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2012 Update on Internet in Russia THE RUSSIAN WEB UNTANGLED
Relentless Audience Growth Russia’s Internet audience is now the largest in Europe at 51m monthly users,
ahead of Germany which it passed in Q4 2011. Yet with online penetration
below 60% outside Moscow and St. Petersburg, we forecast continued strong
growth in Internet audience in the rest of the country (the “regions”).
Online Monetisation Powering Ahead Now that Russia has achieved European leadership in online audience, e-
commerce and digital advertising are in its sight. While local issues remain,
the Russian Internet ecosystem continues to develop, and audience
monetisation is ramping up.
Distinctive Development Path The vibrant local Internet community, largely centred in Moscow and St.
Petersburg, continues to invent Russian-specific ways to define the web, with
social and logistics as key areas of home-grown innovation. Local champions
continue to dominate the Internet in key categories, and have actually
improved their leadership in the past year compared to their international
peers.
Investment Activity Mirroring Market Development Foreign investments in the Russian Internet space have increased markedly
in the past year, as funds and strategics alike are increasingly keen to position
themselves in such a fast-growing opportunity. Conversely, the local investors’
ecosystem has continued to develop, and several sophisticated specialist
funds have emerged that are now also looking to invest abroad.
Conclusions We foresee continued double-digit growth in key metrics for the remainder of
this decade. Strong progress has been made in certain sectors such as e-
commerce, by companies who have addressed key local problems. Watch out
for this trend in other sectors in the next 18 months – our picks include online
travel, display advertising and digital content.
GUILLAUME BONNETON
[email protected] London: +44 207 101 7578
SASHA AFANASIEVA
[email protected] London: +44 207 101 7569
INDEPENDENT TECHNOLOGY RESEARCH
SECTOR UPDATE ~ JUNE 2012 ~ DIGITAL MEDIA
Important disclosures appear at the back of this report. GP Bullhound LLP is authorised and regulated by the Financial Services Authority
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INTRODUCTION
Now: Largest European Online Audience The Russian Internet audience grew around 14% in 20111 to become the largest in Europe, overtaking
Germany. Broadband access is still skewed to larger cities – penetration is 37% in Russia while in Moscow
and St. Petersburg it is at 91% and 76% respectively. The regions’ broadband penetration is around five years
behind and forecast to reach 59% by 2015. Small towns and rural areas benefit from mobile Internet
expansion – currently at 22% of the population2.
E X H I B I T 1 – E U R O P E A N O N L I N E A U D I E N C E A N D G R O W T H
Source: ComScore Media Metrix, 2012; GP Bullhound
Continued Double-Digit Growth Last year, 93% of new Internet users were not from Moscow and St. Petersburg, but from the regions – this
trend is likely to continue as the gap in Internet penetration is still at around 15%3. More established local
players are leveraging this trend and are investing to expand their regional operations rapidly: for instance
Avito raised $75m in May 2012 to drive audience acquisition4, mostly in the regions; Ozon raised $100m in
September 2011 to strengthen its logistics and distribution network across the country.
Russia’s Internet users are forecast to reach 67.9 million at end 2012, comprising nearly 50% of the country’s
population 5.
E X H I B I T 2 – A N N U A L G R O W T H I N A U D I E N C E P E N E T R A T I O N B Y R E G I O N S I N R U S S I A
Source: FOM, 2012; GP Bullhound
1 Source: ComScore Media Metrix, September 2010-11 2 Source: VTB Capital, March 2012 3 Public Opinion Foundation, spring 2012 4 GP Bullhound was engaged as an advisor to the company 5 Source: eMarketer, 2012
53m 51m43m
38m24m
23m 22m 18m12m
6m
14%
2% 2%0%
6%4%
1% 2%4%
Online audience (Dec 2011) Growth y-o-yGrowth (Sep 2010-11)
68% 71%53% 50% 53% 45% 32%
+4.0% +4.0%+6.0% +5.0% +8.0%
+6.0%+8.0%
72% 75%59% 55% 61%
51%40%
Moscow St.Petersburg
Towns with1m+
population
Towns with500k-1m
population
Towns with100k-500kpopulation
Towns with<100k
population
Villages
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Russian Websites Reaching Mass Scale Russian websites are steadily reaching the top audience spots in Europe. As of March 2012, out of the top five
European web properties by monthly audience, three were Russian: Mail.ru (first place), Yandex (third place)
and Vkontakte (fourth place).
