Russia’s angel investing market grows but problems with start-ups and law persist – IIDF
Russia’s Internet Initiatives Development Fund estimates that in 2012, early-stage angel investing in Internet start-ups grew 20% y-o-y to $370m, but a lack of market transparency and a low quality of projects remained a problem
Nov 06, 2013
Innovation news portal Venture Business News reporting the IIDF findings emphasized that almost half of all transactions in 2012 (42%) were unpublished deals with undisclosed terms. The transactions reportedly varied in value from $20,000 to $300,000, with investors getting a 20-to-40% stake in their investees.
Typically, as the start-ups go ahead and raise next-round investments, the business angels’ initial stakes are diluted to 10-20%. Unlike VC funds that have strict procedures, the business angels prefer personal contacts with developers.
According to another estimate by the National Association of Business Angels (NABA), there are approximately 2,500-3,000 active angel investors in Russia. One won’t be able to assess the efficacy of their investments until one or two years from now when the first wave of investor exits from their projects is expected, the IIDF study said. So far, most of the angel-invested start-ups have been in the red, or have managed to break even and are now plowing their small profits back into business development.
According to IIDF, this generally positive dynamics of private investing in Interne projects stems from the lowering of the volumes of investments angels have to put up. However, there still are lots of factors that hinder the development of the industry, the Fund underscored. These include a low quality of start-ups seeking investments, with their founders airing groundless ambitions and expecting high valuations while presenting poorly elaborated business models. Other impediments include mistrust between players in the venture industry and a certain competition between angel and government investing, said business angel investors polled by IIDF.
Russia’s legal problems add to the downside, the Fund pointed out. Parties in transactions still have to do an immense amount of paperwork when dealing with limited liabilities companies (the legal form of ownership that most start-ups choose when registering). The national option regulation is also underdeveloped, thwarting team motivation mechanisms.
Typically, as the start-ups go ahead and raise next-round investments, the business angels’ initial stakes are diluted to 10-20%. Unlike VC funds that have strict procedures, the business angels prefer personal contacts with developers.
According to another estimate by the National Association of Business Angels (NABA), there are approximately 2,500-3,000 active angel investors in Russia. One won’t be able to assess the efficacy of their investments until one or two years from now when the first wave of investor exits from their projects is expected, the IIDF study said. So far, most of the angel-invested start-ups have been in the red, or have managed to break even and are now plowing their small profits back into business development.
According to IIDF, this generally positive dynamics of private investing in Interne projects stems from the lowering of the volumes of investments angels have to put up. However, there still are lots of factors that hinder the development of the industry, the Fund underscored. These include a low quality of start-ups seeking investments, with their founders airing groundless ambitions and expecting high valuations while presenting poorly elaborated business models. Other impediments include mistrust between players in the venture industry and a certain competition between angel and government investing, said business angel investors polled by IIDF.
Russia’s legal problems add to the downside, the Fund pointed out. Parties in transactions still have to do an immense amount of paperwork when dealing with limited liabilities companies (the legal form of ownership that most start-ups choose when registering). The national option regulation is also underdeveloped, thwarting team motivation mechanisms.