MoneyTree TM Venture Capital Market Navigator. Overview of Russian venture capital deals for the first three quarters of 2012

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1 MoneyTree TM Venture Capital Market Navigator Overview of Russian venture capital deals for the first three quarters of

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3 Content Introduction 4 Information technologies 6 Biotechnologies and industrial technologies 11 Investment geography 11 Large innovation deals 12 Grants 12 Conclusion 13 Methodology 14 Contacts 16 3

4 Introduction We are pleased to present our new publication MoneyTree ТМ : Venture Capital Market Navigator (the MoneyTree ТМ Russia Report) prepared by the PwC Center for Technology and Innovation (CTI) together with RVC based on results for the three quarters of MoneyTree ТМ studies have already won international acclaim, because PwC has, for many years, been conducting the research for a range of leading technology markets, such as the USA, Israel, India etc. In the first MoneyTree ТМ Russia Report, we analysed transactions completed in the information technology (IT) sector in At that time Russia's venture market has started to develop intensively, which required an objective, comprehensive review and analysis of the situation. In this report, we retain our focus on venture investments in the IT sector by comparing key performance indicators year-on-year and concurrently extend our research scope over another two sectors, namely biotechnologies and industrial technologies. According to the data obtained, total venture investment in Russia's market in the 9 months of 2012 amounted to USD 495 million received from 117 deals (including deals with undisclosed values). On top of that, 655 grants totalling over USD 133 million were provided for the development of IT, biotechnologies and industrial technologies during the 9 months of It is noteworthy that we have not factored grant-related data into the total market volume as assign grants to non-market tools of financing innovative companies. Further development of Russia's venture capital market is also testified by investment in the development of innovation infrastructure. Over the first 9 months of 2012, the market witnessed 7 such deals totalling USD 24.7 million. Among them, for example, is the Fastlane Ventures company (which serves as an incubator for developing and launching new internet projects) with investment from VTB Capital in the amount of USD 18 million. The IT sector retains a leading position in terms of venture capital investment: for the three quarters of 2012, their volume reached USD 485 million, which is 2.5 times more than for the same period of The forecast based on the previous report turns out to be conservative: for the 9 months of 2012 alone, venture capital investment in the IT sector has exceeded our original estimates of USD 450 million. However, the number of transactions remains practically unchanged. From this we can conclude that gradual change to the venture investment market structure favours mature companies. Investors are now more inclined to support projects which can demonstrate their achievements by reference to specific performance indicators and willing to put in larger investments. In addition, certain startups which raised investment in 2011 are getting more mature and now able to make proper use of next rounds of financing. Speaking of biotechnologies and industrial technologies, which are still new sectors for Russia's venture capital market, they are still lagging behind the leader, namely the IT sector, both in terms of deal numbers and investment amounts. Based on the results for three quarters of 2012, there were 14 deals (USD 2.6 million) in the industrial technologies sector and 13 deals (USD 7.0 million) in the biotechnologies sector. In addition, several large deals were made in the amount of over USD 50 million each. This is an important factor for market development, since it demonstrates that investors are prepared to make significant contributions and creates preconditions for subsequent exits. 4

5 Investment snapshot for three quarters of 2012 (volume in USD mln, number of deals) Source: RVC, Venture Database, PwC The emergence of new successful innovation projects, increased interest from Russian and foreign investors and active government support are all factors stimulating an increase in the number of entrepreneurs and, correspondingly, startups. Not only does it mean abundance of new ideas, but also a significant growth of thoroughly thought-out projects, which in its turn entails changes in investor behavioural patterns. We note the steady growth of the Russian venture investment market, the "maturing" of its participants, the accumulation of a critical volume of experience and the expansion of the number of spheres for investment capital and are certain that the market will continue to gain momentum and create new opportunities for all participants. We'll be tracking down further developments in the venture capital market in our future MoneyTree ТМ Russia Reports. 5

