Perspectives for Venture Capital in Baltics and Russia (Allan Martinson)

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Slides from Connect Estonia seminar CONNECT WITH THE SMART MONEY, on August 29, 2006.

Transcript of Perspectives for Venture Capital in Baltics and Russia (Allan Martinson)

  • 1. Venture Capital in Baltics andRussiaAllan Martinson Managing Partner MTVP

2. What is Venture Capital? Private Equity Industry = funds and vehiclesinvesting into non-listed enterprises Two main categories of private equity: Buyout funds Venture Capital funds Venture Capital funds invest into New and fast-growing industries Usually taking minority stakes Usually seed to early growth stages Often, but not always into innovation and technology 3. Private equity from investors viewpoint High risk/high return asset class Usually reserved only for investment professionals andhigh net worth individuals Pension funds Government-sponsored funds Funds of funds High net worth individuals and family offices Usual minimum ticket 1 million dollars Sizes of the funds between 10 m USD-10 b USD Typical lifetime of funds between 5-10 years Low liquidity, high return expectations Typical investor does not allocate more than 10% of itsportfolio to private equity and he/she must like this assetclass 4. Model of private equity industry PE/VC fundmanagersMgt Ideas$ EnterprisesStock market or EnterpreneursPE/VC fundstrade buyers $$$ $ Investors of PE/VCfunds 5. Cost of Venture Capital Minimal expected (promised) return no less than 25-35% >80% of profits are generated by 100% annual returns Historic average 15-17% As all portfolio companies may not succeed VC funds expect at least50% annual growth in value of separate companies 5-year return expectations expressed in money-back ratios: Failed: write-off Walking dead: 1X money-back (0% return) Okay 5X money-back (50% per annum) Good 10X money-back (80% per annum) Superior >20X money-back (>110% per annum) Skype: over 100X money-back in 2 years 6. What does Venture Capital produce? VC industry produces mature companies from raw ideasand young teams by adding finances, experience andcontact network VCs assist in company-building: from seed to growthstage VCs are human and always invest into humans, not intocompanies 7. Venture Capital is more than just money Good Venture Capital = Smart Capital Extensive experience and good instincts Strategic management and mentorship Maintaining of discipline and focus Assistance in recruiting of top talent Assistance in creating partnerships Assistance in exits Mediocre companies get the most attention ofVCs Failed companies = no money, no time Superior companies usually manage themselves 8. How do VCs pick their investments? All VC funds have formal pre-selection criterias: Geography Stage of investments Size of investments Industries but informal criterias are the most important! 9. MTVPs 6 investment criterias1. Does it fit our formal criterias (geography, size, industry?)2. Do we believe into the people and the team?3. Does the company operate on growing market?4. Does the company have unique competitive advantage?5. Do we as VCs have necessary skills and understanding of the business?6. Does the company have any substantial risks? 10. Human aspect - the most importantcriteria We always invest into people, not into companies,market shares or business plans We invest if we like the team and we would like it to continue We help the enterpreneurs to bring their visions to reality What makes a good team: Strong vision Strong execution Has been together at least one year Have been succesful in the past Carries common values: integrity, trust and transparency 11. MTVPs annual deal funnel30-40 First Meetings 10-15 Follow-on Review 5-7 Meetings>200Every InvestmentsPlanPer YearDue diligence process 12. Typical myths about VCs Myth: VC is a long-term strategic partner Reality: VC has horizon of 2-7 years, helps the company to mature and then exits Myth: VC money goes to R&D Reality: 90% of the Venture Capital goes to commercialization of the products and services Myth: VCs like early stages Reality: In moct cases VCs would like to see at least 1 m USD in annual revenues Myth: VCs invest lots of time into their companies Reality: Typical partner in VC fund manager has 5-7 companies under supervision and can spend no more than 100 hours per company per year 13. MartinsonTrigon summary AS MartinsonTrigon: ~12 m EUR investment vehicle Founded in 2005 1st fund of Martinson Trigon Venture Partners Geography: the Baltics and Russia 4 investments signed by far, 2 in works 3 full-time professionals + Trigon Capital investmentbank Next fundraising in late 2006 14. Focus areas Information technology Internet and new media Offshore software Social networkingdevelopment Search technologies IT services and outsourcing Mobile content Software products and Internet-based new mediatechnologies Gaming industry E-commerce and e-services Telecom New media New generation TV Data communicationbroadcastersservices and datacentres New telecoms (VoIP, WiFi,WiMAX, 2.5G/3G etc) 15. MartinsonTrigons investment profile Typical investment between EUR 0.5-3m (average EUR2m) In syndicates with other VCup to EUR 10 m Strong control either through majority stake or strongminorities + shareholders agreements Extensive support to the management Earnout & option schemes Holding period 3-5 years Exits through strategic sale or IPO 16. Portfolio Offshore programming inRussia IT services and datacommunications in Lithuania Music TV franchise in theBaltics CRM collaboration technologycompany in Russia/USA 17. Baltic VC landscape Two dedicated high-tech funds: MartinsonTrigon (2 Baltic investments) ASI Private Equity (3 Estonian investments) Occasional investments by generalist PE players Mostly into IT services and telecom companies Handful of angels ~10-20 angel investments No direct presence of foreign VC funds State-sponsored VC programs in Estonia andLatvia 18. Baltic high-tech successes Skype Playtech SAF Tehnika Hansabank Tens of interesting startups, but often failing toget critical mass Problem of getting over 1 m EUR barrier E-services is the most promising industry 19. Russian roulette 4 high-tech VC funds operating locally: Russian Technologies, MTVP, Intel Capital, ABRT U.S. VCs have done ~10 deals (Bessemer, Insight Partners,Merifin etc) IT and telecom investments by general PE Up to 10 success stories Rambler Media, RBC, Aelita, Acronis etc State-sponsored VC initiatives under way ($550m) Hundreds of companies available for pipeline Growths 50-200% p.a. Finances, accounting, reporting, taxes usually in mess Strong global ambitions, often not matched withmanagement experience 20. CONTACTSALLAN MARTINSONSVEN NUUTMANN#"" ! !#$% %& ! !!"!!") (*+ !ANDRES SUSI- - ! -!"- -! -" *#$ &,! ! !") (* ,!