Tech investment volumes in Eastern Europe and Central Asia were modest last year, if compared with the Chinese, US or Western European markets. However, 2018 was marked by giant corporate deals involving international players while a series of smaller venture transactions illustrated the diversity of the regional startup scene.
In this review, which encompasses Russia, Ukraine, Belarus, Kazakhstan and other Central Asian republics – all former parts of the Soviet Union where Russian language still dominates business life – Ukraine Digital News chief editor Adrien Henni offers a glimpse into local market activity and its international implications.
Major corporate deals in Russia
Last year was marked by several important corporate moves involving foreign players. In February Yandex, the NASDAQ-listed Russian search giant, and Uber completed the merger of their taxi-hailing activities in the region. The combined business was valued at some $3.8 billion on a post money basis, with a 53.9% stake for Yandex and 36.9% for Uber.
The deal appeared as Uber’s second retreat from a major market globally, as the US giant needed to improve revenue and narrow losses. (In a comparable move, in 2016, Uber left China in exchange for a minority stake in rival Didi Chuxing, after losing more than $2 billion battling its competitor.)
Far from retreating, French carpooling giant BlaBlaCar consolidated its leadership on the Russian market. In August 2018, it acquired BeepCar, a competing service launched by LSE-listed Mail.Ru Group the year before. Among BlaBlaCar’s investors is a major Russian PE firm named Baring Vostok.
Mail.Ru Group, meanwhile, invested $26 million in Citymobil, aiming to compete with its archrival Yandex in the taxi-hailing service market.
Leading the social network, digital communications and gaming markets in the region, Mail.Ru Group intends to become a major e-commerce player, too. In September 2018, the group announced an alliance with Alibaba Group to create “one-stop platform for social, communications, gaming and shopping.”
The move illustrated the growing appeal of Russian e-commerce in investors’ eyes. According to a Morgan Stanley research, this market could exceed $50 billion by 2023 – up from around $18 billion in 2017 (physical goods only).
Also in the running, Yandex has teamed up with Sberbank to create a huge e-commerce platform, based on a $500 million investment from this leading state-owned financial institution. As a result, two marketplaces were launched in late 2018, in addition to the existing marketplace Yandex.Market.
Sberbank also launched a joint-venture with Rambler & Co and UCS to a create multifunction food service platform.
On its side Ozon, a major player also inspired by the Amazon model, announced plans to raise several hundreds of million USD in equity in the first half of 2019. The capital injection may come either from Ozon’s existing shareholders (among which are Baring Vostok, a major Russian PE firm, the conglomerate Sistema, and telco MTS), or new investors, including foreign ones.
Startup investment in Russia
In Russia, just a few domestic VC deals exceeded $10 million. Among the main ones were:
- A $17 million capital injection into AI-powered service platform YouDo;
- A $10 million investment in InDriver, a Russian ride-hailing startup which started gaining traction on the US market;
- An investment from Baring Vostok in e-learning platform Skyeng at a $100 million valuation.
A number of smaller deals involved domestic private or public funds. The most prolific investor, IIDF (FRII), backed more than 360 startups since fund launch in 2013.
Several deals involved large Russian corporations. For example mobile operator MTS acquired two event ticketing companies and an eSports club – in addition to its participation in YouDo’s round of funding – in a strategy to develop products outside the traditional telecom sector.
Foreign VCs – which showed interest in the Russian market before being repelled by international tensions in 2014-15 – are now practically absent. Among the main deals of last year were:
- A Japanese fund’s $15 million injection in SimpleFinance;
- An investment of $7.5 million in a Russian online freight service, involving the Abu Dhabi sovereign fund;
- A $2 million round for e-logistics startup Dostavista, involving New York-based FJ Labs;
- A $4 million round for Busfor, involving VNV, a Swedish fund whose previous “romance” with a Russian startup ended up with a multi-billion dollar exit;
- An investment of up to $1.5 million brought by Austrian fund Speedinvest in AI startup Conundrum.
Some foreign corporations were also in the game, including Japan’s Mitsubishi, South Korea’s Cosmo & Company, and several French, Austrian and US companies chasing Russian startups. Meanwhile, French accelerator NUMA injected small amounts in half a dozen startups, while 500Startups helped Sberbank launch an internationally-oriented accelerator.
Total foreign investment in Russian startups has been estimated at slightly more than $200 million over the year (source: RVC, Inc. Russia). This number includes major deals involving Russian-founded startups established abroad (see below).
The Russian government remained a key backer of the local startup ecosystem, with support from such institutions as Skolkovo, the international tech hub at last close to completion on the outskirts of Moscow, and RVC, the state fund of funds dedicated to innovation.
Startup investment in Ukraine
The renewed tensions with Russia did not affect much local startup activity. eSports startup DreamTeam involved Mangrove in its ICO, while local e-commerce leader Rozetka bought from Naspers a 56% stake in EVO Group.
Most other deals involved small amounts from local funds or international crowdfunding campaigns, while larger amounts went to Ukrainian-founded startups established abroad (see below).
Meanwhile, IT outsourcing and software development companies from Ukraine remained attractive assets:
- Switzerland’s Partners Group purchased stock worth $1 billion in Ukraine’s GlobalLogic;
- Kiev-based AVentures and Horizon Capital backed Ukrainian IT outsourcing companies CoreValue and Intellias, respectively;
- Blam!, a game studio from Odessa, Ukraine, was acquired by a Lithuanian game publisher;
- US company DXC Technology intends to acquire Luxoft, a software development provider with Russian and Ukrainian roots, in a $2 billion deal.
