Russian Venture Capital

Market Overview 3Q 2013

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Dear friends!

We are pleased to present the new issue of RMG’s Russian Venture Capital

Market Overview, offering a detailed analysis of Russia’s VC market in

3Q2013.

3Q proved the most successful quarter to date in 2013 by VC invested and

deal count. Russia made further progress towards a mature venture capital

market, with a record amount of capital raised in exit deals and a surprising

upsurge of activity by corporate VC investors.

However, there are still a number of unresolved structural problems. Seed

financing in Russia is scarce and comes mostly from state-backed funds and

financial organizations. Also, the dominance of IT over other technology

sectors on the VC market is much greater in Russia than in developed

markets.

Although the amount of venture capital invested in Russia is likely to be much

lower in the four quarters of 2013 than in 2012, the current year has brought

advances in the quality and depth of Russia’s VC market. Formation of a

history of successful exits, increased interest in venture investments among

corporations, and steps by the government to create a favorable venture

environment are helping local and foreign VC investors to see Russia as an

attractive market.

Our aim in this report is to help make the Russian VC market more transparent

and understandable, and thereby contribute to its growth.

Arseniy Dabbakh

Director, Corporate Finance

Rye, Man & Gor Securities

Contents

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About Rye, Man & Gor Securities .....................................................................................

Russia’s venture capital market: the 2-minute tour ...........................................................

Trends on the VC market ..................................................................................................

VC market overview ..........................................................................................................

Exits and large deals ………..............................................................................................

New VC funds in 3Q .........................................................................................................

VC market structure .........................................................................................................

Methodology …................................................................................................................

Contact information .........................................................................................................

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About Rye, Man & Gor Securities

Rye, Man and Gor Securities (RMG) is an independent Russian

investment company. RMG has been on the market for 20 years, in

which time it has earned an excellent reputation among both clients

and peers as a reliable partner.

RMG provides a wide range of services to Russian and foreign clients

in the venture capital market, including:

– search for promising target assets;

– capital raising through public or private offerings;

– search for strategic investors and M&A deal support;

– venture project support, including strategy development and

measures to increase capital-raising potential;

– advisory on deal structuring and financing, deal processing,

negotiations, and due diligence of target companies.

Rye, Man & Gor Securities is a member of the National Alternative

Investment Management Association (NAIMA). NAIMA is a non-profit

partnership representing alternative investment firms and service

providers committed to the growth of long-term capital in Russia. Its

major targets are:

– raising awareness of the alternative investment sector among

asset allocators, regulators and entrepreneurs;

– creating a more favorable legal environment for direct

investments;

– promoting Russian private equity and venture capital in the global

limited partner/general partner community and setting

professional standards for further development of this market.

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Russia’s venture capital

market: the 2-minute tour

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Soft/Internet B2C

$42m

Soft/Internet B2B

$14m

Other technologies $6m

Industrial tech $7m

Biotech $1m

Expansion

$35m

Growth

$6m

Startup

$14m

Seed

$15m

Private funds

$40m

Corporate

$13m

Public

$9m

Business angels $6m

PPP $1m

Exit

$93m

Round С+ $8m

Round B $17m

Round A $25m

Seed $20m

3Q2013

$163m

$70m $93m non-exits exits

VC invested

91 7

98 deals closed

+17% compared

to 2Q

+89% compared

to 2Q

Trends on the VC market

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• Both state-backed VC organizations and private funds are increasingly

interested in early stage VC projects. In an attempt to bridge the existing

seed capital gap, the government’s Agency for Strategic Initiatives has set

up the Internet Initiative Development Fund (IIDF), which will invest RUR

6bn (about $200m) in promising early-stage companies.

• A recent spate of checks and investigations by law-enforcers and

supervisory agencies after allegations of embezzlement in the government-

backed VC world has been has come to an end. Skolkovo and Rusnano

seem to have convinced the “hard end” of the Russian government that VC

investments are inevitably high-risk, and that lost investments are not a

crime. We view this as a useful “despooking” of the Russian VC market

• An increasing number of VC educational projects are being launched. One

educational initiative, People of the Future, started its Venture Academy in

the summer. Venture Kitchen, founded by the Higher School of Economics

and Russian Venture Company, has been operational since July.

