Global geopolitical and economic changes shook a few things up in the venture capital market in 2022: Russia is struggling with sanctions, markets are changing, capital flows are being redirected, and companies relocated. Partnerships with companies and the venture community in the CIS is becoming increasingly important.
How will the current geopolitical environment affect the venture capital industry? What is the main growth deterrent for this market? Where will it go from here and how fast? Experts discussed these and other issues at the panel session on New Realities of the Venture Market in Russia and OIC Countries hosted by the Innopolis Special Economic Zone as part of the International Economic Summit Russia – Islamic World: KazanSummit 2022.
Attending the session were
- Farrukh Kholmukhamedov, Director of AloqaVentures venture fund, IT project manager at Aloqabank, founder of Aloqa Ventures, Uzbekistan;
- Samir Nabiyev, organizer of the Global Technology Symposium (GTS), General Director of Book Club Uz, Uzbekistan;
- Danat Zhumin, Partner, Barakat Partners, Kazakhstan;
- Artyom Naumov, Managing Partner, Soprano Capital, Russia;
- Aigul Yunusova, private investor, Russia.
According to the experts, the key factors that determine further development of the venture capital industry include IT personnel and capital migration, the transition to a new phase of the ongoing economic cycle and declining economic activity, conventional investment instruments losing popularity and excessive liquidity in the market.
“We are now in the final stage of the current economic cycle, when it’s natural for all markets to go down: bonds have already crashed, yields in international share markets are contracting; commodity markets are still holding. The downward trends will probably affect the money that goes into the venture capital business. While 2020 and 2021 chalked records for raising capital for private projects around the world, 2022 and 2023, with a high degree of probability, will see a different trend. At the same time, a unique situation is developing in Russia: due to the tightened capital controls, sufficient liquidity has accumulated with nowhere to invest it, because traditional instruments have questionable prospects,” said private investor Aigul Yunusova.
Samir Nabiyev said many founders prefer seeking Western funding for new projects, due to problems with accessing venture investment in the CIS; this trend is a key problem of this market in the post-Soviet countries.
“If a founder has an idea, they should be able to go to a venture fund and tell them. That’s how it works in the US. We don’t have this easy approach yet. Here, things are complicated. We need to build a bridge between the startup and the investor and make crossing it easy,” Samir Nabiyev emphasized.
So what does our region need to ensure that free liquidity flows to the venture capital market, so that promising start-ups do not have to seek it in the West? The panel experts identified five necessary conditions for development of the venture capital market in the CIS.
1. Favorable legal regulation of investment and state support
The key rules of the game in the venture capital market are determined by the state.
“A legislative framework should be created for venture funds and start-ups to develop their projects without having problems with the law. To do this, it is important to work out mechanisms and opportunities for the correct structuring of transactions, for starting up businesses, transferring rights, and so on,” Danat Zhumin said.
Samir Nabiyev added that benefits, subsidies and other forms of support are important for both start-ups and venture funds.
2. Building awareness about tools and projects among new members of the venture community
Currently, the market has both professional players and private investors with sufficient capital but not enough venture investment experience. As a result, their knowledge of the venture market rules of the game and promising projects is minimal.
“How fast the venture market develops depends on whether the industry can communicate the meaning and potential of venture investment to potential investors. Building awareness is possible through media, educational platforms and other communication channels. It is important to approach this matter as a strategy. Communications must reach liquidity owners. And conditions are already emerging through the development of infrastructure. One successful example is Innopolis that hosts information events, including for private investors,” Aigul Yunusova noted.
3. Developing venture investment culture
Our venture capitalists should learn how to lose and be patient. These are the key competences for this market.
“When they enter a project they should be ready to lose. Venture projects are for the long haul: you invest and forget about the money. This is how Western investors think. Our investors prefer short-term investment with fast returns. We should develop the culture oriented at long-term investment,” Danat Zhumin commented.
Professional communities, which are particularly important at the regional level, could help develop this culture. These communities may include associations and clubs – as long as they bring together market members not on the ambition of multiplying their capital but based on socially significant values such as supporting the country, the region and local population in the current circumstances.
4. Developing the culture of entrepreneurship
These days, it is challenging for many entrepreneurs to convert their ideas into actual business projects. However, the quality of these projects is the key to success.
“There may be smart guys with worthy ideas but often, they are unable to convert these concepts into viable businesses,” Samir Nabiyev stressed.
Aigul Yunusova confirmed that ability to execute a project is a key competence for entrepreneurs.
“An idea may not take off or bring the desired number or figures but entrepreneurs must be able to execute it and tweak the plan along the way,” the expert noted.
Another important skill to develop is understanding the customer’s needs and pain, deal with them and monetize. These needs should not be superficial. It should be something significant that customers are willing to pay for.
5. Trust between full-fledged market participants
Trust is another point of growth for the industry.
“We don’t have a culture and platform of trust when founders can approach venture capitalists, pitch their ideas and get funding based on a mere concept. Founders are wary about sharing details of their ideas and prefer to keep specifics under wraps. The industry will get a serious boost when there is a platform of trust and founders can simply come to a venture investor or an investment fund with a pitch,” Samir Nabiyev noted.
Experts noted that our countries already have a good foundation for the progress of the venture industry. There are plenty of attractive ideas and projects. There are strong founders, venture investors and liquidity. With a systemic approach engaging the government, entrepreneurs and the venture community, it is possible to create a full-fledged platform and seriously bolster the venture industry.
ByMaria Maidanyuk, Acting Director of the Investment Department, Innopolis Special Economic Zone