Venture Capital in Baltics and Russia

Allan MartinsonManaging Partner

MTVP

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

Private equity from investor’s viewpoint• High risk/high return asset class• Usually reserved only for investment professionals and

high 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 its

portfolio to private equity and he/she must like this assetclass

Model of private equity industry

Enterpreneurs

Investors of PE/VC funds

PE/VC funds Stock market ortrade buyers

Ideas

$$ $

Enterprises

$

PE/VC fundmanagers

$ Mgt

Cost of Venture Capital• Minimal expected (promised) return no less than 25-35%

– >80% of profits are generated by <25% of the funds– Best funds show >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

What does Venture Capital produce?

• VC industry produces mature companies from raw ideasand young teams by adding finances, experience and contact network

• VCs assist in company-building: from seed to growthstage

• VCs are human and always invest into humans, not intocompanies

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

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!

MTVP’s 6 investment criterias

1. 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?

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

MTVP’s annual deal funnel

5-7Investments

Per Year

30-40 FirstMeetingsReview

Every Plan

10-15 Follow-onMeetings

Due diligence process

>200

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 ofthe 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 companiesunder supervision and can spend no more than 100 hours percompany per year

• 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 investment

bank– Next fundraising in late 2006

MartinsonTrigon – summary

• Information technology

–Offshore softwaredevelopment

– IT services and outsourcing–Software products and

technologies

• Telecom

–Data communicationservices and datacentres

–“New telecoms” (VoIP, WiFi, WiMAX, 2.5G/3G etc)

• Internet and new media

– Social networking– Search technologies– Mobile content– Internet-based new media– Gaming industry– E-commerce and e-services– New media– New generation TV

broadcasters

Focus areas

• Typical investment between EUR 0.5-3m (average EUR 2m)– In syndicates with other VC’up 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

MartinsonTrigon’s investment profile

Portfolio

• Offshore programming inRussia

• IT services and datacommunications in Lithuania

• Music TV franchise in theBaltics

• CRM collaboration technologycompany in Russia/USA

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 and

Latvia

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

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 with

management experience

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CONTACTS

ALLAN MARTINSON SVEN NUUTMANN

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