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Ratmir Timashev - How Western funds choose Russian startups

0 22 April 2014

Ratmir Tymashev, a partner in venture fund ABRT, has been investing in partnership with Luxembourg-based fund Mangrove Capital Partners since 2007. In this article, published in Russian in online business journal Hopes&Fears, he draws on this experience to explain how foreign funds approach the Russian IT sector.

Russia and the CIS - only 3-5% of the global market, but there are some good businesses.

Investment is a complicated and disciplined business. Nobody invests in a project on a purely emotional basis: “I like this guy, he’s got a good idea, I’ll give him some money”. Every professional investor has a clear set of criteria, which may change depending on which stage the project is at – the initial phase, when there are only ideas and prototypes, or the expansion phase, when there is already a product and the first customers. 

Western investment funds generally have a better defined set of criteria than the majority of Russian ones, as they tend to have been around for longer and to have more of a global presence. It’s not surprising that startups from Russia and the CIS want to get on the radar of American and European investment funds. Western investors can help give a company access to the global market. Of course, not every western investment fund is looking at Russia, as it only makes up 3-5% of the global IT market. There are good businesses here and good ideas, but it’s far easier to invest in Silicon Valley than to rummage around in our 3%. There are exceptions however, for example the Luxembourg-based investment fund Mangrove capital, our regular investment partner, which sees a lot of potential in Russia and the CIS. 

Co-investing with Mangrove

My partner Andrei Baronovy and I created our venture fund ABRT in 2005. We had just sold our company Aelita Software and were wondering what to do next. During the deal with the search engine Quintura we had worked with Mangrove, an early investor in Skype (we were first to invest in the company, and they second). That particular project fell through, but we recognised each other’s competency. 

Mangrove is a large professional fund with many experts and analysts, who invest in companies throughout the world and can predict which markets in Russia will take off in a year, three or five. We are falling behind the West in some areas, but in others we are keeping pace. Mangrove’s experts know how to work out which are the up and coming sectors. For instance, a few years ago we invested in a company called Oktogo (now it’s called before the Russian online travel sector really took off. 

We have been working with Mangrove since 2007 and we constantly exchange information about which markets look interesting and have good prospects. In 2009 the travel industry was showing impressive growth. We took a look at each sector, starting with ticket sales. We prefer transaction models, so in the end we went for hotels. In terms of ticket sales it was clear that all that lay ahead was intense competition and decreasing margins. 

We looked at many projects, starting with Oktogo. With Mangrove the way we work is that we have our own criteria, but we also know theirs very well. When we find a good team, and it’s the team that we look at first of all, we present them to our partner, either via a face to face meeting or a conference call. Marina Kolesnik from Oktogo had a Harvard background, was involved in, and had gathered a strong, balanced group of professionals around her. We liked her vision for the project (although later everything would change several times). Mangrove agreed with our choice. The whole process, from discovering the project to making an investment, took about four months. 

Why foreign funds like to co-invest

On the one hand investment is a very competitive business, but on the other investment funds love to pool risk and know-how. If you read about investments, you will notice that rounds are most often led by a consortium of two or three funds. If western companies see good prospects in Russia and the CIS, and are ready to take the political risks which they entail, then they are most likely to turn to local players, with proven track records, for help. For example, they may look to funds or investors who originally come from countries of the CIS but have proven themselves in both the domestic markets and in the West. We don’t only work with Mangrove, but also consult with, for example, Insight Venture Partners, when they are considering investing in Russia or the CIS. We know what will interest them and we bring them suitable projects. We have sometimes consulted with American companies, without entering into any official partnership. In that case they usually ask us for help with analysis of a particular area or to share our expertise in relation to a specific project, by assessing its place in the market, or its competitors for example. 

How Russian startups can attract Western investors

We are currently holding the ABRT-Mangrove CEO Camp, an expert forum for companies from Russia and the countries of the CIS, and Europe, where directors and founders of IT companies can work through their business ideas together with both Russian and foreign mentors. They receive recommendations from venture funds, draw up product strategies, and get to know potential partners and clients. The first stage is taking place in St Petersburg, after which it will move to Silicon Valley. 

In order to catch the eye of western investment funds, the first thing to do is to make a sober self-assessment. Does your idea have the potential to work as a global business? Or is it too local? On the other hand, IT businesses which are conceived for the local market still have to follow the rules of the global market, so a good idea developed for the local market could still attract foreign investment. 

The second thing to do is to make links with Russian funds which invest in partnership with western companies. All funds have managers who work with their projects. You don’t need to write a hundred page business plan. A short description of the project and an Excel file which outlines your expenses and where your revenue will come from is enough. Some companies rush off to Silicon Valley to offer themselves up to investment funds there. That’s a good idea, but it’s worth doing your research and taking part in lots of the events and conferences that take place there too. That way it’s easier to organise meetings and to find lots of opportunities in once place. It’s very important to learn as much as possible about the investment funds you want to talk to. If a company doesn’t do early stage investment then there’s no point coming to them with just an idea. 

But the most important thing is to keep working on your product. Then the investors may even come to you.

Source: H&F
Top image via Shutterstock

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