A Tumultuous Venture Landscape in Russia
Investors taking on higher risks are undeterred by potential dangers.
Venture capital investments in Russian businesses have experienced a wild ride since 2015, with an average annual investment of $750-850 million until 2020. However, the scenarios in 2021 and the following years showcased a stark contrast. While investments surged to over $2.5 billion in 2021, they drastically dwindled to $85 million in 2023 – a 30-fold decrease.
But lo and behold, a resurgence occurred in 2024, largely driven by acquisitions of IT companies, including corporate software developers. Notably, the number of merger and acquisition (M&A) deals involving software development companies tripled since 2022, amounting to 23, with the total number of such deals involving all tech companies jumping by a third, reaching 86.
This growth trend can be attributed to the shifting landscape of the tech sector. The study by Dsight confidently states, "Amidst economic changes, we are witnessing a peak in mergers and acquisitions. Large players are acquiring promising startups to strengthen their positions and implement innovations." However, it's important to note that the overall number of venture capital deals declined by nearly 8% in 2024, dropping to 176.
So what's causing this rollercoaster ride in Russia's venture market?
According to Dan Mednikov, director of the Institute of Innovation Management at the Higher School of Economics, the issue lies with the limited number of attractive options for venture capital investments in the country. An exodus of startups changing their jurisdiction after the start of the SVO (Special Military Operation), particularly in the information technology sector, reduced the supply of objects for venture capital investments. Furthermore, the cessation of activities by major global venture capital funds with expertise in Russia also contributed to this scarcity.
Another crucial factor is the distorted venture cycle – the chain that had only recently started functioning in the middle of the last decade. With many venture investors leaving Russia, this cycle has ceased to operate as it should. As a result, venture funds investing in Russia today are compelled to put their money into companies with short growth cycles to reap their investments back sooner. Consequently, startups without a quick growth trajectory don't fit into the risk profile of venture funds.
However, there is a glimmer of hope. The rise in the number of M&A deals points towards an increasing interest in Russian tech companies. The key to swiftly boosting venture capital investments in startups lies in ensuring favorable stock prices during a company's initial public offering (IPO). Anton Ustimenko, head of the IPO preparation services group at B1 Group, believes that the growth in IPOs in 2024 can be attributed to the ongoing technological transformation of Russian companies.
Regardless, the success of IPOs is somewhat hindered by a high key interest rate, pressuring company valuations. In fact, six of the 14 companies that went public in 2024 reported losses for investors by the end of the year. This trend might deter investors from taking part in new IPOs in 2025. Furthermore, insufficient secondary market volume and high yields on low-risk financial instruments pose additional challenges for IPOs in the upcoming year.
However, a reduction in the key interest rate by the central bank could potentially shift massive funds from money market funds and bank deposits to the stock market. This change could enable investors to purchase shares in multiple IPOs totaling up to 100 billion rubles, making 2025 a promising year for the Russian stock market.
With venture capitalists focusing on selling their company shares profitably during IPOs and refocusing on investments at the seed and early stages, the restoration of a healthy venture cycle and transition to a new stage of investment growth could be on the horizon.
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Tags:* #Investments* #Investors* #VentureMarket* #Research
- The study by Dsight predicts a peak in mergers and acquisitions in the tech sector in 2024, with large players acquiring promising startups to strengthen their positions and implement innovations.
- The number of merger and acquisition (M&A) deals involving software development companies tripled since 2022, amounting to 23, with the total number of such deals involving all tech companies jumping by a third, reaching 86.
- Despite the resurgence in 2024, the overall number of venture capital deals declined by nearly 8% in 2024, dropping to 176.
- Anton Ustimenko, head of the IPO preparation services group at B1 Group, believes that the growth in IPOs in 2024 can be attributed to the ongoing technological transformation of Russian companies.
- A reduction in the key interest rate by the central bank could potentially shift massive funds from money market funds and bank deposits to the stock market, making 2025 a promising year for the Russian stock market, especially for venture capital investments.