6 Information technologies Venture capital investment by quarter: investment raised, number of deals, average deal value In our report we have focused on the IT sector which represents Russia's most robust and fast-growing sector appealing to venture capital investors. Based on our comparison of the results for 9 months of 2012 to the same period of 2011, we have identified the following trends: number of venture capital investment deals in the IT sector for both periods is commensurable: deals, of which 89 have publicly disclosed data on deal value; deals, of which 86 have publicly disclosed data on deal value. That said, the total volume of venture capital investment in the IT sector increased over 2.5 times year-onyear: USD 485 million in 2012 versus USD 186 million in A significant growth of the total investment in the IT sector is driven by larger volumes of investment with higher investment rounds in later stages of projects rather than increased numbers of deals. This new trend is mostly attributable to a vigorous increase in market competition. Along with the increase in the number of startup projects, entrepreneurs are finding it necessary to develop ideas and business models more clearly, as well as achieve more considerable preliminary results using their own resources in order to attract investors. In addition, the number of experienced entrepreneurs testing their abilities in several projects and who better understand the mechanisms and principles of how the market works is increasing. Investors are adopting more thorough approaches to selecting projects, companies and businessmen for their support and investment and getting ever more particular about startup projects: a well-proven business model stands a better chance of raising investment for its development. On the other hand, competition between investors is getting more noticeable. To obtain the best projects for their portfolios, they are starting to more vigorously promote their own investment funds by means of attending public events, industry conferences and disseminating information about successful implementation of their projects in mass media. The industry is becoming more transparent, however a significant portion of the market is still unaccounted for due to the undisclosed nature of certain deals. Venture capital deals trends in IT sectors by quarter, , USD million Average venture capital deals value, USD million (30) 217 (35) (45) 25 (19) 91 (25) 43 (39) 110 (25) Q Q Q Q Q Q Q Q Q1 Q2 Q3 Q Note: Not including deals for which no concrete date of closure was indicated. Source: RVC, Venture Database, PwC Source: RVC, Venture Database, PwC 6

7 Venture capital investment by project development stage Distribution of venture capital investment by stage of a project life cycle for the three months of 2012 shows a trend toward a reduction in funding for projects at the seed stage: only 30 deals for the 9 months of 2012 versus 46 deals in the same period of This said, our research demonstrated both growing numbers of deals in startup stages (24 deals in 2011 versus 29 deals in 2012) and a significant increase in deal numbers and volumes of investment in early-stage companies (two-fold increase: 22 deals versus 11 deals in 2011 in the total amount of USD million); likewise for companies in the expansion stage (eight deals versus one deal in 2011 in the total amount of USD million). One explanation for this could be that, as a rule, the same venture capital funds contribute to projects at both the seed stage and the startup stage. In an effort to minimise risks, they prefer to invest in more mature projects. This is clear evidence of the fact that there are not enough funds and business angels in the country yet who specialise exclusively in the preseed and seed stages. Number of deals by project stage in IT Qs to Qs , (investment volume in USD millions) (23.8) (8.3) 29 (51.2) (29.2) 22 (222.7) (65.2) 8 (152.8) 8 (53.2) 5 0 1(14.6) Seed Startup Early Expantion No data 1(50.0) Number of deals Qs Number of deals Qs Source: RVC, Venture Database, PwC 7

8 Venture capital investment by financing round Based on the 2011 research findings, we emphasised a prevailing market demand for startup investments; however, the three quarters of 2012 demonstrated increased numbers of deals in later stages. In 2012, Round A accounted for the greatest number of deals - 34 deals. While the number of Round B deals remains at the same level (eight deals), the investment volume has significantly increased: USD 28.4 million in 2011 to USD 45 million in Round C brought in an investment of USD 75 million (three deals), Round D completed two deals in the total amount of RUB 88 million. Also, there were five acquisitions of companies (in connection with investor's exit) in the total amount of USD 74.3 million. Currently, the market is in for large exits from companies which have raised investment in the last few years. Breakdown by investment round in IT sector Qs to Qs , number of deals (investment volume in USD mln) (22.8) (92.2) 32 (8.5) 29 (84.6) (28.4) 8 (45.0) 7 (38.2) 5 (74.3) 6 (102.0) 3 (75.0) 1(12.0) 2 (88.0) Seed A B C D Exit No data Number of deals Qs Number of deals Qs Source: RVC, Venture Database, PwC 8

