From Siberia – from the venture fair
Mumble in the investor's language
Mikhail Kichanov, "Expert Siberia" No. 25-2015
At the IX Siberian Venture Fair held in Novosibirsk at the beginning of June, startups, investors, analysts and the authorities understood the reasons for the decline of the venture capital investment market in the country, formulating ways out of the crisis and identifying breakthrough growth points. 45 companies presented their projects to private and public venture funds at the Siberian Fair, of which 33 were from Novosibirsk, six from the Altai Territory, one from Tomsk and five from Thailand. The industry direction of the projects is nanotechnology and new materials, biotechnology and medicine, instrumentation and business in the field of energy efficiency. The amount of the declared investments is about $ 30 million, which is three times less than in 2014. However, this is not a financial, but a mental crisis, experts are sure.
Business SchoolThe Siberian Venture Fair is one of the largest such events in the country, ranking third in terms of the number of participants and declared volumes of venture financing after the Russian and Kazan.
"Many entrepreneurs consider the venture fair site as a school, an opportunity to plunge into this environment, get feedback, rethink their vision of business development. After all, unfortunately, many people want to do business on their knees, just grow extensively somehow, without any specific strategy. As a rule, such stories in the technology market end sadly, – says Igor Gladkikh, Director-coordinator of Venture Fairs of Russia. – The technological product is perishable. If you do not have a clear vision of the company's development, in a year or two or three competitors will come, and your advantage will be reduced to zero. At best, you will occupy some small niche, but not that you will not become a giant like Google, but you will not be an average confidently growing company."
According to Gladkikh, venture capital investments are "not at all a red sun that shines for everyone": "This is a very hard–honed tool for identifying several percent of companies that work in fast-growing markets, have a certain set of business competencies, strategies and visions, which means they can potentially become leaders in their segments."
"We constantly tell firms [applying for venture investments]: if you really want to get money from the first call, you will never get it. This also needs to be learned. Therefore, we try to prepare [entrepreneurs] in such a way that they do not look like white crows. Our main task is to teach the creators of a startup to at least mumble in the investor's language. At least a little closer to understanding his expectations. Up to the point that we teach not to say unnecessary words, to exclude verbiage," Boris Ivlev, one of its curators, director of the Novosibirsk Regional Fund for Science and Innovation Support, explains the principles of working with companies participating in the Siberian venture Fair.
According to Ivlev, every creator of a promising innovative startup should know the answers to the five main questions that interest every venture investor. The first is how much money a business angel or venture fund will earn by investing in the project. The second is how strong the team that will work on the project is. That is, whether the investor can entrust his money to her. The third is the scale of the market that the startup enters. Simply put, how much and for how long his product will be in demand. The fourth is how intellectual property is protected; whether there will be a situation when the development, and with it the profit, will be in the wrong hands. And, finally, the fifth – when the investor returns the invested funds.
Market rollAs the discussion platforms of the Siberian Venture Fair have shown, the current economic situation in the country does not favor venture investments.
The market decline that began in 2013 and continued in 2014 will continue in 2015.
"Over the past 10 years, the Russian venture capital market has undergone significant changes for the better. The professionalism of the players has significantly increased. In terms of growth rates in some years, we occupied leading positions in Europe. Laws on investment partnerships and business partnerships have been adopted. Development institutions are actively working. At the same time, Russian high–tech innovative companies still face restrictions on the capital market," says Albina Nikkonen, Executive Director of the Russian Venture Investment Association (RAVI).
The volume of the direct and venture capital investment market in Russia in 2014 grew by only 5.3 percent to $ 30.5 billion, which is comparable to the value achieved in the "crisis" 2009 (+6%). For comparison, in 2012, the growth was 33.6%. "The growth rate of total capital shows a tendency to slow down. This is due, in our opinion, to the overlap of two factors: the overheating of the market in 2012 with funds when there was a maximum value, and objective reasons related to the availability of capital to raise new funds," Nikkonen said at the plenary session of the Siberian Venture Fair.
The total number of operating private equity and venture capital funds in Russia over the past year increased by eight percent to 347 (in 2012, the same indicator was 48%). At the same time, 85% are venture funds, emphasizes Albina Nikkonen.
Total investments in Russian companies in 2014, according to RAVI, decreased by more than half: from $2.92 billion in 2013 to $1.3 billion in 2014. The total capital of investments at venture stages reached $144 million, which was only 57.3% of the 2013 level. At the same time, the total amount of capital of existing venture funds, according to the results of last year, exceeded $ 5.6 billion.
The average size of venture investments is also falling: $2.7 million in 2012, $1.4 million in 2013, and $800 thousand in 2014. There were 2.5 times fewer investments in excess of $ 50 million. The reasons are in the prevailing market realities – a high degree of uncertainty in the economy and, as a result, high risks of large investments.
