Russia’s venture capital market is booming, fuelled by a run of billion dollar IPOs

Russia’s venture capital market is booming, fuelled by a run of billion dollar IPOs
Capital markets are flush with corona-stimulus money and the revolution in e-commerce has created ideal conditions for Venture Capital investments. Russia's online economy is growing five times faster than the real economy and an IPO boom is sucking in more investment. / wiki
By Ben Aris in Berlin November 7, 2021

Russia’s venture capital market is booming as entrepreneurs and business hope to cash in on the international appetite for the rapidly expanding tech sector.

Dsight, a Moscow-based business intelligence company with a focus on investment, has just released the English version of its Russian venture report covering the first half of 2021, reports East-West Digital News (EWDN).

In contrast with last year’s disappointing numbers, the market showed signs of renewed growth earlier this year, with total deal value exceeding $1bn for the first semester.

This is an all-time record, notes Dsight: “Over the last few months we have been watching the Russian market grow continuously, and cruise along to Europe’s top 10 venture regions,” writes the agency’s founder, Arseny Dabbakh.

The stars have aligned to make Russia’s tech sector one of the most dynamic in the world. Russian e-commerce was already booming before the coronacrisis hit, but the pandemic has only served to catalyse the already rapid growth in online retail, which is growing about five times faster than the real economy.

The leading retail players were already investing into their online offering, but the traditional bricks and mortar retailers are now increasingly facing competition from the largest e-commerce players like Yandex, Ozon and Wildberries, which this year became Russia’s largest retailer of any kind and is taking on the established market leaders like children's good chain Detsky Mir at their own game. At the same time, Russia’s leading banks are snapping up online ventures in a quest to build complete ecosystems that cater to the gamut of customers' lifestyle needs.

Russia’s retail banking behemoth went as far as to drop the word “bank” from its name and is now rebranded simply as Sber. The competition between all these players has led to an explosion of M&A activity, with startups able to sell to one of the vying incumbents at valuations in the tens and hundreds of millions of dollars.

M&A has also been growing fast, although the after-effects of the start of the pandemic last year weighed on M&A activity in the first half of this year, with the rate of growth in the number of deals slowing somewhat from previous years. The total value of transactions in January-June was up by 16.5% to $17.17bn from $14.74bn a year earlier, according to law firm AK&M. During this period, 294 transactions were recorded 38.7% more than in the first half of 2020 (168 transactions). In ruble terms, the amount of transactions increased more noticeably: by 20.4% to RUB1,279.5bn ($17.95bn) from RUB1062.6bn a year earlier, which is due to the fall in the ruble exchange rate, says AK&M.

“However, more transactions worth more than $1bn were concluded in the reporting period than last year four against three. The largest transaction of the first half of 2021 was the January purchase of Citrix Systems IT company Wrike, a developer of a collaboration platform, from Andrey Filev and Vista Equity Partners for $2.25bn. The second place was taken by the sale in May at competitive auctions of the property of the Antipinsky Oil Refinery, which was acquired by Anatoly Yablonsky's Rusinvest LLC for $1.51bn. In the third place was the March purchase by the Pipe Metallurgical Company of its competitor the ChTPZ group from Alexey Komarov for $1.11bn. Completing the four billion-dollar deals is the May sale by Oleg Tkach and Vladimir Uzun of the largest Russian publishing house of educational literature "Enlightenment" to a consortium of state-owned companies, including Sberbank, RDIF and VEB.Russia, for $1.1bn,” AK&M reported.

In general, assets continue to fall in price. The average value of transactions (excluding the largest ones) decreased by 6.4% to $38.6mn from $41.3mn in January-June 2020, but analysts believe that as the economy recovers the number and value of deals will pick up again, a renewed wave of the epidemic notwithstanding.

At the same time, in the last year Russia’s IPO boom has seen a dozen companies list on international exchanges with billion dollar plus valuations. While tech and e-commerce are predominant, the newly issued stocks from other sectors of the Russian economy are also being snapped up by hungry portfolio investors.

All of this has combined to create a very fertile climate for venture capital, which is on the hunt for projects and is spoilt for choice in the largest consumer market in Europe, populated by a talented, highly educated and entrepreneurial population.

Venture Capital rising

Among the interesting trends observed by Dsight is the growing share of early-stage business angel investments in Russia. Individual investors were not after numbers, concede the analysts, who identified only 31 deals involving them in H1 2021 – but they were after volumes, with total deal value doubling to $49mn and average deal value reaching some $2mn (+160% year on year).

“Angel clubs in Russia and investment volumes are only growing,” confirmed Alexey Solovyov, a figure of the Russian VC scene, in an exchange with East-West Digital News. He cited the example of AngelsDeck, the biggest BA (business angel) community in the Russian-speaking space, which was involved in more than 70 deals this year.

“Russian angels invest collectively together with tier-one international funds. The emergence of business angel networks is perhaps the most significant trend this year in Russia,” Solovyov said.