Given the political context, the Ukrainian government’s effort to support tech innovation appeared as very modest, with the announcement of a $1.3 million state-backed startup fund.
Startup investment in Belarus
In this country, startup investment activity was also modest in 2018, but often involved foreign investors.
Belarusian fund VP Capital and Russian family office Larnabel Ventures made investments in two Belarusian startups: $7 million went to Banuba, which develops AR technologies for mobile apps, and $2 million were injected into Facemetrics, which is working on an AI-powered parental app.
High-tech face filter maker Banuba, a startup with Belarusian roots, has raised $12 million since inception from local and foreign investors.
Period tracker app Flo completed a Series A round involving Mangrove Capital Partners (Luxembourg), Flint Capital (Russia) and Haxus (Belarus).
Meanwhile Wargaming, the famous Belarusian game publisher, participated in a $16 million investment operation to make the tank battles of the World of Tanks available in virtual reality format.
The Belarusian authorities did much to support the emergence of the startup ecosystem. A December 2017 law and a March 2018 decree created an unprecedented regulatory environment for the IT industry and related investment activity. No fewer than 264 IT companies were registered at Hi-Tech Park Belarus in the course of the year.
Startup investment in Central Asia
In Kazakhstan, a Central Asian state known essentially for its natural resources, startup activity is becoming noticeable. In 2018 Clockster, which offers “a new way to clock-in and clock-out employees,” and Wunder, an online coding school, completed modest rounds of funding involving Russian and Singaporean investors, respectively, while 4G hotspot maker Nommi successfully completed a crowdfunding campaign.
On its side, Chocolife, an e-commerce startup launched in the early 2010s with support from a Dutch business angel, was in the process of preparing an IPO.
A five-year state program adopted in December 2017 aims to develop corporate innovation, e-government services, education and transportation technologies through 120 projects. In November 2018, in a bid to boost tech entrepreneurship and attract venture financing, the government opened Astana Hub and appointed a US tech entrepreneur, Joseph Ziegler, to head it.
Innovation is also burgeoning in other countries of Central Asia. In August 2018, young girls from Uzbekistan reached the final of Technovation, an international tech contest intended for female teens in which this country participated for the second time. In November, the reformer-president of Uzbekistan Shavkat Mirziyoyev signed a decree to liberalize investment activity and attract international investors, in particular in the field of innovation.
Meanwhile Dushanbe, the capital of Tajikistan, saw the launch of a startup hub dubbed ‘StartupStan.’ Its instigators aim to develop synergies among Central Asian players involved in startup development.
In August 2018 ‘Generation Z,’ a team of young girls from Uzbekistan, presented their app ELIST, which promotes gender equality, at the final of an international contest in California.
Eastern European founders go global
The most impressive deals of the year involved startups with roots in the region but having established themselves under a foreign jurisdiction (typically the USA or Western Europe).
Exemplifying this trend was GitLab, an open source software startup with Ukrainian origins, which raised $120 million in two consecutive rounds in California. Another Ukrainian-founded startup, People.ai, landed $30 million from US investors “to deliver on the true meaning of predictive enterprise.”
Software publisher RealtimeBoard and web server company Ngnix – both US-headquartered companies founded by Russian entrepreneurs – raised $25 million and $43 million, respectively, in the United States.
Waves, a Russian-founded Blockchain solutions developer incorporated in Switzerland, secured $120 million to develop its project Vostok.
Born in Russia but also headquartered in Switzerland, WayRay – a developer of an advanced car driving AR solution – completed a $80 million Series C roundled by Porsche and China Merchants Capital.
A few exits involved companies with Eastern European founders operating abroad:
- German Adjust bought Acquired.io;
- US Piano Software acquired Newzmate;
- Canadian Corel acquired Parallels;
- Snapchat wooed Teleport’s best developers.
In September 2018 WayRay, a Russian-born startup now headquartered in Switzerland, completed a $80 million round with participation from Porsche.
From Russia with venture money
Last year saw the launch of sizable international tech investment funds or programs backed by Russian players. Among the main initiatives were:
- Fort Ross Ventures announced a $200 million fund for US startups interested in the Russian market;
- Leonid Boguslavsky’s RTP Global (previously known as Ru-Net) launched a $200 million fund focusing mainly on Indian startups;
- Russian asset management firm Leader and China’s Shenzhen Capital launched a $100 million tech fund for Russian companies to develop on the Chinese market;
- Grishin Robotics announced a $100 million investment program in partnership with US game developer Epic Games
- Russian security solution developer Leta launched a new $50 million corporate venture fund to help software startup “eat up the world;”
- Airline company S7 announced plans to launch an international $50 million venture fund
- Russian state-owned fund of funds RVC announced plans to create 10 new funds to stimulate VC activity in the country, including a $100 million vehicle dedicated to education technologies.
Over the past ten years, tech funds with Russian backers supported hundreds of tech companies across the globe – even more in the USA and Asia than in Russia. Thus Airbnb, Alibaba, Dropbox, Facebook, Hyperloop One, Rocket Internet, Shazam, Spotify and Uber, to name just a few, were fueled by “Russian money.”
This review was prepared with participation from Mr. Alim Hamitov, Director at MOST Business Incubator (Almaty, Kazakhstan), Mr. Nikolai Markovnik,General Manager at VP Capital (Minsk, Belarus and London), and Mr. Ihor Ovcharenko of Astana Hub (Astana, Kazakhstan).
Last year, East-West Digital News published a research study about startup investment and innovation encompassing 24 countries of Central and Eastern Europe. You may download this document at no charge from this link.