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Outline of most remarkable deals in IT sector of Ukraine in 2015

Summary includes TOP 5 Ukrainian VC & PE deals in Ukraine: Snapchat on Looksery, seed investments into Petcube, EBRD into Depositphotos and late seed by an undisclosed investor, Goerge Soros’ ...

Ukraine’s IT sector is of interest to foreign investors amid fundamental risks related to geopolitical tensions in the Eastern Ukraine and Crimea. It is due to the mobility and detachment from location areas via internet connectivity option. We tried to fathom backgrounds of the sellers’ side, as well as motifs of the buyer’s choice and determine key data on the deals with comments from the participants. 

1. Odessa is one of the leading IT hubs of Ukraine. Over vast 45 million Ukraine, the city is famous by its distinctive trait of warm humor, expressive type of trade and markets, and hanging-in-the-air cosmopolitan environment, being a port city at the Black Sea in the South of Ukraine. Background is like soil that produces exotic or ordinary products taking the odds. So here it is “made in Odessa” Looksery, a joky style application to make your videos look fluky, funny, stylish, disguised or attractive, and even more than serious. Thus,

Snapchat acquires Looksery for estimated USD 150mln, largest deal in IT of 2015 in Ukraine

Deal Market/Type:  

Corporate Buyout

Target company:

 

Looksery

Country: Ukraine

Sector: IT  

Product description: The application is based upon facial recognition in polygonal face mask altering face in videos. The math algorithm in the app calculates 30 frames per second, making it possible for a human eye to sense effects real time.

Stake involved (%):  

100 

Buyer:

Snapchat

Country: the USA

Sector: Social media

Seller:

Looksery

Country: Ukraine

Sector: IT 

Date of Announcement:  

2015  

Deal Status:  

completed  

Deal Value (US$ mln):  

estimated 150

Social media Snapchat manifested its interest in Looksery application in late spring of 2015 and finished the deal by the end of the year. By the time of striking the deal, the ramping up Looksery had been generating USD 1mln a month in license sales to foreign telecommunications companies mainly. Outstandingly, the application generated more than 2mln downloads at 90% positive responses during first 2 months only. The number of Looksery employees was about 50, of which 30 were programmers. Looksery team joined Snapchat upon the completion of the deal.

While the parties do not disclose the deal amount, analysts estimate it at USD 150mln. To note, the number of videos viewed by Snapchat audience was more than 6bn in 2015, as Financial Times puts it. We suggest that Snapchat is looking to monetize the application at selling the branded and featured video lenses. Also there are prospects to use the application in film industry.

“In search of product development, Looksery team had noticed growing demand in frontal selfie cameras.  The very problem of frontal camera lenses is that they make a person look chunky. At the beginning, we tried to make a face look slimmer, and moved to build upon it via putting on other facial effects. It took three months to modify the idea and program core 

algorithms, and about a year to produce a feasible product in 2014 and gain publicity in Kickstarter, CNN, Forbes, Business Insider and other”, explains Yuriy Monastyrshin, founder of Looksery.

 So, behind the scenes, there is a super angel investor Victor Shaburov who sold SPB Software to Yandex for estimated USD 38mln and Handster to Opera for estimated USD 10mln. Mr. Shaburov sponsored math competition among schools and programming competitions in Odessa. There he met Yuriy Monastyrshin, 23 year old, who generated the novel idea and developed the application to the startup together with his team. Later, Looksery advanced to crowdfunding at Kickstarter raising USD 46,000 plus popularity. And finally, Snapchat bestowed a graceful exit, and Looksery team joined the US Snapchat.

 

2. Those who figure out a problem or challenge of life, very often make a business of it. Having paved the way, one becomes a ground breaker and innovator of living conditions for many. Here is a regular story of creative approach to challenging problems. A dog owner Alexander Neskin became startupper with Petcube, as his dog was furious taking up residence in a new flat. Left alone doggy had been shredding sofas and destroying other furniture and barking to drive neighbors mad. The IT pro and robotics admirer from Kyiv, Ukraine bought Arduino platform, joined up camera, two servo motors, and laser pointer, created a web interface to play with his dog online. He also allowed friends to play with Rocky via Internet, and it turned out to be fun and solution approaching at the business idea. So, Petcube is handy, from local Hackers and Founders and global Kickstarter to attracting venture capital and generating sales 

Petcube attracts additional USD 2.6mln of investments

Deal Type:  

Venture Capital, late seed

Target company:

 

Petcube

Country: Ukraine

Sector: IT

Product description: Home monitoring device (4x 4 x 4 inches)  with a build-in wide angle camera of 138° degree streaming HD 720p video, 5mW 3R class laser, motion and sound detector, microphone and speakers wifi connected and managed by free app for smartphones

Stage:  

Series B

Investors:

Almaz Capital, AVentures Capital, Y Combinator

Country: Russia, Ukraine, the USA  

Sector: Investment Funds, seed accelerator

Date of Announcement:  

January, 2016

Deal Status:  

completed  

Deal Value (US$ mln):  

2.6

IT industry investments funds of Almaz Capital (offices in Moscow, Russia and California, the USA) and AVentures Capital (Kyiv, Ukraine) with an input from Y Combinator decided to channel additional USD 2.6mln to Petcube Inc. Prior to that, the investment funds disbursed USD 1.1 mln in spring of 2015. Y Combinator included Petcube into its batch of Y Combinator’s Demo Day for the Winter 2016.

