The Russian Venture Capital Association (RVCA) was formed in 1997, and its mission is to promote Russian private equity and venture capital (PE & VC), intensify innovation activity and competitive growth. Each year the RVCA Yearbook highlights the state of the Russian industry and identifies key industry trends and barriers against innovation development. KITE Invest spoke with the RVCA’s CEO, Albina Invanovna, to get a better understanding of Russia’s large and dynamic PE & VC industry.
KITE Invest: Can you please address the deal flow of the private equity and venture capital industry in 2014 and what is anticipated for 2015?
Albina Ivanovna: Regarding the formation of the overall VC market picture, the last year was quite interesting. Practically all key indicators of the market were affected by the range of several powerful factors in 2014: both an unstable economic situation in the country, the completion of life cycles of a number of VC funds, and a predicted « shrinking » of the market after its growth till 2012. In the aggregate, it served the reason for the market to noticeably and symmetrically sink in 2014: the level of funds’ investment activity decreased more than twice in comparison with 2013.
In the strict language of digits, according to annual RVCA statistics the cumulative volume of PE & VC funds investments made $1.048 billion in 2014. For comparison: this indicator made $2.92 billion in the previous year. However, there isn’t any decrease in the transactions flow – even a small gain is observed: from 225 in 2013 to 232 in 2014. Such disproportion of number and volume of the investments is explained by the fact that now the main flow of transactions is being generated by the venture segment of the market – the large capital has chosen a « waiting attitude ».
The forecast for 2015 does not look optimistic. At the end of the last year we conducted a survey, and the vast majority of the PE & VC players operating in the Russian market predicted further recession – at least for the next two years.
KITE: What are the current key industry trends found across Russia?
AI: In the short-term prospect we wait for further lowering in rates of fundraising, reduction of the invested capital volume, decrease of exits number.
But in medium-term perspective – with 3-5 years horizon – a relative revival is possible. Such hopes are based on the Russian venture market’s peculiarities – it reacts to changes in the economy extremely flexibly – thus, after the 2008 crisis, the Russian PE & VC market showed an explosive growth by 2012. The matter is all the basic elements of the Russian venture branch have been already formed and currently there is a process of sharpening professional tools which allows the branch to remain always afloat in any circumstances: the classical pyramid of venture capital is being built; new forms of funds – more adapted for this ecosystem niches – are being formed; the investment accent is being transferred to early stages – the number of seed funds, funds at business accelerators and business campuses is growing.
KITE: Please shed light on how the private equity & venture capital industry varies across the vast country?
AI: There is no direct dependence between « the country scale » and the venture capital industry condition. It is confirmed by both the Russian and foreign practice. Like the Silicon Valley in the USA leads by the level of PE & VC investors’ investment activity with an enormous lead from all other regions, in Russia, for example, the most active is CFD.
In the global market the key indicators are: saturation of the capital market and the level of innovation infrastructure.
Let us take for an example such comparable by their sizes countries as Great Britain and Romania – by all indicators of the investment activity they are different not simply many times, but tenfold.
KITE: What is the relationship for PE & VC with the Government in terms of incentives, and the feasibility of foreign investment and foreign entrepreneurship thriving in Russia currently?
AI: Active participation of the state has always been a key feature of emergence and further development of VC industry in Russia. It cannot be said that the state busily interferes with regulation of the VC market players’ relationships; but though it takes an active part in reduction of « venture entropy ». It finds realization both in legislative initiatives and in implementation of a large-scale program for development of system of early stage funds with the state participation: thus, more than half from the total number of the 2014 investments fell to the share of the Fund for development of Internet initiatives which was created with the assistance of the state.
As concerns the relations with foreign partners, everything is rather quite good. No matter what happens, investors from the USA, as well as, Europe and Asia countries still show interest to the Russian market of innovations. In 2014, the total volume of the foreign funds’ investments in the Russian companies made $162 million. I am sure that the Russian innovation ecosystem will continue to develop and attract foreign investors.
KITE: What is the climate of entrepreneurism and small and medium-sized enterprises (SMEs), and do foresee VC funds maintain the majority of funds?
AI: I would say that they will keep, and I dare to foretell that cumulative capitalization of VC funds will only grow. Demand for innovations has existed, exist and will have been existed.
And although, in the current situation the access to foreign capital is complicated for new fundraisings, the Russian market has accumulated large volume of capital, which is to be invested. Venture capital proved to be an effective funding mechanism for technological companies; the competences of players are growing; more players come to the market than leave it, despite the economic situation. So, forecasts are moderately optimistic.
KITE: What measures does the RVCA take to increase and support entrepreneurs and SMEs?
AI: RVCA, in cooperation with its numerous partners, institutes of development and the bodies of regional and federal authority is active in several directions at once. The Association pays great attention to increasing the level of competence in the PE & VC market: for several years we have been organizing and holding educational events for all the market participants – both for businessmen, investors, and institutions of higher education teachers – aimed at the development of the general enterprise climate in the country.
One of the important activities of the Association is development of the communication environment. Regularly RVCA conducts Venture Fairs in various regions. The Fairs are contact platforms for investors and entrepreneurs. The venture fair is a demanded discussion platform with its special environment of professional communication, a place whereby developer, businessman, and innovator can find a mentor for the project, attract interest of a potential investor, find partners in business and declare its market prospects. Almost, more than 40 fairs in various regions were conducted in last 15 years.
The next fair will take place in Kazan on April 23-24; it will be the Anniversary XV Russian and X Kazan venture fairs. Scale of the fair is remarkable: more than 1000 participants, more than 150 active investors, more than 40 advanced Russian hi-tech companies, more than 30 events devoted to a wide range of issues of investments attraction into the knowledge-intensive enterprises. It should be emphasized venture fair is the central event in the VC market, it defines further vector of the industry development in many respect.