Draper Fisher Jurvetson has partnered with Russia’s Bank VTB to take advantage of a government giveaway and gain a presence in a market that has eluded the Menlo Park, Calif.-based firm for years.
DFJ’s choice to partner with a partially state-owned bank comes after an unsuccessful foray into Eastern Europe that started in 2004 with DFJ Nexus. DFJ Nexus was launched in partnership with Techinvest, a privately funded Ukrainian VC outfit with plans to attract between $50 million and $80 million to finance about 40 Ukrainian and Russian tech companies.
“Nexus was our first exploratory effort,” says DFJ Managing Director Don Wood. “It was never a fund. It was a concept, but the timing wasn’t right and we didn’t have the full team.”
Wood was responsible for inking the deal with VTB and says that it was a natural choice for expanding the DFJ affiliate network, despite the fact that VTB has never done venture capital investing before. “It is the largest and most progressive bank in Russia,” he says. “They had already put together a team that we found quite impressive.”
The partnership will take the form of a new affiliate called DFJ-VTB Aurora and will cap the fund at $150 million. Part of the fund, about $58 million, comes from a June award from the Russian Venture Co. (RVC), a public-private partnership designed to stimulate early stage technological investment in the country. Other fund contributors include the European Bank for Reconstruction and Development.
The money from the RVC may only be invested in Russia, according to the terms of the government grant. But the DFJ affiliate will be able to invest in any of the Commonwealth of Independent States with the rest of the fund, about $90 million.
Throughout Russia, the RVC intends to invest $550 million in eight to 12 venture funds that back local companies. It contributes up to 49% of the limited partner commitments to a fund with the expectation that the remaining 51% will come from non-governmental LPs.
It has made two other grants so far. The RVC also backed Bioprocess Capital, a biotech fund created by Pitch Johnson’s Asset Management firm, with a $56.8 million investment. Bioprocess is raising a $116 million fund. Johnson was instrumental in advising the Russian government on how to set up such a matching funds program.
The RVC also backed Finance Trust, a fund established by Israeli financial group Tamir Fishman and Russian partners, with $37.8 million. Finance Trust is raising a $115 million targeted fund.
People closely associated with the process say that the RVC will announce the second round of winners in the coming weeks.
What may be even more interesting to DFJ and other U.S. firms is the access to Russian sources of capital. The country, rich from oil and natural gas prices, is starting to awaken to the possibilities of technology investing and looking for firms that have experience.
“There’s money there and from the president [Vladimar Putin] on down the country realizes that the post-natural gas and oil opportunity is to tap into technology startups,” Wood says. “The way to do that is to start new companies. Whether it’s wealthy private individuals or corporations, the country is showing signs of strong interest in putting money in venture capital and private equity.”
At least one other U.S. firm is trying to make inroads into the country. San Francisco-based Starboard Ventures is working closely with the Russian government and pursuing partnership opportunities with Russian incumbents. But it’s not an opportunity to be undertaken lightly.
“This is not a place for ‘fly-ins’,” says Starboard co-founder Stewart Guenther. “Having a strong network and presence within Russia will continue to be a key differentiator.”