As the Russian economy remains affected by Western sanctions, with no lifting of them in sight, the local IT venture segment took a major hit in 2023, almost halving in comparison to the previous year.

Although in 2023 the number of deals struck in the Russian venture capital market was slightly up from the previous year, the total value of the deals continued to slump.

Foreign investors have largely stayed away from Russia since the invasion of Ukraine in February 2022 and subsequent Western sanctions slapped on the country, while local investors have also been hesitant about pumping their cash into risky projects against the backdrop of overall economic uncertainty.

Investors unenthused

According to data recently released by the Russian IT investment platform Dsight, a total of 158 venture capital deals involving IT start-up projects were concluded in 2023 for a total amount of $71mn. The number of deals was up by 15% from 2022, but their total value saw an 83% decline from the previous year.

The average investment check was a mere $460,000, with Dsight explaining this small size of investment primarily by the overall uncertainty among the market players.

The most popular area of investment was business software, which accounted for 22% of the total value of deals and 15% of their number, followed by educational technologies (edtech) with 10% and 5% respectively, and financial technology solutions (fintech) accounting for 10% of the value and 11% of the number of deals.

Nearly one-third (32%) of the deals were struck by public funds and corporations. Another 35% of deals in 2023 were made by private funds, and 27% by business angels, which slightly stepped up their activity compared to the previous year, Dsight said.

The main distinctive feature of 2023 in Russia's venture capital market was the "high caution" of venture capitalists in the process of choosing projects for investment, according to analysts quoted by the Russian business daily Kommersant.

Meanwhile, the previous low in the Russian venture capital market was hit in 2022 when the size of investment decreased by 83.5% year on year.

Few notable exceptions

Only projects "with an established business model" received relatively large investments. But about 75% of deals were made with seed and pre-seed stage start-ups, "which usually do not receive large investments".

The largest venture capital deal was the acquisition of the Zdorovye.ru service for $3.9mn by the private investment group Kamaflow.

The second largest deal of the year was the purchase by private investors of Looky, a social network for bloggers and businesses with built-in artificial intelligence for photo processing. The value of the deal was reported to be $3.7mn. The third largest deal was an investment in Hyper, a company that creates infrastructure for electric cars. The size of the investment amounted to $3.6mn.

In another major venture capital deal, a developer of a platform for accelerated drug development, Razvitie Biotechnologii (Biotech Development), collected an investment of $1.7mn from the Syndicate Venture Club and Alfa Investments.

In August 2023, Astra Group JSC (the parent company of Astra Linux OS developer Rusbitech-Astra LLC) acquired a 26% share in Resolut LLC, the creator of a platform for storing open-source code and collaborative development GitFlic, according to the SPARK-Interfax registry.

Astra Group specified that this is the first stage of the deal, and at the end of the second stage the company will control 51% in the startup, while the remaining shares will remain in Resolut's founders' control.

This deal is part of a project to create an analogue of foreign repositories GitLab, GitHub and BitBucket, according to Ilya Sivtsev, CEO of Astra Group. "The company is already working on the platform, which will be a complete environment with a combination of source code management tools, testing, automation, documentation, framework and development templates," he was quoted as saying by Kommersant.

He added that "with the support of a major vendor" Resolute plans to increase the pace of product development and "offer the market boxed solutions, including those with information security features."

Astra Group intends to bring to the market its own platform for joint development of open-source code, which is designed to replace GitHub and GitLab, two major open-source code repositories that cut ties with Russia in the wake of its invasion of Ukraine.

By doing that, Astra Group is joining the race to launch the Russian analogue of GitHub, in which Rostelecom, DIT Moscow and the Ministry of Digital Media are already participating. Experts point to the relevance of the project, but also point out" risks of investing in young platforms".

In November, companies related to the major mobile phone operator Vimpelcom acquired a share in Candy Flip Robots, a tech start-up founded by former Gazprom Media top exec Vladimir Margolin. The company has developed a solution in the field of analysing customer emotions from video images. Experts do not rule out that in the future Vimpelcom will supplement its own product line with this technology.

Under the deal, Vimpelcom's venture investment arm Hive acquired 13.3% in Candy Flip Robots. The parties did not disclose the value of the deal, but analysts valued the entire company at RUB220-270mn ($2.46-3mn). Therefore the 13.3% share could set Hive back a mere RUB30mn ($336,000).

However, this investment might pay off nicely in the longer term. The research company Market Research estimates that the global market for solutions in the field of emotion recognition (EDR) will grow to $44.4bn at a CAGR of 11.4% by 2030. Candy Flip Robots expects to gradually take leading positions in the Russian market of artificial intelligence and machine learning.

 

Grim prospects

In 2024, the situation in the Russian venture capital segment is unlikely to dramatically improve. Although investments in IT projects may slightly go up, as the sector benefits from the strengthening of the local IPO market, that is unlikely to compensate for the negative impact of political factors, such as the war in Ukraine and Western sanctions.

According to some observers, this year Russia's venture capital market could see some increase in the number of investments, especially at late stages, such as pre-IPO. "We also expect an increase in the number of new funds, including those in which private individuals participate," said a research note from the Voskhod investment fund.

A growing number of IPOs might also help attract more venture capital to Russian tech start-ups, as it could stimulate interest in investments in the technology sector in general, according to Voskhod. In 2023, eight IPOs took place in Russia, compared with just one in 2022, while in 2024, according to VTB's forecast, ten more IPOs may be done.

Still, the Ukrainian war and sanctions are expected to continue to be major factors limiting growth in the Russian IT start-up segment. Elena Ivanova, editor-in-chief of the Russian Venture magazine, was quoted by Kommersant as saying that the current decline of the Russian venture capital market "is largely due to political reasons, and there are no objective prerequisites that they will be resolved in the short term". Therefore, according to Ivanova, it is "not worth expecting a recovery of the domestic venture capital industry."

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