Venture investments as a factor in the development of the Russian economy in a pandemic

Introduction

In conditions of economic instability, it is difficult for the vast majority of organizations to find optimal sources of financing for their activities. In this regard, investments in business projects with a high degree of risk and profitability for private investors are becoming very popular.  It is worth noting that such projects need money, they cannot be quickly and easily implemented or sold at the price that was originally agreed. At this stage, the transformation of the national economy is taking place, new ways of doing business are being actively introduced, new knowledge is emerging and professions of the future are being formed. Due to the active scientific and technological progress, interest in innovative projects is increasing. However, at the present stage, there is a decrease in investment activity. In our opinion, venture investments can become a key direction for the development of the Russian economy in the context of the crisis caused by the coronavirus pandemic.

The essence of venture investments

Venture investments are investments of investors' funds in startups that have a sufficiently high degree of risk and at the same time high profitability. As world practice shows, venture projects are innovative startups that offer new ideas and methods of business introduction. ^[4]

Venture capital is one of the key factors in stimulating technological innovation. In addition, in modern conditions, the reduction of capital gains tax has led to the growth and development of the venture capital industry. ^[3]

The implementation of venture investment is not just an influx of funds into startups. The involvement of experienced investors allows us to develop a strategy for the long-term development of the company, form an effective management team, improve the level of corporate governance and business ethics. It is important to note that venture investors are making active efforts to identify innovators with a commitment to commercializing breakthrough technologies.^[2]

Investors are teaming up with entrepreneurs to create an "acceleration effect", actually shortening the time interval and increasing the speed with which promising technologies are brought to commercial maturity and public utility.

Features of venture investment in Russia

In order to draw a conclusion about the role of venture investments in the national economy during the pandemic, it is necessary to consider the statistics of changes in venture investments over the previous period.

Consider the volume of venture capital investments in Russia from 2016 to the 1st half of 2020 (see Figure 1).

Fig.1 – The volume of venture investments in Russia in the period from 2016 to 2020.

It is important to note that the Russian venture capital investment market grew by 48% in 2017 and amounted to 243.7 million US dollars, and in 2016 165.2 million US dollars. It is worth noting that at the seed stage of concluding transactions, the largest increase in the average volume of capital investments in 2017 was 2.2 times. As for the average size of transactions at the startup stage, there was an increase of 49%. However, the inflow of investments at the stages of expansion is marked within the boundaries of standard values.

As a result of these actions, the volume of venture transactions for the first half of 2019 underwent changes and amounted to $ 262.8 million, and for the full year 2019 amounted to $ 427.1 million.

In the first half of 2020, the venture capital transactions market in Russia decreased by 9% to $ 240 million and amounted to 78 transactions compared to 2019, in which the volume was fixed at $262.8 million and 130 transactions. At the end of 2019, the market significantly decreased and sank by 2% to $427.1 million instead of $ 433.7 million compared to 2018. There was a noticeable decline in the market due to a 9% reduction in the number of transactions in the first half of 2020. The average transaction size increased to $5 million compared to $3.1 million in 2019. The increase in the average transaction size at the expansion stage gave an impetus to the growth of the average transaction size. This growth indicates an increased interest of investors to invest in mature projects where there are sustainable business models.

After the relatively stable development of venture investments in the pre-crisis period, at the beginning of the pandemic, there was a sharp (shock) decline in all types of investment in February 2020 as a result of the restrictions imposed. They have led to an increased demand for online and digital solutions in all spheres of life. Since March 2020, there has been a rapid recovery of the investment process, both in projects implemented before the pandemic and in new projects aimed at overcoming pandemic limitations and the medical and social consequences of exposure to coronavirus infection. (see Figure 2).

Fig.2 – Dynamics of transactions in 2020.

It is worth noting that Russia was forced to face various difficulties associated with adaptation to new conditions, as well as the economic crisis caused by the spread of a new coronavirus infection. The largest number of venture investors in Russia is at the earliest stages of investment. Investors try to be as attentive as possible in the process of interacting with the project teams, which can become a good way to develop and achieve the goals of projects in the future. It is necessary to pay attention to the fact that remote work, remote conclusion of transactions slow down the process of implementing project goals and does not help to diversify, as well as hedge investment risks. (see Figure 3).

Fig.3 – Dynamics of transactions in 2020 by stages.

The main part of the implemented projects are deals that were worked out and prepared at the final stages even before the coronavirus pandemic began. Currently, there has been a noticeable decrease in the total number of transactions at an early stage and at the startup stage. However, it is planned to launch more new funds that will be aimed at developing and entering international markets.