9 Venture capital investment by sub-sector: investment volume and number of deals In terms of both deal numbers and venture capital raised, the fastest-growing sub-sectors are represented by e-commerce, cloud computing technologies and social networks. As compared to the 2011 performance indicators, we have identified a growth trend in both deal numbers and volumes in these sub-sectors. Investment by IT sub-sector Qs to Qs , number of deals (investment volume in USD million) Mobile apps 1 (1) 6 (26.3) Cloud computing technologies Social networks 11 (20.3) 18 (12.2) 22 (25.6) 17 (24.7) Telecoms 3 (5.3) 2 (3.1) E-commerce 14 (48.9) 21 (315.7) Online tourism 5 (25.2) 5 (24.4) Other 17 (65.2) 38 (73.1) Number of deals Qs Number of deals Qs Source: RVC, Venture Database, PwC Based on results for the three quarters of 2012, the e-commerce sub-sector is the unrivalled leader. The sector saw 21 deals raising approximately USD million in investment. That is more than 6 times the growth as compared to the comparable period of 2011 (14 deals totalling USD 48.9 million). By the number of completed deals, the sub-sector of cloud computing technologies holds a leading position 22 deals raising approximately USD 25.6 million in investment. Projects related to the development of social networks and information & social services ranked third by the number of completed deals: 17 transactions, USD 24.7 million. It is also worth mentioning projects related to the development of mobile application services - six deals totalling USD 26.3 million. We also see sustained interest in companies in the online tourism sub-sector at the same rate as last year - five deals totalling about USD 25 million. Based on findings from our review, we have identified market saturation in certain segments and, consequently, a trend toward vertical integration, establishment and development of complementary services. A good example of this is 9

10 the e-commerce sub-sector which is stimulating development of complementary services such as online crediting, cloud services for content management, logistics solutions, etc. Other services related to the online tourism sub-sector which are developing rapidly now are recommendation services, mobile applications, and travel planning assistance services. In addition, we can see that investors are demonstrating a vivid interest in educational projects. On the researchers' estimate, over the next 12 months, investors will focus on digital educational and lifestyle technologies, mobile applications as well as B2B-related services and infrastructure technologies servicing such fast-growing sub-sectors as e-commerce and online tourism. Investment by IT sub-sector and project stage, number of deals (investment volume in USD mln) E-commerce: 21 (316) Cloud computing technologies: 22 (26) Startup 32% Early 27% Seed 36% 22 Expansion 5% Startup 30% Early 30% Seed 15% Expansion 25% Social networks: 17 (25) Early 12% Startup 41% Seed 47% Media: 7 (46) Mobile apps: 6 (26) Educational services: 4 (7) Other: 4 (11) Online-tourism: 5 (24) Telecoms: 2 (3) Electronics/instrumentation: 2 (1) Source: RVC, Venture Database, PwC 10

11 Biotechnologies and industrial technologies The new and updated content of this report contains a review of biotechnologies and industrial technologies. Since these sectors are just beginning to develop in the Russian market, we have, in this stage, taken the decision not to segregate them into sub-sectors. Currently, investments in the biotechnologies and industrial technologies sectors are provided to companies in the early stages of development and average deal values are relatively small; however, global experience indicates that such investments are more capitalintensive and long-term in nature than those earmarked for the IT sector. We anticipate that, providing the positive trends in the Russian and global economy continue, these areas are bound to succeed and demonstrate vigorous and dynamic growth. According to the data obtained, total venture investment in Russia's industrial technologies market for the three quarters of 2012 amounted to USD 7 million received from 13 deals. There were five deals with no disclosure. Average deal value stands at USD 0.9 million. Peak of investment activity in that market was reached during the second quarter of 2012: six deals (two of which were not disclosed) in the total amount of USD 4.9 million. According to the data obtained, total venture investment in Russia's industrial technologies market for the three quarters of 2012 amounted to USD 2.6 million received from 14 deals. There were five deals with no disclosure. Average deal value stands at USD 0.3 million. Investment geography In our research, the geographical distribution of investors was analysed based on the location of their headquarters, rather than the place where the legal entity is registered. Investors of Russian origin still represent the driving force behind the development of the Russian market (participating in 102 deals). However, the involvement of foreign investors is also notable. The USA came in second for the number of deals (7 deals) followed by Germany (6 deals). We note emergence of interest from Asian countries: for instance, there were two deals involving Japanese investors. Top-3 foreign investors in 2011 and 2012 Country Number of deals in 2011 Country Number of deals in 2012 USA 8 USA 7 Germany 4 Germany 6 The Netherlands 4 France 3 Source: RVC, Venture Database, PwC 11

