Ben Aris in Moscow -
Leonid Boguslavsky is by far the most successful investor in Russia's internet sector, but you wouldn't know it to look at him. A former Soviet-era computer science professor at the prestigious Academy of Sciences, he now heads ru-Net Limited, an investment company with over 40 companies in its portfolio worth $700m, whose tentacles stretch around the world but remain rooted in Russia.
Boguslavsky seems to have the Midas touch with start-ups. Going down the list of firms in which he was either a co-founder or early partner reads like a who's who of the Russian internet. He was one of the driving forces behind Yandex, Russia's answer to Google (and still twice the size of Google in the Russian-speaking corner of the internet). Yandex floated in New York in 2010 with an $11.2bn market capitalization, making it the largest online concern in Europe. He was an early investor into EPAM Systems, which in February 2012 went public on Nasdaq in a placement that raised $72m, or 14.7% of share capital. Only about 1.52m of the 7.4m shares sold came from the company, while the remainder were offered by selling shareholders. And he was also an early co-investor into Ozon Group, Russia's answer to Amazon, which will probably be Russia's next billion-dollar internet IPO. Ozon saw sales rise 55% last year to reach $250m, Ozon's CEO Maelle Gavet told bne in a recent interview.
But little of this success is visible in ru-Net's modest offices tucked away in the upper floors of a hard-to-find shopping centre on the unfashionable side of the Moscow river. Boguslavsky is likewise understated; he enters the small meeting room where the interview is held dressed in jeans and a sweat top, a few days of stubble on his chin, and speaks with the relaxed but authoritative air of the academic he once was.
The early years
As former president Mikhail Gorbachev's reforms unwound restrictions on foreign investment, one of the things to arrive in the Soviet Union were computers. The Russian state had been run on pieces of paper, but as the economy began to commercialise at the end of the 1980s everyone wanted to move into the 20th century.
Specialising in mathematical models of protocols - a precursor to the software that drives the internet - the arrival of the PC transformed computing from an arcane academic discipline into a business. Boguslavsky set up a company and won commissions from the Russian and Czech governments to build integrated IT systems. Working on Oracle machines, Boguslavsky quickly established himself as the go-to man in Eastern Europe and was soon hired by the US technology company in 1990 to represent its business in the Soviet Union.
The next decade saw a lot of change. The Soviet Union collapsed the following year, but that only increased the demand for IT services and he spent another decade as the exclusive distributor for the US technology firm in Russia and its former Soviet Republics. Finally, after completing a job for PwC, the consulting company bought Boguslavsky's company in 1997 in Russia's first big tech acquisition and retained him as a consultant.
However, things in Russia began to change fast in 2000 after Russian President Vladimir Putin took over from the ailing Boris Yeltsin as the economic chaos of the 1990s gave way to an economic boom. "We wanted to become more professional, so we were joined by some US citizens in 2000 who had the same sorts of ideas and set up ru-Net Holdings - an investment company with an initial capital of $20m," says Boguslavsky.
The growth years
The dot.com enthusiasm spread to Russia, but as the country was still so backward and essential pieces of infrastructure like widespread credit card usage were simply missing, building up companies remained a largely academic exercise. Nevertheless, ru-Net Holdings began establishing obvious companies that it assumed one day they would come into their own.
Among the early ventures was Yandex, which has been a runaway success. "Our strength is that we support business development. Our team is full of professionals and we can offer both technical expertise, as well as management skills and finance," says Boguslavsky. "Yandex and Ozon are examples of when we invested in the people. In some cases companies - I prefer to think of them as 'projects' - come to us, but in most we go to them."
Over the last decade he has been involved in dozens of firms. Of course, access to capital was an important factor, but as Russia's first successful tech entrepreneur the combination of technical expertise with proven management experience made Ru-Net Holdings unique in Russia.
The first half of the naughties was also about building up businesses, but by the middle of the last decade Russia's stock market was increasing in value by 50% a year and the sector was starting to attract outside attention. On top of that, a middle class was emerging which made e-commerce a viable business for the first time.
In 2006, the company restructured again, placing its existing assets into a special purpose vehicle and ru-Net Ltd was formed to invest into new businesses, this time with $700m of capital available. "Now ru-Net Ltd has over 40 companies in its portfolio, half of which are in Russia and the rest in the international markets," says Boguslavsky. "We have 13 investments in the USA - more technology companies and not aimed at the consumer. Things like big data, cloud computing and security companies... It is important to be in the US, as it is the kitchen and they are cooking up new technologies. It helps with all our other investments in Russia, India everywhere. In the emerging markets it's more about consumers and all the models are the same."
As the decade wore on, Boguslavsky became increasingly proactive, seeking out good ideas and getting involved very quickly, investing and advising on the best start-ups that were moving into some of the more obvious niches. "We were the first investors into Big Lion," says Boguslavsky, naming Russia's biggest daily coupon company. "We approached them a few weeks after they had launched the site. It was profitable and bigger than [US rival] Groupon. Now it has got to the scale where its business model doesn't only depend on group buying."
Another example is the movie steaming site ivi.ru, which is partly owned by a rising star of the Russian internet, Dmitri Alimov, whom Boguslavsky spotted at a very early stage. Boguslavsky approached ivi.ru shortly after the site was launched and it is now the premier movie-streaming site in Russia. In its first serious round of capital raising in September 2012, the company attracted Barings Vostok Capital, Russia's most successful private equity investor, among others.
Russia's internet sector has now moved into a fast growth phase. The country's consumers are now as wealthy on a purchasing power parity basis as the poorer countries in the EU and things like consumer credit and credit cards are growing at an exponential rate. While there are enough people and money about to set up a profitable business with millions of dollars in turnover, most companies are focused on what is the electronic version of a land rush - to grab as much market share as possible from what largely remains virgin territory. Slugging it out in the market place will come later once all Russians have been exposed to the different services on offer.
"Most of the companies we got into in the last three to four years are still in the growth stage," says Boguslavsky. "The dilemma is always how fast you want to grow: e-commerce you could earn a profit now but at the cost of growth. If the company grows 50% in under two years, it will build up some sizeable revenues, but if you grow at only 20-25%, then you can earn profits. However, at the moment everyone is in competition to grab the market share and make sure their company is in the top one to three. It is very costly."
While Russia's e-commerce and internet industry is still growing up, it is already starting to attract international interest. ru-Net started to go international about three years ago. The motive was less about the problems or uncertainties of working in Russia and more to do with keeping in touch with what is going on in the investor.
"Russia has come out of the blue and no one understands how to do business here and our experience is a competitive advantage," says Boguslavsky. "We are recognised as the same animal as the other foreign tech funds and not just some crazy Russian guys with a bit of money. It is good for us too, as we learn new tricks and ideas that we can use in our other businesses."
ru-Net faces a bright future. Russia's online industry is growing fast, and rising incomes and increasing broadband penetration is only going to make doing business easier. Added to that is Russia's vast size, which makes it ideally suited to e-commerce as retailers struggle to figure out a way of covering a market that literally extends halfway round the world: the e-commerce industry was worth $25bn in 2012 and that should grow to between $90bn-130bn by 2020.
In the meantime, ru-Net has all its ducks lined up to be at the leading edge of this transformation. "In the last 18 months we had four exits and we have several other companies we could exit from now if we wanted to," says Boguslavsky. "They are at a late stage and if we need more liquidity we can sell them."
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