Pavel Terentiev is Managing Partner at AddVenture, a fund launched in 2008, at the very early days of the Russian venture industry. In this exchange, he recalls the spectacular development of the Russian venture scene over the past ten years, and explains how savvy entrepreneurs and investors can seize the opportunities of the undergoing digital transformation of our lives. This interview first appeared in EWDN’s latest study “Startup investment and innovation in emerging Europe.”
Back in 2008, AddVenture pioneered the Russian VC market. How did the market look at that time, and what has it become now?
We launched the first AddVenture fund 10 years ago: at that point, the idea was to accelerate seed-stage businesses and bridge them with next-stage investors. In these years, the Russian venture ecosystem was poor with virtually no professional angel investors and a handful of sectoral funds operational. By 2008 just few funds, like RuNet, Softline and Luxembourg’s Mangrove were already operating in Russia; Almaz Capital launched that same year.
The market has progressed very substantially since then, be it in terms of size, professional knowledge, integration to major tech hubs (mostly the UK, Berlin and Silicon Valley) or capital availability. Currently, there are two dozen active institutional venture investors, a fairly developed angel network, a clear interest in the sector from more traditional financial players like private equity firms.
Meanwhile, the government supports the market through its fund of funds RVC and, indirectly, the Internet Initiatives Development Fund. [Editor’s note: Russia’s largest seed-stage startup investment fund, IIDF was launched in 2013 following an initiative from president Putin. It is not owned by the Russian state, however.]
The two largest Russian Internet corporations, Mail.Ru Group and Yandex, having understood that they cannot do everything themselves, have also been quite active on both the acquisition and equity financing side over the past two years.
We have recently seen some huge transactions involving both domestic and foreign players: Naspers’ acquisition of a controlling stake in Avito in 2015; Mail.Ru Group’s acquisition of Delivery Club, Russia’s largest food delivery service, for $100 million in 2016; the Yandex.Taxi – Uber merger at a $3.7 billion valuation in 2017; and Sberbank’s $500 million investment in the e-commerce marketplace Yandex.Market, aiming to become the Amazon of Russia, in 2017, too.
Does the Russian VC market still lag behind Western Europe?
Undoubtedly, if judging by the size of the Russian market and its stage of development. The numbers speak for themselves: Russian startups received less than $900 million in investment in 2016 vs. some $11 billion for their European peers.
The positive side is that the scarcity of resources – in terms of funding and exit opportunities – makes Russian entrepreneurs really prudent about their company’s finances, and work hard to improve capital efficiency. There are many examples of local platforms which have reached results in terms of scale similar to what their peers achieved in other parts of the world – but with five or ten times less cash.
These local companies are helped by Russian consumers’ quite advanced Internet consumption patterns and by the overall size of the consumer market (around $600 billion in household consumer spending).
Over the past few years AddVenture — like many other Russian funds — has switched to an international strategy. Why did you do this?
Putting aside the economic and political risks related to focusing on one country only, the idea was to go for a big game fishing. Even though, in size, the domestic consumer market is considerable ($600 billion), the consumer purchasing levels and consumption structure are less favorable (30% of Russia’s total consumer spending is spent on food vs. 13% in the USA).
Keeping this in mind, building a 50-100-150 million-dollar business locally in our focus verticals is a no-brainer (or close to that), but growing further might be more challenging. Therefore, if you want to build a 2-3 billion-dollar platform within a fairly short horizon of time, it is logical to seek expansion opportunities across several geographies – and that is exactly what we have done.
Which specific value can you, as a Russian team, bring such startups from across the world?
At a very initial point, our proposition was nothing but funding – as well as the generic, consumer-focused transactional e-commerce DNA of an investor who believes in the segment strategically with a first-hand experience in supporting similar businesses the sophisticated Russian market.
Currently, with a processed pipeline of over 100 international platforms and over 15 investments made in the home and local services sector, we offer even more: fast decision making and due diligence process; horizontal knowledge sharing with our other portfolio companies doing exactly the same thing but in a different geography (data analysis and benchmarking, product, marketing, and technological tips); direct access to a pool of potential strategic buyers.
The latter point works extremely well in the opposite side – established Internet players in developed markets and FMCG corporations look for international expansion and show interest in our multiregional sectoral portfolio.
Which industry segments does your investment strategy focus on?
Now we focus exclusively on the home and local services market, and consider investment opportunities anywhere in the world. This sector is huge: for instance, the US market is estimated at around $1 trillion in annual spend, which translates into a global opportunity of well over $4 trillion.
Basically, we differentiate two business models: horizontal market-places connecting homeowners with service professionals for a wide variety of non-recurring and / or complex projects, and specific vertical transactional platforms addressing customer needs that can be standardized or have a recurring nature, i.e. home cleaning or laundry services.
We see two important macro shifts in these segments: changing labor relations and new consumer behavior. These shifts affect virtually all industries simultaneously across the globe.
- Read the full version of this and other fascinating insights into the Eastern European startup and VC scene in EWDN’s latest study (free download).