12 Large innovation deals In the first three quarters of 2012, seven large deals were completed (over USD 50 million) with total investment value of USD 762 million. Large innovation deals encourage foreign investors to enter the Russian market and contribute to innovation market capitalization. However, the market is still expecting large exits. Project Name Sector of investee s operation Investor Investment volume, mln USD Closing date Pilkington Clean technologies RUSNANO 247 May 2012 Usoliye-Sibirskoye Clean technologies RUSNANO, Sberbank of Russia 133 March 2012 Silicon Russkiye Bashny Machinery and UFG Private Equity II, Macquarie 100 February 2012 equipment Renaissance, Infrastructure Fund, ADM Capital CEECAT Recovery Fund, European Bank for Reconstruction and Development Quantenna Telecommunications Sigma Partners, DAG Ventures, 79 April 2012 Venrock, Southern Cross Venture Partners, Grazia Equity, Bright Capital, RUSNANO, Sequoia Capital Avito.ru E-commerce Baring Vostok Private Equity Fund IV, 75 May 2012 Northzone Ventures, Kinnevik Accel Partners Lamoda E-commerce JP Morgan Asset Management 68* September 2012 PPR Luxoft Cloud computing technologies, software VTB Capital Private Equity Fund 60* July 2012 * estimated deal values Source: RVC, Venture Database, PwC, data from corporate web sites Grants A new section of our report examines grants. As mentioned above, we have not factored grant-related data into the total market volume as assign grants to non-market tools, but we strongly believe that they are an important factor for the development of an innovation-driven economy in Russia. All in all, 655 grants were provided for the development of IT, biotechnologies and industrial technologies during three quarters of 2012 with total investment of USD 133 million. The greatest portion of grants was issued by the Foundation for Assistance to Small Innovative Enterprises in Science and Technology (Bortnik Foundation): 556 grants totalling about USD 24.4 million. The Skolkovo Foundation issued 87 grants, but scored the leading position in terms of size of investment - USD million. Organization Sectors Number of projects Investment volume, mln USD Nokia Corporation IT Star Fellows IT Microsoft Seed Fund IT Skolkovo Foundation Biotechnologies IT Industrial technologies Bortnik Foundation IT Biotechnologies Industrial technologies N/A Total Source: RVC, Venture Database, PwC, data from corporate web sites 12

13 Conclusion Speaking about the Russian venture market in the three quarters of 2012, we can state that the market is becoming more mature and transparent. We expect that this dynamic growth will continue in future periods. Despite the fact that IT is currently the most attractive sector in terms of venture investment, our initial view of the biotechnology and industrial technology sectors shows that these sectors are also demonstrating activity which, in our opinion, will only intensify. Further development of the venture capital market in Russia will be driven by active competition between both businesses and investors. The number of startup projects thoroughly prepared and thought-out by businesses will be on the rise and, accordingly, overall growth of investment will continue. Investors will continue providing larger investments to companies in later stages of development, which will entail new significant exits. 13

14 Methodology This report has been prepared under The MoneyTree TM Report methodology ( The MoneyTree TM Russia Report contains information from RVC and Venture Database which was used by PwC in establishing an overview of the situation. In analysing the data, venture investment actually received from business angels, investment companies, private, corporate and public venture funds and not exceeding USD 50 million in each round of financing were taken into consideration. If a company received investment in two or more rounds, then each round is viewed as a separate deal. This study incorporated deals that were formally concluded in the period from 1 January to 30 September The term "venture investment" is understood here to mean the acquisition of a stake or capital in new or growing companies, acquiring less than a controlling share. Resources invested are primarily directed to business development, not to the purchase of shares owned by existing shareholders (founders) of the company. This report covers the companies which pursue business activities in the areas of IT, biotechnologies and industrial technologies in the Russian Federation. Please note that this report does not include information about deals oriented at foreign markets, but in which investors of Russian origin are involved. This report provides information about the size of grants issued. The term "grant" is understood here to mean a free subsidy for pursuing scientific research or R&D work. However, grants are non-market sources of funding and not factored into the total market volume. Definition of sectors and sub-sectors: The biotechnologies sector includes companies involved in the development of medical equipment and pharmaceuticals, medical research and provision of medical services. The industrial technologies sector includes entities involved in the development of equipment and technologies for further use in clean technology-based operations; manufacturing of machinery and equipment for various purposes to be used in industrial production; production of chemicals; and automated industrial operations. The IT sector includes the following sub-sectors: e-commerce; development and application of cloud computing; telecoms; mobile apps; services and apps related to the creation and development of social networks, online communities, information and reference services; online tourism (hotel booking services, ticket booking services, information and reference services in this area); development of electronics and IT hardware. Stages in the life cycle of a project/company and their definitions: Seed stage: The company has a concept, idea for a product, but no final product; work is under way on the prototype. Startup stage: The company has a pilot version of the product, or an initial demonstration version; testing is under way. Early stage: The company has a product ready to enter the market, demand is being tested. Expansion stage: The product is available on the market, sales and demand growth can be observed. Late stage: The company is becoming a major organisation, showing characteristics of a public company. 14

