19 October 2021
Article

Peak Time: Dialogue on the Prospects for the Venture Capital Market

The COVID-19 pandemic caused an unprecedented surge in the global venture capital market. 2020 saw records broken, while 2021 promises to be "hotter" still. On why now is the best time for startups and investors to find each another was a topic of conversation at a session celebrating 15 years of the SKOLKOVO Business School. Taking part were experienced market representatives, and also teachers and alumni of the School's programmes.
Peak Time: Dialogue on the Prospects for the Venture Capital Market
Content source: Source: SKOLKOVO Business School

The Rise After the Fall

After the coronavirus crisis and the failures of 1H 2020 in Q3 and Q4, figures for the global venture capital market reached their highest point in history. Vitaly Polekhin, President of INVESTORO International Investor Organisation and leading lecturer of Investment Practices at SKOLKOVO Startup Academy presented the statistics.

Where the previous record for the volume of transactions (2018) was USD 142.7 billion, in 2020 the figure reached 156.2 billion. Investors received USD 290.1 billion in value through exits and attracted USD 73.6 billion to the subsequent funds. In the last three months of 2020, there emerged 28 unicorns (companies valued at USD 1 billion+): a record for the quarter.  

"A huge number of exits occurred in 2020, both through IPOs and through acquisitions. Record amounts have been raised by venture funds. This is interesting because this will be invested in startups over the next three to four years," remarked Polekhin.

In Russia, the situation is slightly different. Although the number of mergers and acquisitions grew, the volume of venture capital investments saw a slight drop.

"The trend is a similar one: failure too in Q1 and Q2, except we could not make up the difference over Q3 and Q4. The statistics for 1H 2021 have not yet come out, but I am telling you that there is growth there," he emphasised.

Polekhin pointed out the trend where the sharp bends of crisis years turn into high profitability.

"The last crisis was the Great Recession of 2007-2009. Businesses that are now either unicorns or major public companies, those things we all use: Airbnb, Pinterest, Slack, Square, WhatsApp – they were all set up and received their first investments at precisely such a time. Therefore, everyone is expecting something like that now," he said.

Executive Producer of Venture Capital Programmes at SKOLKOVO Business School Daria Lyulkovich described what is currently happening as "a point of unprecedented peak." This is reflected in the number and size of investment attraction rounds, the number of unicorns, and the volume of investments in startups.

"There is a great deal of capital — so much so that even non-traditional investors in this market such as family offices and endowment funds are beginning to invest in startups. There is a vast amount of money, but the number of entrepreneurs with the talent to use capital as a resource and multiply the investor's role is small. Which is why the number of these rounds and the size of these amounts are so unprecedented," she explained.

Bridges

Lyulkovich pointed out that there are about 5.5 million micro-entrepreneurs in Russia, and about a quarter of them at some point want to learn a different type of business.

"When we talk about sleeping unicorns, we see that the potential is actually there, because an entrepreneur who is already in that position, who has already begun to take all the risks and then just wants to learn how to take that step from the traditional economy to the venture capital one: that is where there is a lot of untapped potential to be developed," she explained.

The programme producer points out that the tools for such entrepreneurs are there at the Startup Academy SKOLKOVO.

"However, when we have talented entrepreneurs exiting, it means that we don’t have enough business angels with the know how to invest in venture capital. And it is important for us to set up a programme so that there is a bridge to the first inspiring venture stories, where there is an entrepreneur capable of launching a business under capitalisation, and a business angel capable of offering support at the early stages and who understands what he is making money from," she stressed.

One Startup Academy SKOLKOVO alumnus who switched from traditional business to that of venture capital, Roman Vlasov, founded Casting Place, an online platform for actors, directors, producers, and casting directors. "I'm a film agent. 20 years ago, we set up an acting agency. In that time, our actors have featured in over 1,500 projects, various TV series, and we wanted to create a new kind of business," Roman related.

The platform itself functions both as a marketplace for talent and as a project accelerator. In his words, where before it took the casting director months to choose people for a project, now he can do it in 30-40 minutes. Actors can send their own screen-test from the comfort of their homes and the director, producer, and customer can all view it at the same time.

Casting Place plans to enter Round A next year.

Joint shareholder in Quantum Group, co-founder of Found Box and investor Maria Gorkova related how the Venture Investments and Startups course offered by SKOLKOVO Business School helped her to structure her knowledge.

"I put together my startup about 15 years ago, and it is a big company now already. There was the adrenaline and that sense of wonder that you created with your own hands, but being the COO in a business, this buzz is missing from your routine. I no doubt missed that," she said.

She also felt the need to use her experience. In her words, where there is a clear understanding of and feel for how a business operates, there is also the willingness to share this knowledge.

"We started with the IT business, development, software for the telecoms market. We work with mobile operators, and when the niche was saturated, we wanted to branch out into related areas. We went into joint ventures and having gained experience of integrating with other companies there, we realised that there are a lot of different ideas we can invest in and develop," said Gorkova.

A New Wave

On the subject of whether people are taught to become great entrepreneurs, or they are simply born, Russia Partners Investment Director Alexander Lupachev noted that there is no universal formula for success.

“Business education does not guarantee success, but it helps avoid many textbook errors. In principle, venture capital, funds, private equity is a profession," Lupachev said.

He believes that the next 10-15 years will witness an accelerated development of the asset management sphere, and that it is clear that there will be a demand for its professionalisation.

"There is the hope that this market demand can be satisfied by programmes that allow people to learn to avoid the simplest mistakes," the investor explained.

Co-Founder and Managing Partner of Xploration, and lecturer on the Startup Academy’s Venture Investments and Startups course Eugene Timko, when asked if Russia needs more business angels,  replied that non-professionals often lose money.

“There are a lot of beginners' mistakes that do not lead to profitability, although this can be avoided. Is that why you need more of them? Yes. Need a higher culture? Yes. It has improved a lot in 10 years, and I think this is still a question for the next 10 years. But the angels’ community is definitely becoming a super-powerful tool," he explained.

The investor noted that there is now a generation of powerful founders whose culture of survival in the market allows them to build effective businesses.

"There is a second wave of entrepreneurs, let's say, a modern one. And they are much stronger, better packaged, better sold in the West. In Russia we invest only in those companies that are able to get out of here," Timko said.

However, Lupachev cautioned against underestimating Russia. "Many international investors who come here say that potentially it is like five Canadas, and that you just need to do everything right," he said.

Lupachev complained that the weakness of the stock exchange and the dominance of several major strategists does not allow for making a lot of money quickly.

"For something to change here, first of all the stock markets must no doubt change and transform themselves from giants of the raw materials and traditional sector to those of technology. In China, this transformation has taken place over the past 10 years and can be a driver for the local venture capital and startup ecosystem," the investor concluded.

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