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Trends and Risks in Current Venture Investing

May 26, 20:02 UTC+3
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The global market for venture investments has exceeded USD 127 billion a year and keeps growing as it nurtures humblest startups into high-tech giants. Russia is trying to gain ground as well, having adopted a development strategy, put up institutions and allocated funding to that end. However, Russian venture investors still seem to be inclined more towards the global market, where risks are increasing, as many successful businesses are overvalued, while it is becoming costlier to pick a future star on the startup field.

Investors are inspired by success stories delivered by Google, Uber, Avito, etc. They are ready to invest heavily into attractive projects seeking their ‘unicorn’, which means a business with an over USD 1 billion market cap. As a result, new groups of investors are tapping into the venture market, thus boosting the funding available.

  • The ‘unicorn’ count has been on the rise in the last three years, growing from 137 as of September 2015 to as many as 185 in late January 2017, according to CB Insights.
  • KPMG says the total venture market nearly doubled in size from 2013 to 2016, the current volume standing at USD 127.4 billion.
  • The extreme boost is fostered mostly by new investor interest. Hedge funds and asset managers target startups in search of higher yields as they compete against peers. Corporations are highly active in venture M&As too: according to KPMG, 84% of those in Q1 2017 involved a large corporate buyer.

The Russian venture market is still emerging.

  • Russian Venture Investment Development Strategy 2020 has been produced to establish the core instruments and market mechanisms – the Russian Venture Company (RVC), the Russian Venture Capital Association (RVCA), RUSNANO, Skolkovo Foundation, technological clusters and business accelerators.
  • In 2010–2012, the Russian venture market tripled in size. The country ranked 4th in Europe by high-tech investments (Dow Jones VentureSource, 2013). Following a slump in 2014–2015 caused by the liquidity crisis, the market was back to a recovery streak in 2016.
  • Current estimates suggest the Russian venture market size of USD 894 million (EY and RB Partners, Thaw of the Russian Venture Market, 2017), which translates into around 0.7% of the global market. 54% of the global venture investments come from the US followed by 24% of capital raised in China (KPMG, 2016).

However, the Russian domestic venture market is facing, among others, the following challenges:

  • Excessive focus on more developed projects and the lack of capital supply in most priority industries other than IT. According to PWC and RVC, seed financing in 2016 only reached 10% of the total investment, while IT vacuumed 70% of the total transaction count and 90% of their amount.
  • Shortage of quality projects.
  • Suboptimal regulations: venture capital lacks dedicated regulation, required by its very nature. This is particularly true for the fiscal side, shareholder rights and IP.

Given the lack of quality startups in Russia, investors shift focus towards foreign markets.

  • According to Firrma, more than half of all transactions run by Russia's top 10 venture funds in 2016 had a foreign target, examples including Runa, Almaz, Flint, Maxfield, Target and InVenture.

Investors at large (outside Russia as well) are getting increasingly cautions and seek sustainable targets with clear prospects.

  • More money is flooded into companies post-seed, which hikes the average transaction size. A joint survey by KPCB, McKinsey and Hillhouse cites a vivid example from the high-tech sector, where the average transaction size sky-rocketed from USD 7 million to USD 16 million from 2012 to 2016.
  • According to KPMG Venture Pulse, seed financing is cutting short both in volume and also in number of transactions. The US alone saw a drop of 30% in 2016.

On the other hand, investors are ready to believe in promising projects and underwrite higher risk with more money at seed.

  • According to KPMG, the median transaction volume went up in 2016 and in early 2017 across all venture rounds. Investors show more risk appetite since a breakthrough with just one project covers all losses elsewhere and multiplies the returns.

This strategy creates conditions for yet another financial bubble.

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