Russia’s Venture-Capital Funds Look Abroad

21.06.2016 News

WallStreetJournal An economic crisis and Western sanctions are prompting funds to seek better opportunities overseas.

Moscow—Russian venture-capital funds are shifting their gaze to outside the country, contributing to an exodus of capital amid an economic crisis and Western sanctions.

A robust startup scene emerged in Russia after the collapse of the Soviet Union, and venture-capital funds followed closely behind. New companies sprung from the scientific and academic communities Russia nourished during the Cold War, including Doroga TV, a vehicle-tracking GPS service, and Kuznech, an app that allows customers to shop by browsing online images. But funding is now looking for better opportunities outside Russia.

Many funds are opening offices abroad or focusing on foreign companies. Moscow-based venture-capital fund Maxfield Capital, for instance, opened offices in Tel Aviv, London and New York earlier this year.

Some VC firms are choosing to leave Russia altogether, saying the country doesn’t allow entrepreneurship to thrive.
“It is just morally hard to be in a depressing atmosphere, with a very aggressive state…pushing the society to reject anybody who thinks differently,” said Vladislav Solodkiy, managing partner at Life.Sreda VC, a Russian fund that moved to Singapore from Moscow about a year ago.

Political and currency risks are contributing to the exodus of venture capital. The ruble has lost almost 50% of its value against the dollar since Russia’s annexation of Crimea in 2014 and the imposition of Western sanctions. While the currency has recovered somewhat, it remains vulnerable to swings in oil prices.

The Bank of Russia says $56.9 billion in capital left the country in 2015, including some from funds that invest in new technology companies.

While Russia’s central bank projects the country will suffer relatively low capital flight of $30 billion to $40 billion this year, the figures don’t reflect the full picture. The drop mainly reflects Russia’s inability to borrow on global capital markets due to sanctions. But money is still flowing abroad, despite the government’s attempts to attract investment.

“I am not at all surprised by this tendency,” said Sergey Bulaev, founder of Buy Me a Pie, an Ulyanovsk-based startup that has built an app that creates shopping lists. “It is only natural, because country risks have grown.”
Russian venture capital-funds that are investing abroad have about $1 billion to $2 billion to play with, according to some estimates.

Some VC firms aren’t happy with the crop of startups in the country.

“Founders often take their startups as part-time activity, not feeling responsible for investors’ money,” said Ivan Savelyev, chief executive at Moscow-based Emery Capital. “The quality of ideas and teams are also not the best especially compared to Israel and North Europe.”

Russian-based investments accounted for about 30% of Emery Capital’s portfolio “historically.” Now that share is nearly zero, Mr. Savelyev added. The fund focuses on Israel.

“The capital left for growth, liquidity, bigger rounds, bigger exits and higher dynamic ecosystems,” said Andrew Gershfeld, partner at Flint Capital with five offices globally, including Moscow, Tel Aviv and Boston.
Mr. Gershfeld said he remains optimistic about the Russian venture capital and startup ecosystem if startups and funds target global markets from the outset.

One recognized Russian startup is 2GIS, a company born in Siberia that provides free business listings and city maps in multiple countries. Ostrovok, a hotel-booking service founded by Russian entrepreneurs who studied at Stanford and Oxford universities, has raised millions of dollars in investments. Oktogo, a St. Petersburg-based firm that specializes in booking accommodations for Russians, has also raised millions.

Telegram, a popular messaging app founded by the creator of Russia’s biggest social network, VK, also known as VKontakte, has gained international prominence over its take on the privacy of its users.

“Russia has enough talent, enough culture in IT building to manage this,” Mr. Gershfeld said.

Source: Wall Street Journal