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September 18, 2018

Business angels do not come to Russia due to lack of support, experts said

The movement of business angels in Russia is gaining momentum, although the number of their foreign colleagues in Russia is gradually falling due to the legal insecurity of such investors, lack of state aid and tax preferences, experts interviewed by RIA Novosti say.

Business angels are investors who invest their own funds in projects (most often startups) in exchange for a share in business or a voting stake in order to have a decisive influence in making financial and managerial decisions.

Vitaly Polekhin, President of the National Association of Business Angels of Russia, told RIA Novosti that about twenty people invest professionally and regularly in Russia, investing from very small amounts of money to $1 million a year. And, besides them, there are about five well-known "capitalists" in Russia who invest up to several tens of millions of dollars a year.

"The problems of business angels are the lack of quality projects and teams with the necessary qualities to build a successful business, and some negative trends in the economy, but the key problem is, in principle, the lack of tools to exit from projects and a small number of exits. In 2017, the total volume of exits from projects in the Russian market amounted to 52 million dollars against 66 million in 2016 and 1.309 billion dollars in 2015 (taking into account the deal on Avito for 1.2 billion dollars)", - said Oleg Teplov, General Director of VEB Innovations.

Where are the angels going?

According to Polyokhin, the volume of "angelic" investments in the Russian market grows by at least 30% annually. "Business angels are in a more favorable situation than venture funds, they do not need to wait for the purchase of the project "strategist" to show the profitability, they just need to wait for the investor of the next round and sell their share of the good return, "- he said.

"For several years there has been a continuous growth of the business angel movement, their culture in our country is actively taking root and developing. There are more and more people investing in venture projects," said Alexey Basov, Investment Director of the Russian Venture Company (RVC).

Most often, business angels invest in IT-related projects, and less often in industrial, biotechnologies and industrial projects.

"Many of them invest in b2c-projects when they have an opportunity to feel themselves as consumers of services or goods. Also, business angels invest in areas that are close to their professional activities. For example, in the technologies that are necessary in their own projects," said Alexander Frolov, partner at Target Global.

Teplov explained that the IT sphere for business angels is interesting for quick payback and minimal risks.

"Many business angels, while choosing projects, are guided, among other things, by the possibility to sell them quickly to one of the big players, as, for example, it was with one of the loudest "angelic" exits when Facebook bought the Belarusian company MSQRD. Also the contribution of the business angel in many cases is not money first of all but connections with potential investors and understanding of how to position the business in order to make it attractive for them," he explained.

Without protection

Foreign investors in Russia do not invest at an early stage, complained Polekhin. "And this is a situation that needs to be corrected by attracting foreign capital into Russian projects. In the meantime, most Russian business angels would like to invest in more developed venture capital markets, where the sale of the project at the next round of investment or "strategist" is both more frequent and easier," he said.

"There are more Russian business angels - we see few foreign ones, except for investments in companies of Russian Harvard graduates abroad", - agrees Frolov.

According to him, one of the main problems faced by business angels is the legal insecurity of their interests. "Large transactions (for this reason - ed.) are structured abroad, while small transactions make sense in Russia," he said.

Teplov sees the reason for the reduction in the number of transactions involving business angels in the decline in interest in Russia on the part of foreign investors "including for political reasons and for reasons specific to the venture capital market. The availability of grant support has also increased in recent years, which is much more convenient for a startup - there is no need to transfer shares, there is no obligation to demonstrate financial results.

"Besides, it is not for nothing that angels are called that - for many it is a good opportunity to earn money, doing a good deed and investing their souls in the success of startups. In Russia, there are no strong mentorship traditions, and patronage is not the same as charity. Therefore, if we need more angels, we also need to cultivate culture," added VEB Innovations General Director.

According to Polyokhin, the situation on the business angel investment market is generally quite favorable. However, a number of incentives "would help to increase the activity of business angels" - due to various tax preferences from the global practice, such as those available to private investors - participants of the public stock market.

"Also, the introduction of a number of investment instruments into the Civil Code, such as, for example, a convertible loan, would help to simplify many of the processes associated with the processing of investors' transactions with projects. It is actively used by early stage investors around the world," believes the president of the National Association of Business Angels.

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