Going With the New Wave: The Venture Market's Resurgence
Financial backers remain tight-lipped about their victories in business undertakings.
The venture market in Russia has seen a significant surge, with a dramatic increase in private investor activity. This upswing, fueled by ingenious resources such as Security Token Offerings (STOs), syndicates, and the burgeoning trend of crowdfunding, has led to the birth of six new investment platforms since January, including T-venture, VIK, and "Advanced Technologies". The "Vostok" Fund even orchestrated the first venture STO on the "Atomaiz" platform, masterminded by Rosbank.
Private investors have played a pivotal role, accounting for nearly half of the venture investments' volume and the number of deals. Moreover, they've sunk their resources into approximately 48% of the deals and over 45% of the investment volume. Notably, 57% of these investors channeled their funds towards seed-stage startups, with individual investments averaging around $0.3 million. Early-stage startups, on the other hand, have received $1.9 million from private investors.
Elena Volotovskaya, Managing Director of Softline Venture Partners, suggests that the real volume of venture deals could surpass the reported figures by 1.5 to 2 times ($76-92 million), highlighting the under-the-radar activities of private investors in open data whose deals may not be publicly disclosed. Additionally, experts like Dmitry Kurin, Director of the Development and Investments Department of MTS, forecast that the real volume of venture investments is likely to surpass the research data by twofold. However, Elena Volotovskaya believes that comprehensive market figures will only be available in the early months of 2024, considering the lengthy timeline of deal closings.
Research expects a 30% growth in the number of deals year-over-year, reaching 220 by the year's end. Simultaneously, there's a projected increase in the number of Initial Public Offerings (IPOs) of technology companies from the current 6 to 10. Analysts anticipate a slowdown in the trend of mergers and acquisitions (M&A) in 2025, with a shift towards nurturing new companies instead of mass startup acquisitions by corporations. This transition has already been seen, with a 1.8-fold increase in such deals compared to the previous year, reaching 50 by the first half of this year.
After a sag in 2022, heralding the onset of the "venture winter," and a return to relatively subdued levels in 2023, the market is gradually recovering. The surge in deal volume has already been witnessed, although a rebound to 2021 levels or the peaks of the previous years is yet to be expected. In 2021, the Russian venture market reached a volume of $2.5 billion with a total of 305 deals. However, by the first half of 2022, the investment volume plummeted by 3.3 times year-on-year to $287 million, and the number of deals declined by 38% to 88. By the end of 2022, indicators had fallen by 6 and 2 times year-on-year, respectively, due to the exodus of large foreign investors. In 2023, the venture market's volume decreased another 3.4 times year-on-year to $85 million, while the number of deals increased by 19% year-on-year to 176.
The recovery to 2021 levels may take several years due to the shrinking average checks, predicts the founder of Dsight. Dmitry Kurin agrees with this timeline, but suggests that the venture market may not return to its pre-crisis levels as it was significantly overheated in 2021. The most plausible scenario, according to the head of MTS StartUp Hub, is a recovery to 2019 levels (a volume of $861 million and 243 deals). The market may not achieve these indicators before 2027, Dmitry Kurin affirmed.
The traditional investment model, based on fast capital growth, followed by an IPO or sale to a strategic investor, is fading away. Investors are now expecting companies to demonstrate sustainable growth and profitability to return investments through dividend payments, resembling a debt-for-equity swap. The venture market, a derivative of the financial market, is undergoing self-definition, resulting in a flourishing number of private and individual investors, business angels, and wealthy individuals diversifying their portfolios. However, the early stage of startups remains uncertain as business angels generally prefer bank deposits to high-risk venture capital investments, according to experts.
For the venture market's sustained growth in Russia, more investors, including institutional ones, are needed. Allowing non-state pension funds (NPFs) to invest 1-5% of pension savings in venture funds and establishing new development institutions offering grants and investments without mandatory equity participation, similar to the Fund for the Support of Innovations, could be beneficial. Reducing or eliminating the tax on the increase in income from the sale of shares in IT startups might further encourage investors to invest in venture projects. The market's recovery could accelerate once the refinancing rate stabilizes and investor appetite for risk returns.
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- Investments from private investors account for nearly half of the venture market's volume and number of deals in Russia.
- Elena Kolesnichenko, Managing Director of Softline Venture Partners, suggests that the real volume of venture deals could surpass the reported figures by 1.5 to 2 times.
- The venture market in Russia has seen a resurgence, with a significant increase in the usage of innovative resources such as Security Token Offerings (STOs), crowdfunding, and syndicates.
- For the sustained growth of the venture market in Russia, more investors, including institutional ones, are needed, and government incentives, such as allowing non-state pension funds to invest in venture funds, could be beneficial.
