Fast growth appeal vs. pressure of sanctions: Western VCs’ new Russia dilemma

The past few weeks have demonstrated the uncomfortable position Western venture capitalists that have traditionally invested in Russia are finding themselves in as a result of the international tensions. While, in the eyes of some them, the Russia label has become a stigma, other VCs have proclaimed their commitment to continue investing in Russian startups – with all the possible nuances of strategy and expression in between.

Among those loyal to Russia is Intel Capital, one of the pioneers in global emerging market investments. Having developed over the years a portfolio of more than 10 Russian companies, the fund led recently a $7.3 million Series A round in, a Russian web- and video-conferencing software company.

Intel Capital also invests in Ukraine. Its latest investment there, in June, went to Gillbus, a company that develops inventory distribution systems (IDS) for the bus-transportation industry. The international fund teamed up with two Russian funds – InVenture Partners and FinSight – to support this company, which has offices in Moscow and Bangkok in addition to its Kiev headquarters.

“We are not involved in politics in any form, our offices in Russia and Ukraine are fully functional,” a relaxed Intel Capital representative told East-West Digital News when the deal was closed.

Intel Capital 10 years

Last year, Intel Capital’s Strategic Investments Director Marcin Hejka and Intel Capital’s President Arvind Sodhani (center) celebrated the fund’s 10 years of activity in Russia with local investment directors Maxim Krasnykh (left) and Igor Taber (right). Photo credit: Intel Capital.

New risks, but no stopping

The international tumult has not repelled Bessemer Venture Partners either. Since 2011, this major US fund has invested considerable amounts in Russia’s flash sales fashion site KupiVIP.

“We remain active in Russia and eager to invest in fast-growing Russian Internet or software companies,” Bessemer partner Brian Feinstein said in an exchange with EWDN. He concedes that “The political environment has introduced more risk to our Russian investments. The economy is slowing down, international M&A is no longer an exit option, and there is the low-probability risk of anti-American policy in the future. These risks won’t stop us from making investment in Russia but they certainly raise the bar.”

Mangrove Capital Partners has adopted a similar position. Over the past years, this Luxembourg-based fund has been investing “with love” in several Russian startups, including KupiVIP and (formerly known as Oktogo).

“We are still working in Russia,” Mangrove partner David Waroquier told EWDN, dismissing inaccurate reports from the Russian media. “Our belief is that despite the geopolitical issues, there are a huge number of very well educated and motivated people who want to make products for both the Russian market and the international market. Of course our bar is high, and it is true that we have not made a new investment this year in Russia, but it takes a long time to find great projects, and a long time for the investment process to be completed.”

David Waroquier in Tatarstan, 2011

In 2011, David Waroquier of Mangrove Capital Partners (left) went as far as Tatarstan, an autonomous republic some 800 km away from Moscow, to identify investment targets. Center: Tatarstan’s representative in France, Belgium and Luxembourg Iskander Ioussoupov; right side: Linar Yakupov, director of the Tatarstan Investment Development Agency (TIDA). Photo credit: TIDA

The fund recently launched a training and networking program for CEOs of young Russian IT companies. After the success of the first edition in March of this year, Mangrove and its Russian partner ABRT repeated the initiative earlier this month.

From ambiguous political correctness to violent anti-Russianism

Given the current political climate, however, some other Western investors have stopped operations in the country.

Under direct political pressure has been the EBRD, which has more than 300 active projects in Russia. In August, the bank pulled out of a planned joint investment fund with state-owned nanotechnology investment company Rusnano. The move followed a statement by a majority of the bank’s shareholders, who would be “unable to approve new investment projects in the Russian Federation.”

The announcement, however, was a “guidance but not a formal decision,” the bank’s press service told EWDN last month. The EBRD might thus continue investing in Russia, should its board approve further transactions.

Less ambiguous has been the attitude of Tiger Global Management, a US investor that not only stopped investing Russia – in which it had been heavily involved so far – but also sold its existing stake in one of its Russian portfolio company.

Last month, Tiger thus declined to take part in the latest round of financing of The Russian marketplace, which used to get generous funding from Western VCs, got its last $40 million capital injection only from domestic investors.

Going even further, Tiger has just sold the better part of its existing stake in the platform – which exceeded 50% – to the new Russian shareholders. The deal was revealed earlier this week by Russian business daily Kommersant.

Tiger’s decision was motivated by the international sanctions, according to Finprombank chairman Anatoly Goncharov.

One of those who bought the stake from Tiger, Goncharov sees in the current situation “a chance” for Russian investors, since the local e-commerce market is still growing strongly.

These moves come in the context of a burst of anti-Russianism in some Silicon Valley circles. “The Russian brand, after already being tainted with the gulag and the rest of its toxic legacy, is now synonymous with the mass murder of innocent civilians. There is nothing of value left to recover,” wrote Russian-born physicist Max Skibinsky this past summer on his blog in the days that followed “the mass murder of passengers and crew of Malaysia Airlines Flight 17 using Russia’s weapons.”

Max Sibinsky

In less than three days, the post received over 100,000 views. Its author claimed it was translated into Russian, Ukrainian, Estonian and Romanian, as well as covered by Bloomberg and other major media.

Will Kremlin money compensate VC disinvestment?  

In spite of its impressive growth over the past years, the Russian high-tech scene has never attracted Western investors en masse – and the current negative political context has done nothing to encourage more of them to come, or to retain those who were already there.

Moreover, several Russian funds that originally targeted the domestic market have reoriented themselves, fully or partly, toward global operations. Even before the international tensions of this year, these funds tended to believe that there were more “good” startups abroad than in Russia. In their eyes, the domestic market is insufficient to scale projects at the required size while the Russia label does not help Russian companies deploy their ambitions globally.

Russian startups, however, still have a range of financing possibilities. In the field of e-commerce, the recent deals with and – which received $150 million this past spring from Russian companies AFK Sistema and MTS – prove that a lot of money is available from domestic players.

Ocean Ventures

Launched in 2013, Ocean Ventures, the investment branch of payment operator Ocean Bank, is illustrative of a new wave of startup investment from Russian corporations.

Another example is hotel booking platform, which raised $12 million in June from a Russian investor – in contrast with previous rounds that had involved mostly Western investors.

In financial technologies, a new generation of investors is emerging, as witnessed by the creation of the Life.SREDA specialized venture fund in 2012 and the launch of dedicated startup investment programs by leading payment operators QIWI and Ocean Bank.

The largest support, however, is coming from the government. Last year saw the creation of a $200-million seed stage investment fund for Internet startups, named FRII (the Russian acronym for “Internet Initiatives Development Fund”). The amount is so considerable that the state-backed fund has enlarged its focus to new segments and to startups at later stages.

Topics: Analysis & opinion, Finance, International, Venture/Private equity
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