Corporate venture profits in Russia

Several Russian companies have filed complaints with the European General Court, in an attempt to overturn the sanctions imposed by the European Union on Russia – these have hit the Russian business landscape hard.

And the private equity and venture industries have not escaped the effects of political tensions between Russia and the west. Blackstone shelved its plans for an increased allocation to Russia earlier this year, and industry veterans have vanished from the Russian Direct Investment Fund advisory board.

Political uncertainty has spooked LPs too, particularly those public funding bodies with political responsibilities – a key component of Russia's LP base, as the private equity and venture markets mature. Earlier this year, the European Bank for Reconstruction and Development announced its decision to put future Russian investments on hold amid political instability.

But while the news that one of the most significant investors in traditional closed-ended, LP fund structures may have dealt local fund managers a blow, for those investment firms fortunate enough to commit capital directly from a corporate balance sheet, the situation could not be more different.

"In terms of our business, [the political situation] doesn't change anything because we're looking for young, innovative start-ups," said Marcin Hejka, vice president and managing director at Intel Capital, during the Intel Capital Global Summit held recently in California. "Generally, no political event stops technology developing," he added.

No exit
The VC completed its first investment in Russia in 2003, committing capital to internet and search company Yandex – then a three-year-old start-up. Fast-forward to 2011, the business listed on Nasdaq valued at $8.03bn. Yandex was the second huge exit in Russia, following hot on the heels of Mail.ru, which listed in London in 2010 and raised $912m. "There was absolutely no evidence at that time that investing in Russia and central and eastern Europe could generate good results; there were zero exits. And the situation only really changed in 2010," said Hejka.

For those able to navigate the political intricacies of the country, rewards are certainly there for the taking. As the market develops, start-ups are increasingly focused on building a global business, according to Hejka: "Russia is quite successful in following the Israeli model in terms of bridging the ecosystem to US markets."

But on a local level too, growth opportunities are strong. "The Russian market is really huge and it expands outside of Russia to the Russian-speaking markets, which is about twice the size of the Russian population," said Kirill Cehoval, investment director for Russia at Intel Capital. "Both groups are attractive potential investments for us because you can scale in Russia, and then scale to the Russian speaking markets and then globally. These elements make the market unparalleled in terms of investment opportunities."

Hejka added: "Russia is a fantastic place for technology investment because it combines growth rates typical of emerging markets with intellectual potential typical in mature markets."

Dealflow downcast
But though opportunities may abound, investments have plummeted. unquote" data shows a 37% drop in the number of early-stage and expansion deals in Russia this year, compared to the previous year. Statistics suggest political uncertainty has spooked traditional closed-ended fund investors significantly.

Conversely corporate venture activity in the country is on the rise, according to a recent study conducted by Innovative R&D Club and Russia Venture Company, which showed that the total value of corporate venture in the country doubled from 2012 to 2013 to reach more than $1bn.

With such funds immune to the political correctness of public funding bodies and traditional LPs, the role of corporate venture is expected to increase in a market currently being punished amid political upheaval.

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