Tim Gosling in Moscow -
On September 8, Russian internet retailer Ozon announced the biggest investment to date in the country's e-commerce segment with a $100m in private equity financing, in a deal which illustrates the huge potential of the sector. Russia's Fast Lane Ventures (FLV), whose KupiVIP online retailer previously held the investment record with a $55m capital injection in April, is one of those firms chasing the rapidly rising number of Russia's internet shoppers.
FLV aims to set up one new e-commerce site per month by taking models tried-and-tested in western markets and introducing them to the under-served Russian sector. "Russian consumers are the same as those found all over the world, as our dating site Teamo shows," says Marina Treshchova, CEO of FLV. "70% of visitors to the site are men, but 80% of paying customers are women," she laughs.
Since its inception in June 2010, the company has partnered entrepreneurs in establishing 12 sites, and hopes to have another five or so up and running by the end of the year. "It's what we call the Fast 50," explains Treshchova. "We give ourselves a 50-day cycle from approval to launch."
That need for speed is driven by FLV's target to grow the portfolio of companies in time to grab as big a slice as possible of a Russian e-commerce market worth a potential $80bn, according to Treshchova. "The internet will not wait," she warns, "speed is the key."
Providing seed capital of €0.3m-0.5m, management and operational support, and access to external financing via investment partners, FLV plans to build each of its project companies into a $100m business by the time it looks to exit them, she says.
Each business should be profitable within two years, by which time they could be ready to be offloaded, but Treshchova says FLV will wait for up to four years in order to maximize value. "We've already had approaches for some of our companies, but it's too early right now."
It makes sense to be patient, because Russia's e-commerce sector offers huge opportunities to any investor that can unlock the potential of "60m internet users, which is set to expand to as high as 80m in 2012," according to Treshchova.
BP Bullhound, a UK-based technology sector investment bank, estimated in a recent report that Russia's e-commerce turnover in 2010 reached no higher than $8bn, or just 1.6% of total retail in the country. The project models that FLV is replicating have helped push that figure to 11% in the UK, 8% in Germany and 6% in the US.
This potential saw investors jump at a recent IPO by Russian search engine Yandex, which in turn helped FLV by raising the sector's profile among US investors. "Most of our investors are European - and from the UK and Germany especially," explains Treshchova, who, though she accepts the level of risk is relatively high, claims that FLV does not work with bubbles.
"We only build real businesses, with conservative valuations. Attracting investors depends on your reputation and relationships. We have several repeat investors into the projects," she says, before suggesting: "Maybe offline retail is more risky now given the growth opportunities for the internet."
The innovation conundrum
However, the growth of e-commerce has been extremely sluggish in Russia until very recently - but on the supply side. Treshchova says the original spark for the idea of FLV came after company founder Oskar Hartmann casually discussed six "obvious projects," only to turn around after two years to find that still none of them had been launched in Russia. She notes with incredulity that, "the 10 largest e-commerce players in Russia have remained the same for the past decade."
At the same time, FLV exposes the Achilles heel of innovation in Russia. Although there's no question the country is still turning out skilled technicians, Russian innovators continue to disappoint investors when it comes to the business side of the equation. Of the company's 12 sites already established, only two evolved out of projects that had no previous connection with the FLV team, whilst fully eight are the babies of members of the FLV innovation committee. Treshchova says it's reviewed around 300 projects so far this year, but found that the vast majority suffer from poor business models and investment horizons. "FLV wants tried-and-tested models - 60% of our portfolio has global prototypes which have been running for over a decade - and clear vision," she says, admitting that many entrepreneurs are put off by FLV's "aggressive execution."
However, it's not only the different world views of techies and investors that hold back Russia's e-commerce. The logistics conundrum across Russia's huge landmass also plays its part. No shock then that Ozon CEO Maelle Gavet told Vedomosti that the bulk of the $100m raised will be used to improve the company's dispatching and delivery, pointing out that two-thirds of its 1,100 employees are engaged in fulfillment.
"There are only three players in the market that offer outsourced logistics services," Treshchova says. "We use one for our first site [shoe retailing site Sapato], because the $30m investment needed to build our own operation is too large - for the moment at least."
However, outsourced logistics struggle to offer full coverage of the country. "No one can challenge the delivery capability of Russia Post of course," she admits, "but it costs $15 to send a small package, and that makes it unviable."
Yet that's not about to slow down FLV, says the CEO, who says the company should hit its capacity of 20 start-ups in the stable in 2012, which should then in turn prompt the first exits. The opportunity is simply too big to stand still. "In the European market there are five groups doing what we're doing," Treshchova announces, "but there's zero competition in Russia."
Jason Corcoran in Moscow - Russian banks are disappearing at the fastest rate ever as the country's deepening recession makes it easier for the central bank to expose money laundering, dodgy lending ... more
bne IntelliNews - The Kremlin supported by national sports authorities has brushed aside "groundless" allegations of a mass doping scam involving Russian athletes after the World Anti-Doping Agency ... more
Jason Corcoran in Moscow - Revelations and mysticism may have been the stock-in-trade of Nikolai Tsvetkov’s management style, but ultimately they didn’t help him to hold on to his ... more