Russian and global venture markets in 2007–13 3 Contents Foreword 2 Methodology of research 4 Glossary 6 Global venture market in 2007—13 9 Key venture markets 21 Government incentives and VC funds: best practices 29 Tendencies in the role changes of the key venture market players 32 Russian venture market 33 Russian venture market executive summary 35 History of the Russian venture market 36 Russian Government and the new economy 38 Russian venture market in 2007–13 42 Afterword 62 Russian and global venture markets in 2007–13 | 1 Foreword At EY, we believe that venture capital (VC) investments are one of the key drivers behind the global economy shift. The unprecedented change in the ways in which people communicate and share information, and how businesses go global and reach out to their customers would not be possible without major innovations. The innovations themselves, however, are the result of continuous effort by entrepreneurs and governments alike to develop a clear vision of the high-tech future and a path toward it. We believe it is crucial to keep fast-growing enterprises in the loop to understand the most recent and relevant trends, and support entrepreneurs offering the world their disruptive ideas and technologies. As technology advances and the global economy searches for a breakthrough to rebound from the difficulties of the past few years, the business environment around Alexander Ivlev us changes rapidly, and EY reflects these changes in its thought leadership. Country Managing Partner Our recent studies suggest that the problems of greenfield financing, for Russia, EY regulatory challenges and public-private partnership issues do not fade away. Businesses and governments therefore need to continue their discussion and exchange views and ideas. As can be seen from our report, produced in collaboration with RVC, the venture investment industry is still going through difficult times coming out of the severe financial crisis. In these circumstances, the rapid rise of the Russian venture market suggests that stakeholders continue to believe that the efforts of the Government and market players will result in a transparent business ecosystem and that the way to the prosperous future lies in building the innovative economy. The more challenges we face, the more will appear. In tomorrow’s rapidly changing world, EY, as ever before, will be there to help businesses navigate their way toward sustainable growth and success. 2 | Russian and global venture markets in 2007–13 Within the last seven years, one of the most important goals of development institutions created in Russia was to build the Russian innovation economy on the basis of the public-private partnerships. Specific attention was paid to the establishment of the VC industry in Russia, considered not only as a source of capital and business competences, but also as one of the key elements of the innovation ecosystem. Several years ago, the VC market was virtually absent in Russia. But now things have changed. Joint efforts from the Government, development institutions, the business community, science and education have shown high efficiency in terms of creating a national VC industry in Russia. An important stage for the Russian venture market was completed in 2013. The main goal of RVC, a government fund of funds and a development Igor Agamirzian institution of the Russian Federation, was to create a self-developing CEO and Chairman, RVC venture market (in collaboration with other development institutions) and to stimulate innovation in the development of innovative entrepreneurship. As a result, RVC activities in previous years have been focused on supporting the involvement of the private VC into the innovative entrepreneurship development, while ensuring the creation of institutional and sectorial venture infrastructure. These tasks are considered to be almost completed at this point. Over the past three years, the Russian venture market has increased several times. But a more important fact is that now the growth of the Russian VC industry does not depend on state financing alone. Of course, like any other growing market, the Russian VC industry needs further development. However, one could say that the Russian venture market has been established and it is becoming more attractive for Russian and foreign investors. Until recently, the world’s leading research agencies have not paid a lot of attention to the Russian venture market. But now the situation is changing. Authoritative international organizations acknowledge the positive outcomes of the Russian VC industry. Moreover, the interest in analytical studies that reflect the dynamics of the Russian venture market and its potential are growing all over the world. We hope that this report presented by EY will facilitate the integration of foreign investors and corporations into the Russian venture market and increase international cooperation in the key areas of technological development. Russian and global venture markets in 2007–13 | 3 Methodology of research In this report, an investment is considered a venture investment if Company development stages it is a cash-for-equity transaction with a company at seed, start-up and other early stages of development made by a special-purpose Start-up (no revenues) venture fund. Hence, Rusnano investments or similar equity- A company in the early, formative stage of development being based transactions, including debt-to-equity acquisitions through run by founders and possibly a few developers. Often, the start-up convertible loans, are considered venture investments. stage coincides with seed funding. A company generally goes The following transactions are not accounted for in the statistics: from the start-up phase to the product in development phase very quickly. • Venture investments of an undisclosed volume or investments of a volume that cannot be reasonably estimated Product in development (no revenues) • Grants A company is considered to be in the product development stage when it is developing an initial product and has no product or • Special-purpose R&D financing service revenues. Companies that provide a service rather than a • Investments made by business angels product are considered to be at this stage while developing their business strategy, prior to actually marketing the services and • Investments made by companies that are not managing receiving revenues. a special-purpose venture fund Product in beta test (no revenues) • Investments made by funds that are targeted at real estate and development, i.e., investments in construction projects For information technology (IT) companies, this is an intermediate and objects (although the statistics do include investments period between product development and product shipping. The in companies involved in the provision of engineering and company is technically still in product development, but a prototype architectural design services, production of construction is being tested by select customers prior to market introduction. materials and construction work) In the global market section, companies at the product in beta test The Russian market section of this report is based on the stage are included the product in development stage. statistical data for 2007 to mid-2013 provided by the Russian Shipping product or revenue Venture Capital Association (source: RVCA), processed data of This indicates that at least one product is being shipped for RusBase and EY data for 2011 to the first nine months of 2013 which revenues are being received, regardless of the number of (source: RusBase, EY). Due to the lack of detailed data, some other products still in development, beta test or clinical trials. sections of the report contain conclusions only for 2011 to the For service companies, this stage indicates that the company is end of Q3 2013. providing services to a customer base and receiving revenues for The global market and key venture markets sections of the report those services. rely on the data provided by the Dow Jones VentureSource database. Profitable This stage indicates that a company is shipping products or Each recorded transaction was classified by an industry group, providing services from which it derives revenues, and the the investee development stage and the investee financing company has reported that it is profitable on an ongoing basis. round according to the adjusted Dow Jones classification. The key quality characteristics of the classification are described Restart below; however, each particular transaction was subject to expert Infrequently used, this stage indicates that a company is judgment. reformulating its business plan and is restructuring. Since the restart period is generally brief, many restart companies will subsequently return to their stage of product in development or shipping product. Later stages Investments are used for debt re-financing, acquisition of distributors or suppliers, preparation for exit or other activities aimed at short-term capitalization growth. On some graphs, the start-up and product in development stages and product in beta test and shipping product or revenue are combined so that the data obtained from different sources can be compared. 4 | Russian and global venture markets in 2007–13 Venture round types Industry classification overview The venture round is a stage at which a company is financed by Each company is assigned to one of the industry groups an investor. When determining the type of venture round, consisting of 27 industry segments. Industry codes are assigned a company’s development stage is taken into account, together with regard to the actual product or service the company with the total funding to be raised and the volume of the provides, rather than how the company provides it. For example, transaction in question. if a company is a social network website operator, it will be in the consumer information services segment of the consumer market Seed group, rather than the IT group. A cash-for-equity transaction made by venture investors in very early-stage companies. Typically, seed rounds have historically Industry group Industry segment been US$1m or less, but may be larger.