Frontier Ventures sees low risks, high returns in Russia’s internet sector
Venture investments in the Russian internet market are less risky and more rewarding than perceived, says Frontier Ventures.
The firm, established last year, runs a venture capital fund investing in internet companies in Russia and the CIS region. The fund size is $50m and it is currently in the process of a second closing. The overall target size is $100m.
The investment strategy is far less risky than Silicon Valley type investments or even a normal venture backed fund. Frontier Ventures’ risk/return profile makes it more like a growth fund than a venture investment vehicle, since the businesses it invests in have a relatively high success rate.
The investment strategy hinges on investing in start-ups that operate based on existing products.
Dmitry Alimov (pictured), managing partner of the fund, says: “Most successful internet businesses do not come from original innovation – it most often comes from adapting existing ideas to a specific market. We always back entrepreneurs that take existing strategies and make them fit the Russian market.”
An example is a Russian website ivi.ru, which is based on the netflix.com / hulu.com model. The website allows users to watch Russia language films online.
Since its founding in 2009, the business has already grown to a 15m user base and has become the largest provider in this space in Russia.
Alimov says the fund invests in start-ups that have the potential to increase their value to at least $1bn within the next five to seven years. The Russian internet market offers fertile ground for such growth.
Internet penetration in Russian speaking countries has barely reached 50%, with 60m-70m users currently connected to the internet. This leaves another 70m of potential customers.
So far, usage has been growing rapidly and investments have been bringing returns significantly higher than market returns.
Alimov says: “I expect this growth to continue for the next 10-15 years. There will be particular demand for smartphones and broadband wireless solutions.”