The only parameter that did not show negative dynamics last year is the number of investments made in the venture segment of the market (233, +3% compared to the level of 2013). However, experts tend to explain the positive results in this case by the beginning of the active work of the largest seed investment fund in the Russian market – about a third of the total number of investments made fell to the share of the Internet Initiatives Development Fund (FII).
Changeable light bulbIt is obvious that the Russian venture capital market will continue to fall, perhaps the negative trend from 2015 will move to 2016, and maybe even 2017.
At the same time, RAVI predicts a gradual increase in the interest of venture investors in industries related to the development of real technologies – biotechnology, medicine and healthcare, chemical materials and electronics.
"One day I wondered why, when I come to the store, I see new versions of the light bulb every time. If 20 years ago they were ordinary incandescent lamps, now they are crooked, rough, translucent… It turned out that Philips approved the standard for the production of lighting devices – a complete change of the range in three years. This is the real innovation. The company has to run ahead of the competition all the time. And there are no innovations in our country except in the IT sphere. Maybe we just don't need to change things all the time?" Leonid Vodovatov, Director of the Department of Organization of the Research Complex of the Skolkovo Foundation, reflects.
"No," Evgeny Geisler, Chairman of the Management Board of the Lomonosov Capital Management Company, answers him, "Philips is simply in conditions of fierce competition, which forces it to produce different light bulbs. We see the same processes in the IT sector in Russia. There is no consolidated monopoly or oligopoly, everything is boiling there, everything is competitive, everyone is trying to come up with something new. They are trying to capture customers, to make some new service. But if we look at our stanovye ridges, industrial ones, then there is no "movement" there, and there is no real competition. And in the current economic conditions, when we lose touch with the global market, they have even less incentive to change. Their argument is simple: it will be worse, but its own."
Hence, it is not surprising that the main prize (a grant of 1 million rubles) in the competition of the Siberian Venture Fair went to the developers of a DNA test to determine cancer at the earliest stage - the Novosibirsk company "SibEnzyme". The biomedical cell technology market is one of the most dynamic in the world. "The method is based on the analysis of a DNA molecule. A cancerous tumor does not develop if certain genes are active, the so-called "oncosuppressor genes" that suppress tumor formation. Accordingly, by "disabling" these genes, it is possible to diagnose the disease," one of the authors of the test, Elizaveta Malikova, explained the essence of the development. At the same time, the technology allows you to diagnose cancer with just a few DNA molecules, the time of the study is four to six hours. Standard equipment is used, no unique competencies are required from full–time medical personnel.
State burdenOne of the factors hindering the development of venture investment in the country, experts call a significant share of state capital in this segment of the market, or rather the orientation of startups to grants from the budget.
At the same time, business pays attention to the narrowness of market instruments to support venture financing. "The system of venture debt financing and bridge financing funds is developed in the world. Large systems have grown on this. We don't even have anything close to that," Igor Agamirzyan, CEO of the Russian Venture Company, shrugs his hands.
"How to make sure that an entrepreneur is ready to attract resources not in the form of grants, but in the form of a loan? The issue is very relevant, "grants" interfere with active entrepreneurial activity, active promotion of ideas and goods," Andrey Svinarenko, Director General of the RUSNANO Foundation for Infrastructure and Educational Programs, is convinced.
Andrei Fursenko, the assistant to the President of the Russian Federation, is inclined to explain the growing number of "grants" by the mentality of Russians whose lives have depended on the will of the state for generations. "If the state owes everyone – from kindergarten to retirement – then we will never leave grants,– Fursenko says. – A grant is the optimal expression of what the state owes to everyone. How will a person move to the logic of earning when he is owed in life? This is a big psychological problem. I know one entrepreneur who raised his company with the help of grants. But one day he decided that he was ready to do real business. And what do you think? I couldn't! Dropped out of the market a year and a half later. Why? Because I couldn't fulfill my obligations. However, he soon returned to grants and is now quite successfully using this technique."
By the end of 2014, the share of funds with state financing in the Russian venture capital investment market reached almost 40%. These are 49 funds with a total capital of 2.01 billion rubles. Approximately 39% of state-owned venture funds are located outside the Central Federal District, but their contribution to the total capitalization is about 25%.
Venture funds with state participation are distinguished by industry breadth and significant investment volumes – these funds are the main source of support for early-stage high-tech companies in industries not related to the information and communication technologies (ICT) sector. For example, in the Biotechnology/Medicine sector, the share of funds with the participation of state capital in 2014 was about 90% (in 2013 this was 100%), in the industrial technology sector – over 80% (in 2013 – about 94%).