Petcube generated sales for more than USD 2mln during one year. From a start of first shipment of goods in November 2014, the company sold more than 20 000 gadgets for pets by March 2016.

“The money from the attracted investments will be channeled to expanding of distribution and developing of more pet oriented features. As of October, 2015 the company is selling offline over more than 400 locations, mainly in the USA. The sales are growing in online and offline points of sales”, says Yaroslav Azhniuk, the CEO of Petcube.

As of present, the company staff amounts to about 30 employees. The offices of the company are in Kyiv (Ukraine), Shenzhen (China), and San Francisco (California). Petcube decided to launch a new product Petcube Protect to be available via subscriptions in a cloud storage space. The idea is to deliver a new product making a security surveillance camera out of a pet camera via sound and motion sensors to see if someone has entered a designated space. The price tag is USD 10 -30 in subscriptions. To remind, Petcube gained popularity in Kickstarter with its IoT (Internet of Things) gadget and had raised more than USD 250,000 setting USD 100,000 goal.

3. Depositphotos attracts USD 4mln from EBRD via Venture Capital Investment Program, and USD 1 mln from TMT Investments. Later on,

TMT investments exits Depositphotos on 7.1% out of 16.1% stake for USD 5.85mln

l Type:  

Venture Capital, late seed  

Target company:

Depositphotos

Country: Ukraine

Sector:  IT, Photo Stock

Stake involved (%):  

minority

Buyer 1 :

European Bank for Reconstruction and Development

Country: Ukraine

Sector: Investment

Deal Value (US$ mill):  

4

Buyer 2:

TMT Investments

Country: the UK

Sector: Investments

Deal Value (US$ mill):  

1

Buyer 3:

Undisclosed private individual

Stake involved (%)

7.1

Deal Value (US$ mill):  

5.85

Seller:

TMT Investments PLC

Country: the UK

Sector: Investments

Date of Announcement:  

December 2015, March 2016

Deal Status:  

completed

Total Deals Value (US$ mln):  

10.85

The European Bank for Reconstruction and Development has acquired a minority stake in Depositphotos for USD 4mnl, while Dmitriy Sergeev remains a major shareholder. In the frames of the deal another shareholder of TMT Investments PLC channeled additional USD 1mln to finance working capital. Back in 2011, TMT investments stroke a deal with Depositphotos for some USD 1mln. The EBRD funds must be spent within operations of Depositphotos office in Ukraine, according to the terms. Notably, EBRD via Venture Capital Investment Program chose Depositphotos as its first financing project in Ukraine’s IT sector.  

Soon after the strategic deal with the EBRD, TMT Investments managed to sell 7.1% share stake of its 16.7% ownership to an undisclosed private investor for USD 5.85mln in spring of 2016. Considering the numbers, Depositphotos market value may increase drastically in next several years.

Depositphotos is one of the largest online photo banks. There are more than 45mln photos, vectors and videos in stock with 10mln visitors a month. The company is selling worldwide, providing content and support on 20 languages. The company’s headquarter moved to New York, while representative offices are in the GB, Germany, Italy, Russia, and R&D office in Ukraine. The number of employees stands at 260 in Ukraine alone.  The company generates more than USD 10mln in revenues yearly, according to Artem Inyutin, head of investments at TMT Investments.

 “As of present, 70% of the company’s budget goes into Google context ads and banner ads. At this, we are working to reduce dependence upon search engines, which brings about 25% of profits. 30% is made by PPC (pay per click) and mailing lists, while partner programs, social media, offline events together with media projects bring up to 40% of income flows. I support the exit of TMT Investments, because this deal provided the company with a higher market esteem”, said Dmitriy Sergeev, co-founder of Depositphotos.

 

4. Goerge Soros’ Ukrainian Redevelopment Fund becomes a strategic shareholder of Ciklum

Deal Type:  

Growth capital

Target company:

Ciklum

Country: Ukraine

Sector: IT engineering and outsourcing  

Stake involved (%):  

Blocking stake 

Buyer:

Ukrainian Redevelopment Fund via Ciklum Group Holdings

Country: the USA and the British Isles

Sector: Private Equity

Seller 1:

Horizon Capital

Country: Ukraine

Sector: Private Equity

Date of Announcement:  

2015  

Deal Type:  

Acquisition  

Deal Status:  

completed  

Seller 2:

Majgaard Holding Ltd.

