The Russian startup system has shown record development over the past year. By the end of 2021, the volume of the Russian venture market amounted to almost $1.8 billion for 217 deals, and that’s unprecedented numbers. For comparison: in 2020, the volume of investments was 6 times less – $304.4 million. Venture market in Russia in the first half of 2022 grew by almost 30%, despite sanctions, restrictions and currency fluctuations.
Why is it important to strengthen support for startups? How accelerators and venture funds work? Which startups are being choosen? Can startups run out? Why do large companies need startups? Why are startups important for development of technological progress of the Russian economy?
The situation with startups in Russia
Despite the increase in investment in startups, layer of technological entrepreneurs practically does not grow in Russia. In Russia, there is one startup per 12-18 thousand people. In the USA and Israel the same rate is per 2 thousand people, in the UK it is per 3 thousand people, in China – per 8 thousand. There are opinions that by the end of 2022 the situation may not change for the better – sanctions and departure of foreign vendors will not pass without a trace, and the volume of investment in startups may decrease in 2-3 times.
The low demand for creating a technology business is explained by several reasons. Firstly, this is a high tax burden on entrepreneurs. Second reason is, a large number of monitoring and inspection bodies and, as consequence, endless checks. Lack of personnel in high-tech areas also played a significant role – demand for IT specialists, engineers, technologists, mechanics increased almost 2 times in the first six months of 2022.
In addition, of course, one cannot fail to note the fact that infrastructure for development of own business in major cities and regions is different. Now the state is taking measures to support small and medium-sized businesses in regions that will help restore balance in technology infrastructure. For example, in July, SME Corporation together with the Ministry of Economic Development and Trade identified the most popular measures of public support for the regions. Now they are provided under the general standard, and they can be obtained online.
The most important are not the technologies themselves and the level of their innovation, but people who will integrate and develop these technologies. People require support from the state, social incentives, grants, benefits and so on. The ideas themselves are not worth anything, their implementation and development requires investment.
From startup to business: where startup can obtain support and money
If we are talking about a startup from scratch, then it must go through 5 stages of formation:
- Problem/Solution Fit – confirmation of the existence of the problem and that the proposed solution conforms to it.
- Minimum Viable Product (MVP) – development of product with minimal functionality that lets solve the problem.
- Product/Market Fit – confirmation that the product has a sales market.
- Maturity – the stage of maturity, the transition from startup to business.
The average ripening time of a startup is 7-10 years. According to statistics, 20% of all startups fail by the end of the first year of launch, 50% by the end of the five-year period and 70% in ten-year period. Start-up begins to give profit to its founder on fifth stage of its formation, and maybe much later, but to achieve this moment you need resources – i.e. investment. In Russia 63% of technology startups are launched by own funds, but for further development of the project an increase in investments is required. There are several options of raising money for the project.
In March 2022, the number of ads from business angels who are ready to invest in the business of users, amounted to 1903. Compared to March of last year, this figure increased by 20%. Business angels are private investors who provide financial, expert and mentoring support of the startup in the early stages of its development, for example, at the stage of the idea prior to MVP development. Since the business angel is a private person, his financial opportunities are several times less than that of a venture fund. For example, if private investor can invest up to $100 thousand, then investment check of venture fund starts from $500 thousand and higher.
If we need more global investment and development, then at the stage of a developed MVP startups can turn to venture capital funds. They are ready to offer startups from $500 thousand to $5 million. For example, Admitad Invest, Target Global, RTP Global, TMT Investments etc. Funds purchase shares in startups, which may increase with the growth of the investment check. Average share acquired varies from 15% to 49%. Typically, up to 80% of startups do not reach breakeven point, but there are the other 20% whose profits will recoup all losses.
Another form of startup support is the business accelerator. This is a program of accelerating the development of startups from various funds, corporations and development institutions. Some of the most famous accelerators belong to Skolkovo, Internet Initiatives Development Fund, GenerationS, Moscow Innovation Cluster Foundation. They act as experts, along with entrepreneurs they discuss and compose a development plan, develop financial models, test hypotheses, etc. Accelerators also have joint programs with partners, such as large corporations that seek to increase market share with new logistics solutions. An accelerator is launched to find a startup that can create suitable product.
To participate in the programs, you need to fill out an application on the site, attach the product MVP or presentation materials if required. The most suitable startups will be invited to the next selection stage.
Typically, 10 to 30 startups reach final depending on program request.
Is there room for new start-ups?
It may seem that the market is overflowing with projects of large companies and it is impossible to break into your niche. But that’s not the case. Imposed sanctions restrictions had one of the strongest consequences on the Russian economy, including for the IT segment and reverse engineering. The largest foreign vendors – Microsoft, Cisco, Oracle, Adobe, IBM and others – announced the suspension of their activities. Also, many companies stopped importing in Russia spare parts, micro schemes and other elements. There was a clear need for alternative sales markets and partners. Therefore, those startups that take advantage of this growth point and have luck to occupy the vacated niche, through 10-15 years are likely to become leaders of the Russian market in one or another industry.
Top 5 industries that need new technologies and will be in high demand in near future:
1. IT sector (especially the development of domestic technologies and products);
2. DeepTech (artificial intelligence, machine learning, quantum technology, cybersecurity, Big Data, etc.);
3. FinTech (contactless payments, blockchain technologies, etc.);
4. MedTech (biomedical technology, diagnostic solutions, telemedicine solutions, etc.);
5. EdTech (evaluation platforms, training applications, blended learning, etc.).
Tips for start-ups
- Come to investors only when you have something to show. They pay special attention to project study, MVP and presentation materials, so do not come to investors empty-handed or verbally explaining them verbally that “the idea is very cool and will definitely be mega-successful. “
- Build a strong and progressive team around you. Most startups, which are launched alone, fail, as for a sole person it is impossible to combine both the search for investments and the development of the product.
- Pump your public speaking skills. You have to motivate people to invest money in your project. Product presentation should look easy and energetic, as if the project had already started and reached breakeven.
By Vitaly Arbuzov, founder of the INPRO.digital agency