With an estimated 66 million people online, Russia has the largest online market in Europe, and it is expected to grow by around 15 percent to 20 percent year on year, up until 2018. This rapid growth has created a burgeoning tech scene and a Russian venture market full of highly experienced investors and tech experts. The Russian venture capital market may operate a little differently from those of the U.S. and Western Europe, but this should not dissuade anyone from setting their sights on this vast market.
Russia is currently undergoing a revolution in investment similar to the changes the U.S. underwent half a century ago. In the U.S., the first VC funds were established after the Second World War. By the 1970s, some of these funds had evolved to target early-stage company development.
Only in recent years has a similar system developed in Russia, and as a result, Russian venture capital funds have not yet developed themselves into worldwide brands — there are currently no Russian equivalents to Sequoia or Summit Partners. At the initial stage of Russia’s VC market development, simply having the money and the expertise has been enough.
Good projects to invest in are at a premium in Russia. As a result, VCs are now actively selling themselves to entrepreneurs. While this is obviously a great boon to entrepreneurs, it does throw up the tough challenge of identifying the right fund.
When assessing a VC, it is advisable to look past the simple goal of gaining financial investment. For example, my company, iTech Capital, offers portfolio companies financial and corporate governance expertise and professional support in M&A, business development and marketing. In the Russian market, this type of additional support from investors cannot always be expected.
The perception of risk is something that also differs in Russia compared to the rest of the world. The Russian startup sector contains a blend of European and Asian approaches, which both tend to be more risk-averse than the traditional U.S. approach.
In Russia, the government regularly invests through grants, investment rounds and acquisitions — this is probably the main difference that exists in Russia for entrepreneurs. The principle behind this active role is that the state can help to foster public-private partnerships, which will then in turn support domestic innovation. These partnerships are ideal for helping high-risk projects receive serious capital at an early stage, especially as private investors are more willing to commit funds when the state acts as a guarantor.
In some cases, not being a Russian national can play to your advantage, with the state often preferring to grant funds to teams containing one or two foreign nationals, due to the increased experience brought by international teams. With that in mind, entrepreneurs who actively seek to make contacts in the government could potentially open up a new avenue of investment.
In terms of the complexity of deal-making and buoyancy of the Russian VC market, there is little to differentiate it from the West. One only has to look at some of the recent successful exits of several Russian VC firms — for example, Runa Capital’s exit from enterprise cloud platform ThinkGrid in 2012. The sale of ThinkGrid to U.K.-based Colt Technology Services earned Runa Capital 4.5 times the amount it initially invested in the startup.
The successes of other high profile VCs, such as Yuri Milner, who manages a portfolio worth a reported $3 billion, highlight what the Russian venture community is capable of. The most recent success story is the IPO of Qiwi PLC on the Nasdaq in May 2013. Qiwi PLC is the largest Russian operator of electronic payment systems, and was founded by a group of iTech Capital LPs. Since the date of the IPO, the company has tripled in size.
With a booming tech sector and an increasingly experienced ecosystem of early-stage investors, Russia provides a fertile breeding ground for tech startups. Homegrown tech giants such as Yandex and Mail.ru prove that Russia is capable of fostering companies able to compete with the Western market. For example, in Russia, Yandex holds a 50 percent share of the search engine market, whereas Google commands only 37 percent.
With its unique business model, the Pult Group (disclosure: I am managing director), which has united 11 online marketing platforms and products, offers an example of a new crop of successful Russian businesses already challenging the status quo. Unlike the saturated markets of the U.S. and Western Europe, growth in Russian tech has yet to reach its peak, and as a result, the door is fully open for those with the know-how.
Nick Davidov is an investment director at iTech Capital and managing director of the Pult Group, one of Russia’s leading automated search engine marketing and SEO companies. He also sits on the board for iConText, the leading Russian online marketing agency and Garpun, an online ad management platform. Reach him @Neverwhine.
This article originally appeared on Recode.net.