Daring Financial Backers Remain Unphased by Potential Dangers
Venture capital (VC) investments in Russia have been on a wild ride since 2015, with a notable peak and subsequent drop in 2021 and 2022 respectively. The only silver lining was 2024, when investments slightly picked up due to an increase in IT Mergers and Acquisitions (M&A). However, the overall VC deal activity remains subdued, indicating a complex landscape for investors.
Let's break down what's been happening. In 2024, VC investments amounted to $85 million, a stark decrease from the $2.5 billion invested in 2021. This downward trend can be attributed to a fewer attractive objects for VC investments in the country, according to Dan Medovnikov, Director of the Institute of Innovation Management at the Higher School of Economics. Factors such as startups changing jurisdictions after the start of the SVO (a significant geopolitical event), the suspension of global VC funds, and a shift in focus towards local realities have contributed to this decrease.
However, one silver lining is the increase in M&A deals involving software development companies, particularly in the IT sector. The number of such deals tripled in 2024 compared to 2022, reaching 23. The number of tech M&A deals in total increased by a third, reaching 86. This trend is likely a response to the peak in mergers and acquisitions observed across various sectors, as noted in the Dsight study.
Notably, despite the growth in the IT segment, the total number of all VC deals in 2024 decreased by almost 8%, to 176. This could be due to venture capitalists looking to invest in late-stage companies with a short growth cycle, as they seek quick returns on their investments. This shift means that many startups do not fit into the risk profile of venture capital funds as they do not have a high probability of growing within the timeframe that the fund invests in them.
One possible solution to boost VC investments in startups could be through Initial Public Offerings (IPOs). According to Anton Ustimenko, head of the IPO preparation services group at B1 Group, the ongoing technological transformation of Russian companies has driven growth in both M&A deals and IPOs in 2024. However, a high key interest rate continues to curb both markets, exerting pressure on company valuations. In 2022-2024, the IPO threshold decreased, making IPOs still an attractive capital-raising strategy for some companies, particularly in the tech sector.
In 2025, the situation could dramatically change if the central bank lowers its key rate. This could lead to an influx of funds from various sources into the stock market, potentially revitalizing the VC market and allowing venture investors to sell their company’s shares at a profit during an IPO. This would, in turn, enable them to refocus on investments at the seed and early stages, restoring a healthy venture cycle and transitioning to a new stage of investment growth.
Stay tuned for more updates on the Russian VC market landscape.
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Tags: #Investments, #Investors, #VentureMarket, #Research
- In 2024, the average amount of venture capital investments decreased significantly from the previous year, with only $85 million being raised, as stated by Dan Medovnikov.
- Despite the overall decrease in venture capital deal activity, there was an increase in Mergers and Acquisitions (M&A) involving software development companies in the IT sector in 2024, with the number of such deals tripling compared to 2022.
- Anton Ustimenko suggests that Initial Public Offerings (IPOs) could be a potential solution to boost venture capital investments in startups, as the ongoing technological transformation of Russian companies drives growth in both M&A deals and IPOs.
- Medovnikov, Ustimenko, and the Dsight study all agree that venture capitalists are increasingly focusing on investing in late-stage companies with a short growth cycle, which means many startups do not fit into the risk profile of venture capital funds.