At the same time, there is a tendency of gradual decrease in the share of venture investments by funds with the participation of state capital at the seed, initial, and early stages (from 50% in 2012 to 32% in 2014). There is an increase in the activity of serial seed funds formed from extra-budgetary sources (primarily the FRII).
The bureaucracy is not asleepAnother "state" problem of the successful development of the venture capital investment market is the Russian bureaucracy, Natalia Podsosonnaya, CEO of the Savings and Investments Management Company, is convinced.
"When I talk to entrepreneurs, many are proud to perceive the capabilities of Russian science, the qualifications and talent of our engineers, their technical thought, but they see many administrative barriers to doing business in Russia. In Europe, entrepreneurs are respected, but in Russia you rarely meet officials who would not treat entrepreneurs as if they owed them," says Podsosonnaya with sadness.
The bureaucratization of the public administration system, the instability of the economy and the high cost of money leads to the fact that, having got on their feet, promising startups willingly change their Russian residence permit to a European or North American one. Konstantin Fokin, General Director of the Moscow Innovation Development Center, President of the National Association of Business Angels, shared one of these business stories with the participants of one of the expert tables of the Siberian Venture Fair. "While I was on the plane, a young Russian company with global ambitions approached me with an investment proposal. In order to attract international investors, the founders of this company register it in another country. That is, it turns out like in a Russian fairy tale about tops and roots. In Russia, the expensive part will remain – roots – technologies, people, and so on, and abroad the profitable part – tops – development and profit. Of course, we would very much like this company to remain in Russia, but we have nothing to offer it, unfortunately. And this is a problem that needs to be dealt with. Russia should become an attractive jurisdiction for business so that people are not afraid to invest here. And there is money in Russia, here tens of thousands of people have earned their capital wisely, and not by privatization and inheritance. And investors will react quickly to the first positive changes that will occur in the country," the business angel is convinced.
Money InternetA distinctive feature of Russian venture financing is the dominance of the ICT sector in the investment portfolio of funds and business angels.
Despite the fact that this trend is global, in Russia it is excessively hypertrophied. According to RAVI statistics, over 75% of the total number of investments were made in the ICT sector last year: "Attention is drawn to the unconditional leadership of the ICT sector in both the number and volume of investments, which has been observed over the past two years. Despite the fact that the volume of investments in this market segment reached only 38% of the level of 2013 (due to the absence of particularly large transactions), the number of investments was at a high level (114% of the same indicator in 2013), thanks to the active work of a number of "serial" seed investment funds." Experts in this industry bias see the reason for the "underinvestment" of business in other promising sectors of the economy.
"The vast majority of applicants for investments in our environment by world standards are not qualified entrepreneurs who have the potential to apply for the development of a serious large business. Unfortunately, this is exacerbated by the industry bias towards ICT, or rather, Internet projects. And to be more precise, in projects related to e–commerce, - says Igor Agamerzyan. – Almost all of these are copies of successful Western projects. Those who invest in them in Russia obviously limit their potential, because it is almost always unrealistic to compete successfully with their progenitor."
Among the promising areas of the ICT sector, the Internet of Things project was presented at the fair. The StarNET VC venture fund invests in startups related to the development of this area of IT business in Russia. "Imagine a small lightweight device attached to a dog's collar, and the owner, looking into his smartphone, always knows where his pet is. Another example is lost luggage. This problem is colossal on a global scale. This is billions of dollars in losses from lost luggage annually. You can track the travel of your luggage around the world. And you also know where your child is if he doesn't answer the phone. Moreover, the accelerometer built into the device will emit an alarm signal if the child suddenly moved quickly in space," Gennady Medetsky, CEO of the StarNET VC Foundation, lists the useful functions of the device. And smart Internet things can also signal a flood in the house, the appearance of guests in an empty apartment, measure humidity, transmit data from water and heat meters…
According to the head of the venture fund, the batteries on the "beacon" of Internet things will last for at least 10 years, and the cost of the service will not exceed a dollar a year. By 2020, according to Medetsky's estimates, at least 50 billion Internet things will be tracked in the world by the location of people, their belongings and pets, and this is not the limit.
It is important to note that the lion's share of the Russian venture capital market is concentrated in Moscow and the Moscow region. "There is still a situation in which the overwhelming number of venture capital funds and the largest total volume of existing venture funds are concentrated in the Central Federal District - 81 and 87 percent of the total number and volume of venture funds. The share of "regional" among new venture funds in 2014 did not exceed 15 percent," according to the RAVI analytical report on the results of the review of the Russian venture funds market for 2014.
Investors want to invest in the regions – in fact, for this they fly to the Siberian Venture Fair. However, in Siberia they find literally a few interesting offers. At least by contrast, ambitious local projects have a chance to conquer the world.
Portal "Eternal youth" http://vechnayamolodost.ru
16.06.2015