15 RVC is a government fund of venture capital funds, a development institute of the Russian Federation, and one of Russia s key tools in building its own national innovation system. RVC was established by the Russian Government in accordance with Order Number 838-r of 7 June RVC s authorised capital stands at over RUB 30 bn. It is 100% owned by the Federal Agency for State Property Management (Rosimuschestvo). As of November 2012, RVC-backed funds boast a portfolio of 126 companies. Invested capital totals more than RUB 10.8 bn. RVC s main goal is to stimulate the creation in Russia of a domestic VC investment industry, and significantly increase venture capital funds financial resources. An important area of RVC s work is creating and supporting a special-purpose service infrastructure for VC market players, to increase transparency of investee funds and companies, to ensure Russia has an environment in this area that is conducive to international investors and entrepreneurs, and to optimise legislation affecting the development of innovative business. The publication of the report MoneyTree TM : Venture Capital Market Navigator is a crucial step in supporting the development of the infrastructure of the Russian venture-innovation ecosystem, with RVC participating as a development institute. The MoneyTree TM Russia Report is prepared on a basis of RVC project Database of the Russian venture-innovative ecosystem. Company Venture Database acts as a partnering company of the RVC project to collate and compile data on deals and ventureinnovative market players. Venture Database is a statistics provider for innovation venture market in Russia. Industry professionals get insight on investment deals, projects and market participants; corporations get perspective on new business models and innovation ideas. PwC Center for Technology and Innovations (CTI) was opened in Russia in autumn 2009, with its stated goal being to foster the development of the Russian innovation and technology market. CTI specialists help companies and governments design strategies for innovative development, create technology clusters, accommodate these innovations in laws and develop the infrastructure for the innovations market. For more close work with fast-growing innovation companies CTI opened its office in the Digital October technological entrepreneurship center in October Supporting young innovation companies is one of the Center s main roles. Drawing on our many years of work with the world s largest technology companies, we have a clear vision of how they succeed, and what obstacles they have to overcome on their road to success. Collaborating with young companies and entrepreneurs, the CTI not only pools the experience and knowledge of its experts in Russia, but also draws on the experience and knowledge of experts and its wide net of contacts across the entire global network of PwC firms. Similar centres are operating in PwC USA and Luxembourg, thus offering Russian startups direct access to global markets. The CTI encourages innovation and actively publishes information on new tech and venture capital financing. Our publication Technology Forecast has for many years been an important source of information about the latest trends in IT technologies and their impact on the future of business for the key market players. We are confident that the MoneyTree TM Russia Report will become an important tool for the further development of Russia s venture capital market, helping to open it up to a host of foreign players. PwC in Russia ( provides industry-focused assurance, tax, legal and advisory services. Over 2,800 professionals working in PwC offices in Moscow, St Petersburg, Kazan, Ekaterinburg, Novosibirsk, Krasnodar, Voronezh, Yuzhno-Sakhalinsk and Vladikavkaz share their thinking, experience and solutions to develop fresh perspectives and practical advice for our clients. The global network of PwC firms brings together more than 169,000 people in 158 countries. PwC in Russia ( provides industry-focused assurance, tax, legal and advisory services. Over 2,500 professionals working in PwC offices in Moscow, St Petersburg, Kazan, Ekaterinburg, Novosibirsk, Krasnodar, Yuzhno-Sakhalinsk and Vladikavkaz share their thinking, experience and solutions to develop fresh perspectives and practical advice for our clients. The global network of PwC firms brings together more than 169,000 people in 158 countries. 15

16 Contacts PwC Center for Technology and Innovation RVC Anton Abashkin Head of the PwC Accelerator in Russia Andrey Vvedensky Director, Infrastructure and Regional Development Ekaterina Terentieva Director, Technology Practice Sergey Makarov Head of Infrastructure Development This report has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this report without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this report, and, to the extent permitted by law, RVC, PwC, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this report or for any decision based on it PwC, RVC. All rights reserved. PwC refers jointly to ZAO PricewaterhouseCoopers Audit, PricewaterhouseCoopers Russia B.V. OOO PricewaterhouseCoopers Advisory. or, as the context requires, other member firms of PricewaterhouseCoopers International Limited (PwCIL).