• Transparency remains the major issue for Russia’s VC market. Neither

private funds nor public institutions are eager to disclose their deals and

stakeholders. Even the government-backed IIDF (see above) refuses to say

whose money it will invest.

• The business angel community is virtually non-existent in Russia. In 3Q,

angel investors took part in 40% of VC deals, but this is a much smaller

share than elsewhere in the world and the lack of such investors is stunting

market growth. For comparison, business angels financed as many as

50,000 US companies in 2012, whereas venture funds invested in just 600.

A strong angel investor community provides market depth and the seed

financing that Russia still lacks.

VC market overview

167 336 135 149 87 70

55

50

52 93

89 85

99

75

52

98

0

20

40

60

80

100

0

100

200

300

400

500

2Q2012 3Q2012 4Q2012 1Q2013 2Q2013 3Q2013

Russia’s VC deal flow

Exits

Base market

Deals closed

According to our estimates, there were 98 VC deals

closed in Russia in 3Q13, worth $163m in total,

which is 17% more than a total of $139m invested in

2Q. The deal count increased by 88.5% q-o-q. So

3Q was the most successful quarter in 2013 in

terms of both deal count and value.

3Q saw a record amount of exits, with $93m earned

by investors who sold their shares in venture

companies, accounting for 57% of total VC

investments in 3Q13. For comparison, exits

amounted to $52m (37.4% of all VC) in 2Q and no

exits were registered in 1Q.

It should be noted that we exclude the deal, in which

Russian Direct Investment Fund (RDIF), the EBRD

and Capman Russia II invested $100m in Maykor,

an IT consulting and outsourcing business. Maykor

is a mature company that has a steady business

model and a broad customer base, so we do not

view this as a VC deal even though Maykor is an IT

company. The same rationale applies to the $130m

Lamoda deal closed in 2Q, which we also

excluded.

We therefore estimate the size of the VC “base

market” (VC investments, excluding exits and large

deals) at $70m in 3Q, down by 19.5% compared to

with 2Q.

The total VC invested in 2013 (year-to-date) is

$451m, far less than the $706m invested in the first

three quarters of 2012. We expect the amount of VC

investments in Russia in 2013 to be much lower that

last year’s level of $861m.

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3Q becomes the most successful quarter for Russia’s VC

Source: RMG

US$ million, excl. deals closed

Exits and large deals

3Q saw a record level of exit activity. There were 7

exit deals in which $93m were spent. For

comparison, there were only 2 exit deals in 2Q with

total value of $52m, and no exits were announced in

1Q.

Exits are a key measure of market maturity. A poor

exit record has been one of the factors limiting the

inflow of foreign venture capital into Russia so far,

but in 2013 foreign VC investors started looking at

Russia more positively thanks to improvement of

market infrastructure and increase in market depth.

A history of successful exits is viewed by investors

as a mark of quality for any VC market.

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Company name Business description Investor Exiting

stakeholder

Deal value, $

million Sector

Exits

Yandex.Money Electronic payments Sberbank of Russia Yandex 60 Finance

QuickPay Cash payment terminal Net Element Founders 0.5 Other

technologies

Banki.ru Information portal for the banking

industry

Russia Partners

Technology Finam 6

Content

providers

iConText Context ads service iTech Capital Lev Gleyzer 10 Marketing /

Advertising

Travel.ru Information portal on tourism Oktogo Founders,

Touralliance 2

Content

providers

TM Media holding owning habrahabr.ru

and other online media projects Denis Kryuchkov Mail.ru Group 4.5

Content

providers

Platron Acquiring system for E-commerce Ocean Bank Tatyana

Glazacheva 10

Other B2B

services

Large deals

Maykor IT consulting / outsourcing RDIF, EBRD, Capman

Russia II 100 Other IT

Source: RMG

3Q13 set new records for the number and size of exits

New VC funds in 3Q

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Flint Capital

Assets under management : $30m

Sectors: TMT, E-commerce, finance

Average deal value: $0.5m - $2m

The fund was set up by ex-employees of Finam Global and already has 4

companies in its portfolio as well as managing Bull Ventures, an Ukraine-based

subsidiary fund.

