of the Government. Science needs investment — this is money spent on future generations. But we need to keep in mind that investing now will pay off only in 15 to 20 years for fundamental science, and in 5 to 15 years for applied science. Properly conducted research needs patience, and we are short of that.”

Solution #2 - Legislation

In addition to improving business and science education, Vadim Tereschenko, Senior Vice President and CFO of ABBYY Group, called on the government to support exports, saying that  

“As a company grows and moves to outside markets, it meets a harsh competitive environment, but the Government has almost no instruments to support exports. Any Russian company venturing into the US market is on its own against the US’s aggressive patenting system. Large American corporations use it as a non-financial barrier for outsiders. Consistent help with these non-market barriers would be very valuable to all domestic developers with global ambitions.”

A number of experts surveyed welcomed positive changes over the past two years, including increased dialogue between the government and the tech industry and state initiatives to support innovations, which led to better, clearer regulations and the popularization of entrepreneurship. However, business angel Igor Ryabenky suggests that there is more to be done, claiming that

“the legislation has not been adapted for the innovation sector, especially in the part concerning investors’ rights protection and the regulation of relations between shareholders. Perhaps there will be some changes in the future, but, for the time being, the legislation focuses mainly on raw material industry and export, and not on innovations or investments.”

The future of the Russian VC sector

In spite of their criticisms, most of the individuals surveyed were optimistic about the Russian venture sector’s future. 

Alexander Turkot, founder of Maxfield Capital believes that 

“it is wrong to say that the Russian VC market has fallen significantly behind the European market. In terms of number of the number and total value of deals the Russian market has already exceeded most European markets and is going to outrun the largest European markets in the near future… Russian companies have good prospects for successful access to different markets, global markets included.”

Marina Treschova, CEO of Fastlane Ventures expects to see

“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,”

while Sergei Beloussov of Runa Capital thinks that 

“Currently, Russia has just a few technological companies with a potential value exceeding US$100b; however, there are already hundreds of them whose potential value might exceed US$1b in the future.”


It is no surprise that Russian investors are optimistic about the venture sector's future in the country. If they weren't, they wouldn't be in it. However, they are also realistic about the sector's shortcomings. The significant barriers to IPOs for Russian companies and the lack of willingness on the part of big Russian corporations to acquire startups will continue to make it difficult for investors to make successful exits, while both entrepreneurs and investors still have much to learn. These problems may simply be 'teething' problems that will fade away as the sector matures, but there is plenty that can be done to speed up the process, in particular improving science education in Russia's universities and improving legislation and support mechanisms for innovative businesses and investors. With the right policies, the Russian venture sector has great potential, but its future success is far from guaranteed.  

Top image via Shutterstock

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