Country: Cyprus

Sector: IT

Total Deal Value (US$ mln):  

Undisclosed 

George Soros’s Ukrainian Redevelopment Fund (URF) purchased stakes in Ciclum from Ukraine’s Horizon Capital equity fund and from the Majgaard Holding Ltd. registered in Cyprus by Danish founder of Ciklum. Soros’ URF, which is registered in the USA, bought Ciklum’s shares via a British Isles company named Ciklum Group Holdings Ltd to gain at least a blocking stake in Ciklum Ukraine.

Horizon exited Ciklum whose minority stake it took in 2012. This is a classical exit for the fund reselling equity in 3-5 years period. Ciklum is not a public company and the parties involved signed a confidentiality agreement, prohibiting a disclosure of the deal details. Ciklum sales had been increasing during three years to stand at estimated USD 70mln in 2015.

The organizer of the deal was AVenture Capital. As a matter of fact, URF placed the managing partner of the venture capital fund Andrey Kolodyuk to become a board member of Ciklum.

“Having received a wealthy partner, Ciklum has a lucky chance for success to building a global company via takeovers. Eventually, we see to IPO in New York”, says Kolodiuk.

Ciklum is experienced in takeovers and setting business operations. In 2009 Ciklum bought Mondo, in 2011 it acquired 50% stake in SCR Gruppen, and in 2013 Ciklum took over Kuadriga. Founded in 2002, Ciklum became a global software engineering and IT outsourcing company, with its core office in Kyiv Ukraine. 

The number of employees in Ciklum amounts to more than 2000 employees in Ukraine alone. The company has its sales offices in the USA, Israel, Poland, Spain, Romania, and the Netherlands.

For nine months Goerge Soros and his team were looking for investment opportunities in Ukraine, minding tough geopolitical situation. Finally, Soros’s fund chose its first IT company in Ukraine. “I am investing in a dynamic company that represents the future of Ukraine, I call the ‘New Ukraine’ – Ukrainians who are young, well educated, and eager for their country to build an open society”.

 

5. Horizon Capital invests in Rozetka, taking at least 15% in undisclosed share stake 

Ukraine’s e-commerce market doubled to UAH 25bn in 2015, according to PROM.UA. Despite drastic devaluation of the local currency, online orders increased by 30% y/y in physical terms last year. It is expected to expand to UAH 34bn in 2016 and UAH 44bn in 2017. Internet penetration stood at 50% in 2015, while in cities with population more than a million citizens internet penetration reaches about 80%. At this, increasing number of postal services and online banking warm up e-commerce market. As a result,

Deal Type:  

Growth Capital  

 Target company:

Rozetka

Country: Ukraine

Sector: E-commerce   

Stake involved (%):  

(Undisclosed) 15

Buyer:

Horizon Capital

Country: Ukraine

Sector: Private Equity

Date of Announcement:  

2015

Deal Status:  

completed  

Deal Value (US$ mill):  

estimated 32 - 35

Horizon took a stake in Rozetka through Emerging Europe Growth Fund II (EEGF II). The value of the deal for an undisclosed minority stake stands at estimated USD 32-35mln. The market analysts believe the minority stake is at least 15% to gain voting rights for Horizon. The founder Mr. Vladislav Chechotkin remains a major shareholder.

Initially, Rozetka was an online electronics retailer. As of present, it also offers baby staff, sporting goods, home and garden, auto products, clothes and foot wear, and jewelry. On the web site one can buy fly and railways tickets, as an option. Lately, it started sales of chocolates and strong spirits as well as soft drinks and non-perishable goods. Rozetka grasps 40% of local e-commerce market, which stood at UAH 25bn (USD 1bn), accounting to only 2% of Ukraine’s retail market in 2015. Rozetka launched its e-commerce project in 2005 with USD 250 000 of contributed capital. The company retained up to 90% of its earnings to become local e-commerce major. Horizon Capital has become the first outside investor of Rozetka.

“Fresh investments into business are the best way to fight competition, if any. We will channel funds into improving operations and logistics. In particular, warehousing facilities will be increased in two times.  We are finishing phase 1 project of 30 000 square meters facility in Kyiv. We are keen to develop the company’s infrastructure”, said the founder of Rosetka Mr. Vladislav Chechotkin.

“It is an important deal for the fund. We are happy to invest together with pioneers of fast growing e-commerce market of Ukraine who are aiming at innovative approaches to secure growth” said Lenna Koszarny, the CEO of Horizon Capital.

Written by Bogdan Zakharkiv bogdan@inventure.ua |+38 067 354 01 75

 

 


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