This year’s uptick in venture capital deals follows a mild downturn in the actual investments during the epidemic last year. Russia saw a 20% contraction in venture capital investments in 2020, according to Dsight.

Total venture capital investment came in at $703mn in 2020, down from $869mn in 2019, the firm said in a new report. Dsight attributes this fall to the “unpredictability of the pandemic” and “investors’ risk aversion.”

Despite the fall in investment volumes, the number of deals increased 14% from 2019, with a jump in deals registered at both the startup and growth stages. Most activity came in the second half of the year, after the end of the first wave of the pandemic in Russia.

Most investments went into the e-commerce, entertainment and healthcare sectors. Edtech, agrotech and fintech also seem to have taken off during the pandemic, accounting for small overall values but recording fast growth rates.

The pandemic has also catalysed the VC business with new players of all sizes entering the industry as part of a global boom. VC funds are creating a new “unicorn” (a company with a valuation of more than $1bn) on almost a daily basis, reports The Bell. In the first nine months of this year venture capitalists have invested almost $456bn worldwide in startups at various stages in more than 22,800 deals. According to KPMG's calculations, this is already 64% more in volume and 20% more in terms of the number of transactions than for the entire 2020, and in comparison with nine months of the previous year, the growth is accelerating. In the US VC funds have invested $239bn in the first nine months of this year, a 44% gain y/y. European VC funds have invested €74bn, up 150% more in volume and 65% in value over the same period.

As the enthusiasm for startups grows it now typically takes a startup only one or two years to reach unicorn status, whereas ten years ago it would take multiple rounds of financing over 7-8 years to be valued at $1bn. According to Crunchbase there are now over 1,000 unicorns with a combined valuation of $2.7 trillion.

Helicopter money boosts stock markets

Both the IPO market and VC business are being partly driven by the unprecedented amounts of liquidity that governments have poured into the global economy in the last two years, a large share of which has ended up in the capital markets.

In the United States alone, $1.4 trillion was pumped into the economy at the height of the crisis in 2020, and another $1.9 trillion in 2021. Since the recent low at the end of February 2020, the Dow Jones index has added 41%, the S&P index 56%, and the NASDAQ 81%.

While Russia’s government spent a very modest 3% of GDP on stimulus the international market has spilled over into Russian stocks too, where the leading RTS index soared this year, gaining over 35% as international investors started bargain hunting. The RTS has been range bound, trading between 900-1,300, since sanctions were imposed following Russia’s annexation of the Crimea in 2014. But this year the index smashed two important milestones, rising to above 1,800 for the first time in a decade and briefly topping 1,900 at the end of October.

With US VC funds alone holding $260bn of free capital to invest the pool of available liquidity, this is enormous and an all-time high.

IPO driving the excitement

The ability to float is pulling in more VC funds to the Russian market. Leading e-commerce player Ozon IPO’d in December last year, initially hoping to raise $500mn but closing the deal with a $1.2bn valuation.

And the boom continues. In the first week of November during Russia’s latest lockdown, two Russian companies tried their luck on the American stock exchange: car-sharing firm Delimobil and online real estate company CIAN. These IPOs have only one thing in common: the management of both companies had problems obtaining American visas to travel to the opening ceremony. But that's where the similarities end. Delimobil baulked at the offer price at the last moment and withdrew its IPO, whereas CIAN persuaded investors to buy at the upper end of the offer price range and closed the deal.

Delimobil largest shareholders, Italian Vincenzo Trani and VTB Capital (VTBC), announced at the end of October that it was going to sell 20mn American Depository Receipts (containing two local shares per receipt) at $10-12 per share that would give the company a valuation of $760-912mn. The order book closed on the evening of November 2, but the next day Interfax, citing sources, said that the deal had been delayed due to a dialogue with "additional" investors and it was later reported that the order book was oversubscribed. On November 4 the company announced that it had decided to postpone the deal to early 2022, citing market conditions. One of the difficulties was that investors perceived Delimobil more as an advanced version of good old car rental than a tech play, a market source who followed the placement told The Bell.

By contrast, CIAN managed to convince investors it was an innovative tech play that enables users to rent and buy real estate online without the need for brokers. Investors highlighted both the scale of the business of the company, which is one of the ten largest real estate services in the world by audience. CEO of the company Maxim Melnikov told The Bell: “Buying real estate is always a very exciting moment, our mission is to make [it] so that for our clients this process is as convenient and fast as possible."

More recently the company added the possibility of taking out mortgages from one of Russia’s eight large banks, expanding its service to cover the complete transaction, including the funding. The whole real estate purchase and sale transactions can all be concluded online. “It makes life much easier if the buyer is, for example, in Novosibirsk, and the seller is in Sochi,” explains Melnikov.

Investors valued the company at $1.1bn, at the top of the announced price range of $16 per receipt. Trading in the company's securities opened on the NYSE the next day with gains in the share price.