May 7 – Investors from all over the world came to the first-ever business angel week in Russia, which started in Moscow but is continuing for a week across 25 regions.
Business angels are investors who not only finance entrepreneurial projects at an early stage and readily risk their own money, but they also support the project with their business experience and contacts. Basically, business angels work in innovative sectors.
“It’s not a problem to find entrepreneurs or good honest people,” said Esther Dyson, nonexecutive director and an investor in the country’s No. 1 search engine Yandex. “The problem is finding the next group: entrepreneurs who were successful, sold, and are now angel investors.”
Anyway, diversification of the economy financed by the private sector is definitely needed.
“If the Russian economy does not wean itself off its current 80 percent dependence on natural resources, it would no longer be able to compete with the rest of the world,” said Rusnano Director Anatoly Chubais, who was also attending the conference.
However seed funding with investments at the earliest stage is a very new concept in Russia.
By expert evaluation, there are about 10,000 business angels in Russia, but only 30 percent of them are really active as people who understand their role and search for strategic partners, according to Tatyana Komissarova from the Higher School of Economics.
Konstantin Fokin, the head of the National Association of Business Angels in Russia, estimates that business angels invest only US$300 million a year in Russian startups on average, though he admits that there are no completely reliable sources for that data.
By comparison, the European Business Angel Network, or EBAN, which coordinated its 12th congress with the Russian business angel week, is made up of 17,000 business angels who invest 3 billion euros to 4 billion euros (US$4 billion to US$5.3 billion) each year, EBAN chief Brigitte Baumann said. The U.S. market tends to be at least three to five times larger, she added.
Startups in Russia in their beginning stage usually don’t receive investments from venture capitalists, said Yan Ryazantsev, RVC’s director of investments.
“Usually [venture capitalists] invest when a company is selling products, or when it is ready to sell on the stock exchange. There are very few companies on the Russian market at this stage. So the task at hand is to develop an entire set of small-sized funds for seed funding,” he said to The Moscow Times.
Meanwhile, this week’s US$75 million injection into classifieds advertising site Avito.ru experts take as a proof of the investment attractiveness of Russian startups.
Avito.ru started with US$10 million in seed money that came from two of its founders (chief executive Jonas Nordlander and fellow Swede Filip Engelbert) and two investment firms. Venture funds came on board later, during a US$26 million first round of funding in 2010 followed by the US$75 million round announced last Wednesday.
“The problem with investors is that they want returns within two to three years. And for some of these projects, it is five years,” Komissarova said.
Investors have seen returns most recently at Internet companies, including Yandex, whose IPO raised US$1.3 billion, Bloomberg reported in May 2011. Individual investor returns on investments were not disclosed.
US$1.3 billion was invested into Russian Internet companies in 2010 and US$2.15 billion in 2011, according to research performed by Fast Lane Ventures. But only US$750 million of that investment went to businesses at the startup stage.
For Internet startups, “there are really a small number of qualified investors,” said Kanr Lidzhiyev of Preqveca.ru, an analytical website devoted to Russia and CIS private equity and venture financing. “They are seizing the best opportunities and are enjoying an IRR [internal rate of return] that is higher than for U.S. or European venture capitalists in developed markets with fierce competition.”
To fill that void, RVC’s Ryazantsev believes that it is necessary for entrepreneurs and investors in Europe, Russia and the United States to discover one another.
“The more they interact, learn from one another, understand one another, the more they will drive one another forward,” he said.