A turning point: what will happen to the Russian venture capital market further

On December 17, “Megamind” wrote that in the first nine months of 2015, 241 venture transactions in the amount of 33.9 billion rubles were conducted in Russia. In sum, this result is almost a quarter less than the same period of 2014, and seven percent less than the previous year in terms of the number of transactions. In 2014, for the first nine months, 258 transactions worth 45.4 billion rubles were made.

The head of the Investors Club of the Skolkovo School of Management , Vitaly Polekhin, analyzed the trends of the venture year approaching the end, writes Firrma. He concluded that there were significant changes in the Russian venture capital market.

Source: venture-biz.ru
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The results of investors and projects, as well as the fate of the industry as a whole, will depend on the reaction to these changes. Reflecting on this, Vitaly Polekhin highlighted the main trends of the new venture reality.

Mass shift of focus of venture funds to other countries to more understandable markets

This thing is inevitable. Funds manage the money raised, should ultimately make the partner-investors happy, and the happiness of the fund's partner-investor is measured in IRR (internal rate of return). In the IRR, the key parameter is the time parameter, so it is important not only how many times capital increases, but also when. Therefore, the funds, not seeing the opportunity to predict the timing of exit from projects on the Russian market, in connection with the economic and geopolitical situation, prefer to simply not enter into them at all. That is, the funds do not care when exactly everything will be fine again, and therefore they prefer more understandable strategies.

Angel Investment Growth

Business angels do not invest funds raised, but either their own or the funds of companies that they fully or partially own. The key here is the lack of need to report and rationally justify investment strategies. For them, the internal rate of return is important, but often it attracts an interesting opportunity to purchase a start-up that is inexpensive, potentially complementary to the core business, or multiply the investment several times at the time the Russian market exits from the crisis, even in the currently uncertain future.

These two factors are responsible for a serious drop in the “total” venture capital market with a simultaneous increase in angel / sowing / early investment.

Growth of activity of strategic investors

Assets fell in price, and the weak market suddenly began to demand more effective solutions that were simply not needed before. Everything was fine as it was - “where you don’t stick a stick, everywhere a tree will grow”. Now such solutions are becoming necessary, so getting a start-up that is complimentary to the core business becomes more interesting.

Even far from high-tech corporations from traditional industries suddenly became interested in corporate venture capital issues and the principles of the venture capital ecosystem. This is due to both diversification and the attempt not to leave behind the possibilities for increasing efficiency by absorbing innovative start-ups.

In the coming years, venture entrepreneurs should learn to develop in new realities, clearly understanding the entire funding chain initially, focus more on quick profits or on a strategic investor, Mr. Polekhin believes. It is no longer necessary to simply make an “interesting project” in the hope that, in the event of rapid growth, the venture capital market will pick it up and support it with money.