The startup industry is in a phase of significant changes and challenges that are reflected in both the global and Russian markets. The venture capital market shrank markedly in 2023, but individual segments continue to show potential for growth and innovation. In Russia, the situation has also developed in the context of a decrease in investment, but the activity of startups and business accelerators indicates the beginning of the recovery of this sphere in the country.
Is there anybody alive on the market?
The volume of the global venture capital market in 2023 decreased by 35% compared to 2022 and amounted to $345.7 billion. The number of transactions also decreased: if in 2022 52 thousand transactions were concluded, then in 2023 this number decreased by 27%.
As for Russian indicators, last year investors made 181 transactions totaling $118.2 million. However, the volume of venture capital investments in the country decreased significantly by 91% compared to the previous year, despite an increase in the number of transactions by 10%. Market participants expect positive development of the venture capital sector in 2024. The acceleration program has already registered 50% more projects compared to the previous year and 30% more than in 2022, and 95% of them are new unique projects that have not previously participated in the program.
Key industries for start-up development
Russian investors are still mostly interested in IT projects. More than 50% of investments in 2023 were associated with them. At the same time, there is an active development of financing in medicine, education, transport and logistics. In addition, the focus of investors is on promising areas such as microelectronics, robotics, energy, semiconductors and 3D printing. There is growing interest in projects with a physical product, such as modern materials, equipment, instruments and chemical substances.
Phenomenon of GenAI companies
In the past two years, companies whose activities are focused on the use of generative artificial intelligence have been especially distinguished. According to GlobalData forecasts, the total AI market will reach $908.7 billion by 2030. The value of the GenAI sector is expected to rise from $1.8 billion in 2022 to $33 billion by 2027. These figures highlight significant business interest, as about 44% of companies are willing to invest in AI.
In Europe, almost all companies have already integrated generative AI into their strategies: 57% have already invested in this technology, and 40% plan to increase investment by 2025. The field of AI is also actively developing in the Middle East, Saudi Arabia has allocated $1 billion for an accelerator of startups in this sector. There is also a noticeable rise in China: this year, four startups in the field of GenAI were valued at $1.2-2.5 billion.
Accelerator a la russe
Import substitution or “own path”
The Russian venture capital market suffered significantly after the 2022 crisis caused by economic and political risks. Amid this instability, companies have stopped actively acquiring startups, and investors have shifted their focus from high-risk investments to a model focused on receiving dividends from startups capable of providing stable income. The amount of funding for startups in 2023 decreased by 80% compared to the previous year.
In response to changes in the economic and political environment, startups have had to adapt by building sustainable business models. The main emphasis is placed on the development of domestic markets and a decrease in dependence on external investments, which corresponds to the paternalistic approach and import substitution strategy.
Who are the buyers
In recent years, many investors in Russia have suspended work. In response to these challenges, corporate accelerators have begun to invest actively in finding and developing projects that can strengthen their positions, including import substitution strategies. Such programs often result in M&A deals or the invitation of key team members to the company’s staff.
Business accelerator investments in Russia account for 5% of the total number of transactions, while the volume of investments increased 5 times compared to 2022. Outside of Russia, such platforms have long established their notoriety among startups. Studies show that companies that went through accelerators attracted 50 to 170% more investment and had a significantly greater chance of long-term survival or acquisition. In addition, startups participating in acceleration programs are 26% more likely to overcome the first two years and strengthen their market position compared to other companies.
Startups should remember that accelerators have universal advantages that do not depend in any way on the country in which the business of the emerging company is located and developing. Enterprise platforms help large companies innovate and collaborate with startups to address specific business challenges. They help to improve the culture of innovation, accelerate the introduction of new technologies and products and help to find effective solutions. In the conditions of financial constraints, business accelerators remain one of the most suitable tools for finding growth opportunities, even though the number of customers is decreasing. Companies use accelerators to attract external talent and innovate, which strengthens their market position.
Y Combinator, one of leading start-up accelerators, has helped companies like Airbnb, Dropbox and Reddit enter the market. This contributed to the development of acceleration programs in the United States and Europe.
If we talk about the Russian market, Tochka Bank and IIDF this year began selecting innovative projects. Experts estimate mature technological projects with annual revenues of 10 million rubles. The program is open to companies in need of investment and wishing to integrate into the Tochka ecosystem. Small startups can receive up to 500 million rubles of investment. With mutual interest, M&A transactions are possible for further development.
What’s next
Forecasts and prospects
According to forecasts of analysts of the Moscow Innovation Agency, in 2024 the Russian venture capital market may recover to the level of 2020, when investors entered into 250 transactions worth $788 million. Consequently, compared to the results of 2023, the number of transactions may grow by 38%, and the volume of investments will increase by 6.7 times.
Experts also believe that we should expect a reduction in the volume of large grants due to the budget deficit, with the exception of projects critical for the economy, such as import substitution. The IPO growth of technology companies is expected to continue, as well as the activation of the bond market in the IT segment. Dsight predicts 6-8 IPO in 2024 with high corporate activity in M&A transactions.
At the moment, there are more than 100 business accelerators in Russia. IIDF, one of the most active market participants, plans to invest in 15 startups by the end of 2024. Each of these projects can count on investments from 30 million to 200 million rubles.
According to forecasts of the Moscow Innovation Agency, in 2024 the Russian venture capital market may return to the level of 2020 with 250 transactions worth $788 million. The number of transactions is expected to grow by 38% and the volume of investments is expected to increase by 6.7 times compared to 2023.
New Markets and Opportunities
Experts point out that globalization in the Russian venture capital market has lost its relevance. In 2022, investment funds and startups faced a choice: to develop business in Russia or abroad. Now Russian startups are increasingly targeting the markets of North Africa and Latin America. However, reorientation from West to East remains the most popular. In 2023, more than 60% of startups worked with the Eurasian Economic Union, the Middle East (especially the UAE) and Asian countries such as India, Indonesia and Malaysia.
By Maxim Vozhagov, CEO, Accelerator of Opportunities