— When did you first invest in Russian business?
— In 2006, in a company called Quintura. a developer of search systems. We then supported the media project Entermedia, specialising in multi-platform advertising, including in games. KupiVIP.ru was the third. Then came Drimmi, a social gaming service. We also invested in Oktogo, one of the biggest hotel reservation services. And quite recently, we supported HomeMe, a portal for selling furniture online.
— How and when did you get the idea of investing in the KupiVIP.ru project?
— I realised long ago that fashion is very important for Russian consumers. and this is an extremely attractive business segment for us as investors. The Russians love fashionable things. All the leading brands are represented in Moscow. When we began discussing how to invest in the Russian fashion industry in 2008, there was no trace of any online trading in this sector in Russia. The internet commerce market was clearly lagging behind, there were problems with internet access and with organising payments - Muscovites had not yet even got used to paying by card. And of course there were delivery problems due to the enormous distances. It’s quite an epic to send something from Moscow to Vladivostok.
But in the West, fashion was already an important part of electronic commerce. It was a real challenge for us to introduce Western business models in Moscow.
Quite soon we came to the conclusion that if we wanted to get into the Russian market, the infrastructure would have to be created. Experienced entrepreneurs with knowledge of the local market would have to be found. And we found the right man, Oskar Hartmann. We met to discuss investments in the KupiVIP project in 2008. We talked for two hours and realised that our views coincided. A few weeks after this conversation, the KupiVIP project had already begun.
— Is KupiVIP.ru the most successful of your projects?
— It’s the biggest, which amounts to the same thing. In general, in the world of venture capital, success is measured by what we call “exit” – getting out of the business. Mangrove invests in companies at the early stages of their development. Therefore we don’t usually talk about profits. But of course, KupiVIP.ru is a success; after all, it is the first in its sector on the Russian market. And it is important not only because it is big. Its example encourages many talented Russian venture capitalists; people came to believe that it was possible to carry out electronic commerce projects successfully in Russia.
— How much did you invest in the project?
— I can’t give you specific figures, but I’ll tell you frankly: electronic commerce projects in Russia require a lot of money. Executive discipline is not very high, and there are problems with the quality of service. Therefore, if you intend to open a large-scale business, you have to invest in your own structures: finance, logistics throughout the country, and delivery to the end user (“the last mile”, as they say). You have to set up call centres. All this involves considerable expense. It usually frightens Western investors off, but we decided to go ahead.
Electronic commerce projects in Russia require a lot of money.
— How do you communicate with those carrying out the project in Moscow?
— We share not only money, but also knowledge and experience. We give advice, we help with coaching. Participation in the discussion of plans and ideas is characteristic of Mangrove in general. We don’t manage the business of our startups, the control levers are fully in the hands of the company management, but we always express our opinion. We are in touch with Oskar several times a week, and in the first stages, it was literally every day. Mainly by Skype, of course. In Mangrove I am responsible for Russia and Ukraine, so I am frequently in Moscow, keeping track of the market. And not only in Moscow, but also in St. Petersburg and Kazan.
— When do you expect to recoup the money invested in the KupiVIP.ru project?
— The company continues to grow, but a realistic forecast would be two to three years.
— Is the Moscow business climate favourable enough for European investors?
— In principle, I cannot see any obstacles to investment. And the process is not that different from the way things are done in the West.
In principle, I cannot see any obstacles to investment. And the process is not that different from the way things are done in the West.
— Is bureaucracy a problem?
— This doesn’t directly affect us in Mangrove, but it does indeed affect the business of the companies with which we work. One of the consequences is that as a rule, there are more people working in Russian startups than in similar ones in the West. This is partly explained by bureaucracy and by the fact that more resources have to be spent on financial services.
— What can be done to improve the investment climate?
— At present there are relatively few investors actively putting venture capital into Russia. The main reason, as I see it, is that foreign investors underestimate the potential of the Russian market. The second reason is that investors have no clarity about getting out of the project and getting their investments repaid. A venture investor needs to be sure that five to seven years after its start, a business can be sold or taken to IPO, or that a return on the investments can be obtained in some other way. I expect that soon, maybe after a few years, there will be many successful exits from projects, and more and better publicised sales of companies. This success will be an inspiration to many foreign investors.
Let me remind you of the history of Skype. When the company was successfully sold to eBay, it was a revolutionary event which changed the whole world of the venture business in Europe. It divided the age into two: before Skype and after Skype. Something similar could happen in Russia too in the next few years.
Moscow consumers are seeking more convenient ways of making their purchases – they no longer want to waste two or three hours in traffic jams.
In 2012, the Russian electronic commerce market was estimated at 10 to 12 billion dollars, this being less than 2% of retail trade. On average throughout the world, this figure was 6.5-7%. So there is a vast amount of room for growth. The infrastructure is being formed a little at a time, Moscow consumers are seeking more convenient ways of making their purchases – they no longer want to waste two or three hours in traffic jams.
Apart from this, the variety of electronic trade is expanding. For consumers in the Russian regions the accessibility of goods is the key factor. They can obtain through the internet things which are not on sale in shops in their towns. So you could say that both big cities and the regions have good prospects in different ways.
— How do you see the situation in electronic commerce in Russia today?
— It seems to me that Russian entrepreneurs are now basing their online companies in approximately the same sectors of the economy as their colleagues in other countries. There was recently a sudden rise in the grown of mobile phone trade, and several interesting projects arose. The growth in electronic trade continues, successes in the online gaming industry are not at all bad, interesting studios of game developers and other talented entrepreneurs are entering the market. Russian businessmen are strong in cloud services and in the social networks business.
The Russian landscape is now very varied. The picture has changed greatly over the past few years. Previously it was all reproduction of Western business models and nothing else. But now there are many completely innovative and original projects. This is an important landmark for the Russian internet.
— What is your advice to potential foreign investors?
— If you intend to develop a business seriously in Moscow, you should realise from the very beginning that you will have to expend a lot of time, effort and resources on it. It is important for Russians to have personal contacts, meetings face to face, not over the internet. You must at once get used to having to visit the country frequently. Not once or twice a year, but once or twice a month, as we and other foreign investors do.
Now there are many completely innovative and original projects. This is an important landmark for the Russian internet.
And another thing: certain legal aspects make certain business categories less attractive. I refer to the procurement of goods abroad. Because of dues and other obstacles, foreign goods are significantly more expensive than local goods. For large companies, this is not a serious matter, but for small ones, insurmountable problems may arise.
— What do you think of the fact that many Russian startups are copies of Western originals?
— If it’s a matter of copying some interesting innovative project and adapting it to the Russian infrastructure, then why shouldn’t they be? Both KupiVIP.ru and OkTogo.ru have analogues in the West. But there were no such projects in Russia, and they appeared together with their own infrastructure.
— What is you opinion of state support for venture business?
— Government initiatives such as “Skolkovo”, “Rosnano” and others bring great benefit. But you have to be realistic, and realise that not all startups will be a success. Such is the nature of venture business. The main thing is that the project should be interesting and that its leaders should be ambitious and well-motivated. This is equally important for Russian investors and Western ones.