Runet investment: deal volumes triple in just 12 months

Fast Lane Ventures releases Deal Book of Russian Internet 2010-2011

Fast Lane Ventures, the leading developer of internet companies and an expert in their launch and promotion, has released research on the financing of Russian internet companies and startups between 2010 – 2011. The research covers more than 270 transactions within the Russian internet sector and features full descriptions of these transactions, including dates, funding figures and details on their investors.  Complete data about grants, investments at seed stage and subsequent rounds were collected as well as the information on exits and stakes purchased by company share holders.  
Research Aims:
·  Develop the first analytical product in the area of start-up investment
·  Collate in one place, all of the possible data on investments in internet companies and startups
·  Track the growth pace of financial investments in Runet and filter the key areas of investments 
Research criteria:  
Russian companies whose business model is based on internet operations or whose majority of income is generated by internet transactions.
To be included in this research, the companies had to fit within the following criteria:
·  Operational activity performed in the Russian market
·  Origin of the company in Russia
·  Russian founders
· A representative office or development center operated in Russia  
Source of information:
Public sources and data received from investors and companies directly as well as Fast Lane Ventures’ expert reviews.
Research Results: Market Volume and Dynamics
There were 59 deals in the Russian internet market in 2010.
$225 million was invested in new and innovative internet companies and startups, representing 17.3% of the total investment volume in Runet.  This includes two of the largest transactions involving mature businesses: the IPO of Mail Group and the purchasing of VKontakte shares by Mail Group ($1.3 billion).
In 2011, the number of transactions increased almost by 3.6 times to 215.
Total investment volume into these internet companies and startups increased to $540 million, representing over 26.7% of the total market volume ($2.15 billion comprising Yandex IPO, purchasing of VKontakte shares by Mail Group, investments of ruNet, Rakuten and the Index in Ozon).
Despite the positive dynamics, the Russian internet market continues to be opaque. According to Fast Lane Ventures’ experts, the amount of non-public transactions in Runet is approximately equivalent to the number of public deals. “We are aware of at least 100-150 seed investments completed by businesses and non-public holdings, and 20-30 major investments (e.g. now.ru, wildberries.ru, bonsport.ru, autoscout24.ru, promenad.ru, bigbuzzy.ru, mebelrama.ru, holodilnik.ru, booking.ru, quto.ru, zvooq.ru, bookmate.ru, t & p.ru, etc.) whose financial information is completely closed,” says Andrey Kulikov, Senior Investment Analyst at Fast Lane Ventures.
With these transactions the total investment volume in Russian internet companies and startups could quantified at approximately $500 million in 2010 and $1 billion in 2011.
Main research trends:
The last two years showed a significant increase in investor interest in internet startups at the seed stage. The number of companies which received upfront investments in 2011 increased more than 4 times when compared with 2010 (22 transactions in 2010 versus 91 transactions in 2011). The total value of seed investment amounted to $8.7 million in 2010 and $14.1 million in 2011.
In the same period of time, an unprecedented growth of grant funding can also be observed. Within these two years, 61 startups have received more than $20 million in the form of grants (before 2010 this figure had tended towards zero).
Where the seed stage has seen this significant increase in investments, funding in the subsequent rounds and business exits did not follow this high investment trend and was seen to likely be the “bottleneck” in the Runet investment process. A study of 8 transactions, classified as exits, showed that half of them appeared as teams and technologies purchases, or change of shares ownership. Only two transactions can be labeled as true “success stories”: Groupon’s purchase of Darberry and Skype’s purchase of Qik.
According to Andrey Kulikov, “Today, because of the significant increase in the interest of investors and infrastructure development, young entrepreneurs have more opportunities to start businesses, but they shouldn’t rely on the same level of investment after the start.  The creation of internet companies in Russia costs only a bit less than those for example in the US, however, investors’ expectations for investment return in the Russian market, are not yet at the same level as if they were to invest in the U.S. or Europe. Therefore Russian internet builders who create new businesses on the smaller market will have to work hard to get funding for the later rounds.
Investment areas:
The main area of investment and the main driver of growth within the Russian internet space is electronic commerce.
The analysis of the largest transactions has reaffirmed the commitment of investors to proven business models and companies leading the way in their segments. At least half of the top 10 investments, including VKontakte, Darberry, Avito, Kupivip and others, are direct analogs of Western business models.
“This is a logical trend. Using proven business models minimizes risks of failure and can significantly speed up the process of developing and launching new companies. This speed is critical within the internet market. Ideas are flying in the air and the winner is the one who implements them first,”- said Marina Treshchova, CEO of Fast Lane Ventures.
The key issue for the next few years will be the pace of development of Russian venture infrastructure and if there are enough resources to continue investment both in startups and in more mature businesses financed at the research period.

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