Riding the Wave: Venture Investment Rollercoaster in Russia
Investment risk-takers remain unfazed
Ever since 2015, venture capitalists have been pouring an average of $750-850 million yearly into projects within our nation's borders, with the exception being 2021, where investments reached a whopping $2.5 billion. However, the investment landscape took a steep downturn in 2022, with venture capital investment in Russian businesses falling to a mere $422 million. The trend continued the next year, with investments dwindling to $85 million – a staggering 30 times less than in 2021. But fear not, as 2024 brought a much-needed change, with the positive trend resuming primarily due to an increase in merger and acquisition deals involving IT companies and software developers.
According to Dsight's research, the tech sector is currently experiencing a peak in mergers and acquisitions. Large players are scooping up promising startups to fortify their positions and implement innovativeolutions. However, the total number of all venture capital deals in 2024 decreased by almost 8% to 176. Dan Medovnikov, Director of the Institute of Management and Innovations at the Higher School of Economics, attributes this trend to a lack of attractive investment objects within Russia's borders in recent years. “Many startups that held promise have changed jurisdictions following the start of SVO, especially within the IT field. This undoubtedly led to a drastic reduction in the supply of objects suitable for venture capital investments. Secondly, most major global venture capital funds that formerly operated in Russia and boasted significant expertise have had to suspend their activities here. Lastly, in the pursuit of technological sovereignty within key economic sectors, the focus has shifted to practical, on-the-ground realities, where venture capitalists have never held much sway,” Medovnikov explained to "Expert".
The decline in venture capital investments is also influenced by the disruption of the venture cycle in Russia. Eugene Kuznetsov, general director of the venture fund "Orbita Capital Partners", highlights the importance of investors finding their place in a company's development cycle. Kuznetsov told "Expert" that the chain of investments started functioning properly in the middle of the last decade, but due to the exit of numerous venture investors from Russia, it has ceased to operate smoothly as it once did. Consequently, any venture fund investing in Russia is compelled to invest in companies with short growth cycles simply to recoup their funds as swiftly as possible. This situation leaves many startups that don't have rapid growth prospects outside the risk profile of venture funds.
The research results back this claim, as investments from venture capitalists in the first, seed, stage decreased by almost a third last year, to $27 million. On the other hand, investments at the second, early, stage saw a 67% increase to $52.4 million, and investments at the third, late, stage soared by a staggering 638% in 2024, reaching $97 million. Similarly, while the number of deals by venture capitalists at the seed stage decreased by 37%, the number of deals at the early stage grew by 28%, and deals at the late stage surged by 213%.
Anton Ustimenko, head of the IPO preparation services group at B1 Group, reveals that the ongoing digital transformation of Russian companies has fueled growth in both merger and acquisition deals and IPOs in 2024. Despite high key interest rates continuing to constrict both markets, placing pressure on company valuations, IPOs remain an attractive capital-raising strategy for many tech companies. In 2024, firms raised over 80 billion rubles through IPOs – double the amount raised in 2023. However, out of the 14 companies that went public, eight were from the tech sector, and six of those ended up causing investors to experience losses by the year's end. Hence, investors may be hesitant to participate in new IPOs come 2025. The researchers warn that a shortage of secondary market volume and high yields on low-risk financial instruments could hinder IPOs in 2025, making it challenging to sell shares post IPO.
It's worth mentioning that the situation could dramatically change if the central bank lowers its key rate. "If the CB reduces the rate, there will be an immediate shift of funds from money market funds and bank deposits to the stock market. Even without the planned IPO of Sibur, which is estimated at around 80 billion rubles, investors could effortlessly acquire new shares in the IPOs of several tech companies worth up to 100 billion rubles. Furthermore, there are plans to offer appealing state-owned assets such as VK Tech and Rostelecom’s data centers for trading,” said Yaroslav Kabakov, director of strategy at IG "Finam". Kabakov also anticipates an increase in activity from large, medium, and long-term institutional investors in 2025, which could bolster the Russian stock market. Given this trajectory, venture capitalists may have opportunities to sell their company's shares profitably during an IPO and refocus on investments at the seed and early stages, thereby restoring a healthy venture cycle and transitioning to a new stage of investment growth.
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Enrichment Insights:
- Overall: The decline in venture capital investments in Russia can primarily be attributed to geopolitical uncertainty, the exit of international investors, and unfavorable economic conditions.
- Geopolitical Tensions: Ongoing geopolitical tensions and sanctions have contributed to decreased risk tolerance among investors, causing a significant reduction in investments.
- Exit of International Investors: The departure of foreign capital has significantly impacted Russia's private equity and venture capital sectors, as international investors become increasingly wary of investing in Russia due to political and economic risks.
- Economic Conditions: Russia's deteriorating economic environment, characterized by reduced corporate profits, elevated borrowing costs, and increased taxes, has played a role in discouraging both domestic and foreign investment.
- Impact on the tech sector:
- Reduced Venture Capital Deals: The tech sector has experienced a decrease in the number of venture capital deals, particularly in early and late stages.
- Shift to Alternative Funding Sources: In response to the lack of traditional funding, the tech sector has seen an influx of retail investors. Private venture capital funds have started employing alternative models, such as targeting companies expected to break even quickly and offering dividend-based returns to attract retail investors.
- Pivot to Retail Investors: The tech sector has benefited from increased involvement by business angels and retail investors, which helps maintain liquidity in the sector but also introduces new challenges and risks associated with diversified investor expectations.
- The VentureMarket in 2024 resumed its positive trend mainly due to an increase in merger and acquisition deals involving IT companies and software developers, following a significant decrease in investments in previous years.
- Dan Medovnikov, Director of the Institute of Management and Innovations, attributes the decrease in the total number of venture capital deals in 2024 to a lack of attractive investment objects within Russia's borders in recent years, caused by startups changing jurisdictions and major global venture capital funds suspending operations in Russia.
- The venture capital investment landscape in 2024 showed a decrease in investments from venture capitalists in the first, seed, stage, while investments at the second, early, stage saw a significant increase, and investments at the third, late, stage soared.
- Anton Ustimenko, head of the IPO preparation services group at B1 Group, reveals that the ongoing digital transformation of Russian companies has fueled growth in both merger and acquisition deals and IPOs in 2024, despite high key interest rates causing pressure on company valuations.
- Yaroslav Kabakov, director of strategy at IG "Finam", predicts an increase in activity from large, medium, and long-term institutional investors in 2025, which could bolster the Russian stock market, potentially providing opportunities for venture capitalists to sell their company's shares profitably during an IPO and refocus on investments at the seed and early stages.