IT-Online Venture

Sectors: IT

Stages: startup

Average deal value: $50,000 - $500,000

The fund is affiliated with ITOnline Group, a Russian-American company

engaged in launching and managing Internet projects. No deals have been

announced to date.

Impulse

Founders: Grigory Firsov, Kirill Belov

Sectors: marketing, advertising

Stages: seed, startup

Average deal value: $250,000 - $750,000

Impulse acts as a VC fund, incubator and accelerator. Round A co-investments

($1m+) are also possible.

Rostelecom Venture Projects Department

The state-owned telecommunications provider announced the creation of a

department for venture project development. The department is not a VC fund

but is expected to invest in third-party projects that are of interest for

Rostelecom.

Internet Initiative Development Fund

Assets under management: RUR 6bn

Stages: seed

Average deal value: $15,000 – $50,000

IIDF was founded by the government’s Agency for Strategic Initiatives in spring

2013 but selection of projects only began in 3Q. The Fund’s goal is to provide

pre-seed and seed financing for promising IT projects. Kirill Varlamov, the head

of IIDF, said that the Fund’s assets under management were contributed by

large corporations.

Skolkovo RusInnovations

Founders: Rye, Man & Gor Securities

AUM: $250m

Skolkovo RusInnovations, an investment holding founded by RMG, will invest

in Russia and CIS-based innovative companies. SKRI plans to obtain a dual

listing in London and Moscow in 2014.

17%

18%

38%

23%

4%

Business angels Corporate Public Private funds PPP

13%

87%

There was a sharp q-o-q increase in the number of

early-stage deals in 3Q2013, with 60 seed and 20

startup projects receiving financing, compared to 29

and 16, respectively, in 2Q. Also, more expansion

deals were closed in 3Q13 than in any of the 4

previous quarters.

Distribution of investor types in various VC stages in

3Q reflects the structural specifics of Russia’s VC

market. A large chunk of VC invested at early

stages (38% at the seed stage and 24% at the

startup stage) was accounted for by public funds

and development organizations. However,

government bodies did not participate in late-stage

deals, where private funds and corporations were

more involved.

Early-stage deal numbers increased in 3Q

VC market structure: stages

10

13%

29%

24%

31%

3%

33%

45%

22%

Seed

$15m

Startup

$14m Growth

$6m

Expansion

$35m

Involvement of different investor types at different VC stages

Share of total VC invested at the respective stage, excl. exits

Source: RMG

51 26 7

3 69 27 3

1 45 22 7

1 29 16 5

3 60 20 4 7

Seed Startup Growth Expansion

VC deal flow by stage

3Q2012 4Q2012 1Q2013 2Q2013 3Q2013

Source: RMG

Deals closed

VC market structure: investors

PPP

Private funds

Public

Corporate

Business angels

VC financing by sector and investor type

Biotech

Industrial tech

Other technologies

Soft/Internet - B2B

Soft/Internet - B2C

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Public funds invest in technology, private funds in IT

0

20

40

60

80

100

Seed A B C+ Exit

VC invested by round

Business angels Corporate Public Private PPP

Source: RMG

US$ million

US$ million, excl. exits

Source: RMG

40.1

9.0

13.4

6.3

0.9

The sector allocation of VC investments in 3Q

followed the established Russian pattern. Tech

sectors, including biotech and industrial

technologies, are mainly financed by state-backed

organizations, which tend to specialize in this

sphere. Other investors are IT-oriented, with over

80% of all VC invested in software and Internet

projects. Private funds were again the most active

investors, contributing almost 50% of all capital

invested.

Corporate investors were unusually active in the VC

market in 3Q, accounting for 19% of all investments

compared with just 2% in the previous quarter. High

levels of corporate VC investment activity is a

characteristic feature of developed VC markets, so

the 3Q trend suggests that Russia is moving in the

right direction.

The structure of VC rounds is indicative of

insufficient seed financing in Russia. Private funds

are reluctant to invest in concepts that have yet to

show their efficacy in practice, and therefore

contributed only 18% of all seed capital in the

quarter. Financing from state-backed institutions

also dipped in 3Q, but IIDF, a state-backed RUR

6bn fund set up in spring 2013, is expected to

invest RUR 2bn in early-stage projects by the end

of the year, which is a substantial amount for

Russia’s VC economy.

