«A good product or technology will always find its buyer»
The Report: Facts
and figures
Facts
and
figures
In 2019, sound financial results were yielded from 21 exits of RVC funds from portfolio companies. In June 2019, the Chinese IT giant Huawei acquired part of Vocord — a portfolio company of the Leader-innovations and S-Group Ventures funds. Vocord specializes in the development of intelligent video surveillance systems, biometrics and computer vision. We spoke to Sergey Kerber, Managing Director, Head of the Directorate for Investment Projects and Programs at Leader Asset Management, about the deal, which has generated multiple return on initial investment.
What were the reasons behind the decision of the Leader-innovations fund to invest in Vocord in 2011?
— During the initial stages of investment, our strategy was to find projects, which combined the potential for rapid growth with a relatively low level of risk. And Vocord met these criteria. At that point, the company was a fairly large-scale producer of various security systems. It had ambitious founders and a highly professional team of engineers, who were perfectly capable of solving complex scientific and technical problems. We understood that by providing Vocord with additional finance, we would allow the company to direct a considerable share of its resources into the development of technologies, which wouldn’t immediately generate commercial returns, but would be in demand in the future. At the same time, the company maintained the continuity of its existing business operations. Thus, even if new developments wouldn’t have achieved the expected result, we were confident that the value of our share in the project wouldn’t be lost.
However, the technologies developed by the company were not as popular in 2011 as they are today. And the company was receiving Series A round.
— Yes, indeed. In 2011, DL and AI technologies were not yet mainstream, and not all of Vocord’s R&D resulted in the development of sought-after technologies. However, the fact that Vocord had a sufficiently funded team, which was motivated to follow emerging technology trends and come up with first-class solutions, allowed the company to become one of the first developers of AI-based intelligent video surveillance systems. This lead to the company’s high capitalization, which yielded financial returns for the fund and its investors.
What exit scenarios did you foresee?
— There were two options. First was an optimistic scenario, which is quite common for ventures, whereby a strategy-oriented buyer acquires technologies that would create long-term competitive advantages for his core business. In this case, the value of the transaction and the buyer’s interest are proportional to the effect that the acquired competitive advantages would have on his business. And the second option was conservative, whereby a buyer acquires market share.
What was the growth of the business before the deal with Huawei?
— In line with the arguments laid out above, the increase in Vocord’s capitalization wasn’t directly associated with the growth of the business, which has, of course, grown considerably. However, this is not an extraordinary result, if you take into account the eight-year investment period. By the time of the deal, the scientific and technical accomplishments of the Vocord team were already notable on a global level. This allowed us to go with the optimistic, venture-backed exit scenario.
How do you evaluate the deal with Huawei?
— From a financial point of view, it’s a very lucrative deal for the Leader-innovations fund. We cannot disclose the terms, but we can confirm that the return on investment is close to what venture investors would normally expect.
Info
Interested in energy and energy conservation, alternative energy, new materials and chemical compounds, network technologies and services
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2008
created in
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3
billion rubles
target amount of the Fund
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49%
RVC share
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11
projects received investment
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7
project exits
Vocord specialized in the development of intelligent video surveillance systems, biometrics and computer vision.
How long did it take from the start of negotiations to the signing of documents?
—A little over a year, which is probably the usual length of time when you’re working with a large corporation. It took a while to discuss the perimeter and the key terms of the transaction, as well as the system of certifications and guarantees that the sellers had to provide. It also took a few months to restructure the assets, which had to be done as part of the deal.
Are there any other details that you’re able to share?
—The main difficulty that came up on our side — the side of the CEF management companies (Leader-innovation and S-Group Ventures both acted as sellers) — was that some of the seller’s obligations, which the buyer requested, could not be legally assigned to the CEF. Thus, the management companies had to absorb some of the risks themselves in order to finalize the deal in the interests of the funds’ investors.
Is it extremely rare for Russian funds to invest in a company that develops a technology, which is then acquired by an IT giant?
—We cannot really view this deal as a rare stroke of luck. The fund has invested in 10 projects and exited from 6 so far. Two exits involved the sale of technologies to specialized IT giants. One was Vocord, and the other was the sale of the CDNvideo project to Wangsu Technology Company Ltd (ChinaNetCenter) — one of the largest CDN companies in the world. The rationale for this deal was similar to the rationale for the deal with Vocord: the buyers realized that these technologies would help them develop their core business, so they were willing to negotiate. A number of even bigger deals with assets that have Russian roots took place recently. This indicates that projects that attract the interest of global players are not so rare in Russia.
How does one recognize such companies?
—Obviously, they need to have a first-class — by international standards — technical team and ambitious founders who are results-motivated and able to focus the company’s efforts on solving the most important and lucrative tasks. Success won’t be possible otherwise. On the other hand, success isn’t guaranteed even if all these elements are present. One also needs some luck with risky venture capital investments.
There is some bias related to government funding. Allegedly, investments from funds with government’s participation can limit the company’s access to foreign markets. The deal with Huawei and similar deals — are they proving quite the opposite?
—We do not believe that government funding of Russian technology companies considerably affects their chances of operating abroad. And, what’s more important for us, it doesn’t affect the chances of selling assets to foreign buyers. There are, of course, potential partners who wouldn’t want to work with such companies. But they probably wouldn’t want to work with any Russian company, regardless of its list of investors. Does it mean that one shouldn’t consider Russian jurisdiction when establishing a company? We don’t think so, because our own deals and the deals of other funds involving RVC capital as well as the projects of other companies in our fund clearly show that a good product or technology will always find its buyer.
What other interesting companies do you have in your portfolio?
—The fund’s portfolio includes four companies: Russia’s largest supplier of automation solutions for catering companies, a developer of new video coding technology, a manufacturer of the world’s most efficient passive devices for heat removal and cooling systems based on them, and a company producing separation systems for the gas industry. In line with the fund’s strategy, we are planning to exit these companies and expecting that they will yield substantial profits for the fund’s investors.
