State-controlled corporation backs Russia’s leading startup investment fund

This story initially appeared in East-West Digital News, an international news resource covering the Russian innovation scene.

Rostelecom, the national telecom operator, is in the process of acquiring 31% of FRII Invest, the investment vehicle of the Internet Initiatives Development Fund (IIDF, or FRII in Russian). This is Russia’s biggest fund for early-stage startups, launched in 2013 as an instrument to support the emergence of a strong startup industry in Russia.

Rostelecom’s is injecting RUR 2 bln (around $32 mio at the current exchange rate) through two distinct transactions involving two subsidiaries, as reported by online publication TheBell, which cites Rostelecom VP Business Development Alexander Ayvazov.

The fund has been valued in these transactions at RUR 6.5 bln, or some $105 mio at the current exchange rate. Since its inception, FRII Invest has invested some RUR 4 bln in total in 400 startups, a fund representative told Vedomosti.

“We did assess the value of [these] portfolio companies, they aren’t what we bought. Rather, we are interested in FRII’s team, which has created a massive mechanism to work with startups,” TheBell quoted Ayvazov as saying.

The creation of the fund in 2013 was an initiative by President Putin; however, the IIDF is not financed by the government. It presents itself as a classic venture fund without disclosing the identity of its LPs. According to insiders, large state corporations are among its initial backers – which seems in line with Rostelecom’s latest move.

At launch, FRII received 6 billion rubles, the equivalent of $200 mio at that time. This was a huge amount considering the relatively modest size of the Russian startup market; however, due to the ruble’s sharp depreciation in 2014-2015, the USD value this money quickly shrunk by half.

From domestic ecosystem to international acceleration

With two thirds of FRII’s funding going to startup investments, FRII Invest became the most active Russian venture fund. Thus, in 2017, the fund was involved in 43% of all venture deals, according to industry reports.

In February 2019, the fund announced a new focus to support its existing portfolio companies rather than make new investments. It laid off a part of its 150 employees.

In addition to funding, FRII has brought an important contribution to building Russia’s startup ecosystem with massive acceleration programs and a variety of educational events across Russia. It has also backed the crowdfunding platform StartTrack.

Initially, FRII’s strategy focused mainly on the domestic market – a considerable playing ground for Russian startups with 90 mio Internet users and even more mobile phone users. Then, it began paying due attention to the global market, putting a strong focus on the USA as the world’s largest market in both a venture and commercial perspective.

The rising geopolitical tensions and the anti-Russian hysteria in US political and business circles did not stop FRII’s American enthusiasm. In 2017, it launched its ‘TechMafia‘ project in the heart of Silicon Valley. Behind this judiciously chosen name was a three-month acceleration program, including one month in San Francisco, designed to help Russian startups start their business in the USA. The program shut down in 2019.

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