In 2017, the Russian venture capital market showed positive growth for the first time over the five past years: the significant outflow of funds from the market stopped, and the number of new funds continued to increase. The total capital volume of existing venture capital market also grew.
In 2017, a number of new players entered the market: 22 new venture capital market funds were created, four of which involved the participation of state-owned funds. At the same time, the significant outflow of existing funds from the market stopped. From 2013, 17 funds disappeared from the market every year, on average, while only five funds left the market in 2017. In addition, the total number of venture capital market funds increased by 10% in 2017 to 194 funds.
A positive change could also be seen in the funds’ capital volume. After experiencing a continuous drop from 2013, the market rebounded last year, experiencing growth for the first time in five years. As of the end of 2017, the aggregate capitalization of the venture funds in the market had grown by 8% to USD 4 billion.
The state remains an active player in the venture capital market, accounting for 28% of the total number of the active funds. At the same time, the capital share of venture capital market with state participation in the total number of funds has gradually decreased since 2013.
Venture funds with state capital remain the dominant source of venture capital market for start-ups outside the information and communication technology sector: 89% of these funds focus on investments in the real sector of the economy or have mixed industry preferences. Private venture funds, on the contrary, prefer information and communication technologies. The majority of new venture capital funds operating in the market (over 80%) are also interested in the information and communication technology sector and mixed industries.
The number of corporate venture capital funds, as well as their total capitalization, has not changed significantly over the past five years. However, special divisions and venture capital market created by state corporations are expected to begin operating and investing in small, innovative companies in 2018.
The situation in the venture capital market has changed significantly since 2013 due to capital outflow and revised investment strategies on the part of funds. Caution on the part of investors could be seen in both their preference for more mature companies and in their average investment: whereas funds invested an average of USD 2.7 million and USD 1.5 million in 2012 and 2013, respectively, this figure had decreased to USD 600,000-800,000 by 2016-2017.
Investors’ search for new growth points also became common place. In 2017, the information and communication technology sector, the traditional leader in terms of investors’ industry preferences, significantly weakened: it's share in the total amount of investment decreased by 21% comparing to 2016, and reached 85%. In second place was the industrial technology sector, with the share of 22% of the investment volume. Investments in biotechnology accounted for 7% of the total investment amount.
In total in 2017, venture capital funds invested USD 125 million in 178 companies, compared to USD 125 million in 204 companies the year before.
There were 22 exits in 2017, down from 50 the year before. The decrease in the number of exits was the result of work carried out by a number of funds with state participation. The largest number of exits was seen in companies operating in the information and telecommunication sector. The most popular method for exit is selling to a strategic investor.
Active VC Funds
|Volume of VC funds, USD mln||3,834||3,781||4,071|
|Number of VC funds||183||177||194|
VC funds’ industry preferences, %
|Information and communication technologies||51.4||53.4||53.4|
Volume of VC funds by fund type, %
|Volume of VC funds with government-share||28||24||22|
|Volume of private VC funds||72||76||78|
|Volume of corporate VC funds||11||11||13|
|Volume of seed VC funds||11||11||11|
Distribution of VC investments by sector, %
|Information and communication technologies||77||77||58|
Ministry of Economic Development of Russia, in cooperation with RVC, is currently working on a venture capital market development strategy that is to be submitted to the Government of the Russian Federation by the end of 2018. The vision for the strategy was largely the result of the dialogue that took place among 250 experts and investors invited by RVC to take part IV annual forum Ecosystem of Innovations.
The more than 250 experts and investors invited to the dialogue by RVC formed a vision of a venture capital market strategy that was presented to the Ministry of Economic Development.
Key trends in 2017 included the engagement of corporations in the venture industry, increased interest to the international markets and the emergence of opportunities to secure investments from institutional investors.
The strategy’s objectives include ensuring the availability of venture financing and expanding the selection of venture support instruments. The strategy will comprise the three areas described below.
Shaping the Stable Venture Capital Market Institutions
- improved information transparency;
- improved regulatory framework to make Russia more attractive for investment;
- establishment of regulations for new investment mechanisms (ICOs, crowdfunding).
This should result in open access to information about key players and market indicators and an increase in the number of small, innovative companies in Russia and in the volume of venture support for start-ups, including due to new investment mechanisms.
Increased Availability of Venture Capital Market
- removal of restrictions on venture investments for institutional investors;
- creation of conditions to include corporations in the venture industry, and incentivising the creation of funds for projects at stages A and B.
Annual investments as a percentage of GDP are expected to be comparable to those of European countries. In addition, a significant percentage of venture investments with private pension funds is expected, and the percentage of investments with foreign capital is also expected to increase.
Tech Entrepreneurship Development
- promotion of venture support instruments on an industry basis;
- improvement of acceleration instruments;
- support of regional programs.
An important focal point will be the development of exit mechanisms: pre-IPO, exchange markets and the engagement of corporations.
Expected Results of Strategy Implementation:
- emergence of new technology entrepreneurs;
- increase in the volume of investments in priority areas by up to 50% of the total amount of venture investments;
- increase in the number of successful IPO start-ups;
- partnership with small technology businesses as an important source of innovations for corporations.
The inclusion of large business in the venture ecosystem will create not only exit opportunities for start-ups but also competition for private venture funds.
Private pension funds can become a new source of capital in the venture capital market. The removal of barriers and the development of mechanisms for using venture instruments by private pension funds will secure additional revenue while maintaining an acceptable level of risk.