69,7

0,9

6,5

6,0

14,4

5,6

8,8

41,9

16,1

13,3

12,6 0

10

20

30

40

50

60

70

80

VC investments by sector

Investments, excl. exits, US$ million

VC market structure: sectors

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VC investors place most faith in consumer markets

0,7 1,9 1,7 2,5 0,7 0,8 0,8 1,7 0

1

2

3

Tech IT All sectors 2Q2013

Average VC deal value

Including exits Excluding exits

US$ million

Total Tech 19.2% IT 80.8%

Industrial

tech

Other tech

Software/Internet

B2B

Enterprise

management

systems

Other

B2B

services

Software/Internet

B2C E-commerce

Education

Other B2C

services

Biotech

Source: RMG

B2C software and Internet services attracted more

than a half of all VC investments (excluding exits) in

3Q and over 23% of all VC was invested in e-

commerce projects. E-commerce retained its

popularity with investors but the bias in its favor was

less marked than in previous quarters.

The proportion between tech and IT has shifted a

little towards the former: IT attracted 80.8% of all

VC invested, whereas the figure was 87% in 2Q and

89% in 2012. More importantly, biotech and

industrial tech financing is no longer a government

preserve, as corporate investors are increasingly

interested in these sectors.

The average value per VC deal declined to $0.8m

in 3Q from $1.7m in 2Q. The decrease was mainly

due to a sharp rise in the number of seed-stage

deals.

Source: RMG

Methodology

For the purposes of this report, ‘venture capital

investments’ stand for investments in high-risk and

potentially highly profitable technological projects.

Only VC investments in companies whose

operations are focused on the Russian market were

included in calculation of the market size.

Companies financed by Russia-based investors, but

oriented to foreign markets are not included in the

analysis.

Grant financing was included in the calculation of

market size as, although grants are non-repayable,

they are used to finance commercial VC projects

and thus represent an inflow to the VC economy.

An ‘exit’ stands for a deal in which at least one

investor exits a venture company’s capital.

For the purposes of this report, 4 stages of a VC

project development are distinguished:

1. Seed: the project exists only as an idea or

laboratory research.

2. Startup: a company is in the process of

organization or has conducted operations for

some time but sales have been minimal or zero.

3. Growth: launch of marketing and regular sales

of a new product..

4. Expansion: a company increases its sales,

market share, output etc.

We have modified the methodology of VC sector

classification, compared to our 2Q report. The

methodology we have adopted for this report (and

future reports) enables us to determine more easily

and correctly which sector a venture project belongs

to, based on the nature of its business.

We distinguish 7 sectors: Biotech; Industrial Tech;

Computer Tech and Equipment; Other Tech;

Software/Internet B2B; Software/Internet B2C;

Other IT. The first 4 sectors comprise the Tech

macrosector and the rest comprise the IT

macrosector.

Biotech: healthcare, pharmaceuticals, diagnostics

and medical equipment development.

Industrial tech: laser, energy, green, aerospace

technologies, robotics and other technologies

designed for industrial use.

Computer tech and equipment: telecommunications,

data storage, mobile technologies and computer

equipment.

Software/Internet B2B: applications and web

services whose clients are mostly businesses. The

sector includes enterprise management, marketing,

product development solutions etc.

Software/Internet B2C: applications and web

services whose clients are mostly individual

consumers, including e-commerce, content

providers, search and recommendation engines,

consumer finance solutions, educational services,

games, social networks etc.

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Contact information

We are very interested in the opinion of our readers, so if you are an investor,

a venture entrepreneur or otherwise interested in Russia’s venture capital

market, we will be most glad to receive your feedback and suggestions to help

us improve our reports.

Please send your feedback and suggestions to vc@rmg.ru

Report authors:

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Arseniy Dabbakh

Director

Corporate Finance

Rye, Man & Gor Securities

arseniy.dabbakh@rmg.ru

+7 495 258 62 62

Boris Orlovetsky

Analyst

Corporate finance

Rye, Man & Gor Securities

boris.orlovetsky@rmg.ru

+7 495 258 62 62

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Cover image by Tristan Neuhaus under Creative Commons license.

Copyright © Rye, Man & Gor Securities, 2013

Tel: 7 (495) 258 6262; e-mail: vc@rmg.ru