Having considered venture investments by industry in the first half of 2020, it can be concluded that investment flows are primarily aimed at the development of digital technologies, namely, the expansion of online commerce, which is due to the need to close physical outlets due to restrictions on contact between citizens. In addition, investments began to be directed to business, this is due to the need to organize the workflow remotely. The main reason is the introduction of measures to prevent the spread of covid. The third largest investment is medicine.

In the first half of 2020, as a result of the development of the coronavirus pandemic, there was a shift in the vector of investor interest towards educational services and projects that are somehow related to consumer goods. Business has actively directed all its efforts towards the development of intellectual capital and information technologies. There was a rapid adaptation of investors to the new market conditions, which were dictated by the restrictions associated with the coronavirus pandemic. Investors had to actively respond to changes in consumer preferences. (see Figure 4).

Fig.4 – Dynamics of transactions by industry

In 2019, projects in the field of information technology, intellectual capital, e-commerce, robotics, integrated digitalization and automation of processes were profitable. (see Figure 5).

Fig.5 – Dynamics of transactions by type of activity

The venture capital market in Russia in 2020 showed a twofold growth. The total volume of transactions with Russian startups amounted to 21.9 billion rubles. This result was influenced by a large number of large transactions, but the market was also very active compared to 2019.  The total number of transactions increased to 180 compared to 134. The foreign investment sector showed the fastest growth. The state venture, in turn, showed the biggest drop. Foreign investments in 2020 showed quite positive dynamics compared to previous years. (see table 1).

Table 1 – Volume of venture investments by type of investors^[1]

Despite the coronavirus pandemic, the funds' financial resources were actively invested in 2020. A large number of domestic investors look to the future with cautious optimism, hoping that the pandemic will end and restrictions will be lifted. However, domestic startups demonstrate active attraction of foreign capital and development in international markets. The inflow of foreign investments in 2020 amounted to 3.7 billion rubles, which is significantly more than in previous years.

In 2020, in the sector of corporate investments, investments of private funds and investors, there was a noticeable increase in both the number and amount of transactions compared to the previous year. The exception is the sector of public funds, which for obvious reasons (the pandemic and the reorientation of goals) has reduced the total amount of transactions with an increase in their number with the reorientation of the primary sphere of investment application from educational and entertainment projects to startups related to artificial intelligence and medicine. A similar trend of changing the priority area of investment application is observed in the private funds sector.

The largest jump in the volume of transactions occurred in the sectors of foreign investment, namely by 4 times. (see table 2).

Table 2 – Dynamics of venture investments in the period from 2019 to 2020.^[2]

The growth of the venture capital market in Russia in 2020 is due to several large transactions. Such deals include the Miro project deal, the Doctor Next Startup, Roman Abramovich's investment in 110 Industries, and the NtechLab deal.

Raising $50 million. Miro startup became the largest transaction in this segment. Corporate investments doubled to 5.2 billion rubles. The Perm project with Miro focus demonstrated the attraction of 3.8 billion rubles from the Iconic Capital fund.

However, the largest transaction was a venture loan in the amount of 3.7 billion rubles, which was received by IVI from Alfa-Bank. It should be noted that there has been a noticeable increase in the segment of private investors. It is impossible not to pay attention to the fact that private funds are actively investing money in Russian startups in 2020, in particular, by 64% more than in previous years. (see table 3).

Table 3 – Volumes of venture investments by projects^[3]

Conclusions

Thus, the conducted research allows us to note that venture investments had a "revitalizing" impact on the economy during the pandemic, as they became a source of financing for the development of various projects, including e-commerce, which allowed many business entities to continue their activities. Despite the fact that the volume of venture investments has a positive impact on the development of the Russian economy, the growth rate of the Russian economy still lags behind the growth rate of the world economy, which indicates the insufficient effectiveness of the implementation of venture projects in modern conditions. In this regard, it is important to intensify the activities of economic entities of Russia's financial policy in the field of long-term investments within the framework of cooperation with the partner countries of the EAEU and the CIS ^[9].

Moreover, in order to develop Russia's investment cooperation within the framework of the integration association, it is necessary to form targeted programs, develop special funds of all forms of ownership ^[10] and collective regional funds of financial resources.

It is advisable to create a Venture Fund of the EAEU on the basis of RVC – the state fund of Funds, which is an institute for the development of the Russian Federation, purposefully attracts Russian and foreign investors to priority segments of the Russian economy, promotes the development of new investment instruments of the national venture market. It has 26 venture funds with a volume of 58.1 billion rubles.