E X H I B I T 3 – T O P E U R O P E A N W E B P R O P E R T I E S B Y U N I Q U E M O N T H L Y V I S I T O R S ( M A R C H 20 12 )
Source: ComScore, 2012; GP Bullhound
In specific categories, Russian properties have growing presence. For instance in just a year the Russian sites
within the top 50 largest European classifieds properties have increased their share from 9% to 14% of total
European visits in the category, while in apparel retail, the share of top Russian online properties has grown
from 3% to 8% (Exhibit 4).
E X H I B I T 4 – S H A R E O F V I S I T S A N D N U M B E R O F R U S S I A N S I T E S I N T H E E U R O P E ’ S T O P 50 F O R S E L E C T E D C A T E G O R I E S
Source: ComScore, 2012; GP Bullhound
79.5m 73.8m 71.0m 67.0m
46.7m 43.5m 42.8m 37.3m 37.0m 35.2m
Mai
l.ru
Gro
up
Axe
lSp
ringe
r
Yand
ex S
ites
vKon
takt
e
Dai
ly-
mot
ion
Ora
nge
Site
s
Deu
tsch
eTe
leko
m
MIH
Site
s
Schi
bste
dSi
tes BB
CSi
tes
Russian sites Other European sites
8%
11%
9%
7%
3%
14%
6%
3%
3%
8%
7%
4%
2%
9%
4%
2%
Apparel retail
Books retail
Consumerelectronics retail
Online services
Travel
Classifieds
Entertainment
News
Mar-11 Mar-12
3 5
5 8
5 6
2 3
3 4
7 6
3 4
2 7
Number of Russian sites in category top 50
Mar-11 Mar-12
% of visits to Russian sites in category top 50
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Audience Reaching Critical Mass Powering Monetisation At nearly 50% monthly reach of the entire Russian population, the Internet is now:
1) A viable marketing channel for national brands, whether global or local;
2) Large enough to justify initial outlay costs for logistics and payments systems.
As a result, all forms of monetisation now strongly outperform audience growth (Exhibit 5).
E X H I B I T 5 – A N N U A L G R O W T H C O M P A R I S O N O F C O R E O N L I N E I N D I C A T O R S I N R U S S I A (2 0 10 -1 1 )
Source: AKOR, 2012; J’son & Partners Consulting, 2011; Data Insight, 2012; ComScore, 2012; GP Bullhound
Accelerated Online Advertising In 2011, Russia’s online advertising market grew at 56%. For the first time, it overtook printed press, which,
interestingly, occurred in the UK in 2010 and in the US is only forecast to take place this year.
Television advertising retains a majority share in Russia with its unique ability to reach the mass audience of
this vast country, but the situation in more developed Internet markets indicates that this may well change. For
instance, Ford’s UK digital advertising spend overtook television for the first time in 2011, with newspaper
advertising in third place, but receiving only half of the online budget. “Five years ago”, says Anthony Ireson
(marketing director, Ford Britain), “digital would have been a distant fifth in the marketing pantheon6.”
In addition, as the Internet audience continues to grow, the shift in advertising budgets towards the online
channels will gain further momentum. Already in April 2012, Yandex’s daily audience surpassed that of one of
Russia’s largest free-to-air TV channels, First Channel (“Perviy Canal”), among inhabitants of large cities7.
This will accelerate as TV’s global reach weakens. Indeed overall weekly population reach of TV in ten key
countries including Russia decreased from 71% in 2009 to 48% in Autumn of 2011, as users prefer the more
personalised and flexible channels such as online through PC and mobile devices8.
6 Source: The Sunday Times, 20 May 2012 7 Source: East-West Digital News, 29 May 2012; for audience between 12 and 54 years of age 8 Source: Accenture survey covering Brazil, China, France, Germany, India, Japan, Russia, South Africa, Sweden and USA, September 2011
56%
25%20%
14%
Onlineadvertising
E-commerce Digital contentrevenue
Audience
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E X H I B I T 6 – R U S S I A , O N L I N E A D V E R T I S I N G S H A R E O F T O T A L A D V E R T I S I N G
Source: AKOR, 2012; Zenith Optimedia, 2011; GP Bullhound
With online at around 17% of total advertising spend in 2012, Russia is approximately four years behind
France and Germany (Exhibit 7). We see a number of factors contributing to the increase of this share to
c.20% by 2015 – similar to that of France today:
� Internet businesses, such as online retail, continue to attract users through online advertising,
powered by the growing investment in the sector;
� Traditional brands switch to digital advertising to reach out to a rapidly growing audience across the
whole of the country;
� Foreign businesses continue to enter the Russian market – Digital River’s survey reports that Russia
came out on top of the list of countries where the companies questioned are seeking to expand
internationally in the next two years. It was named by 31% of respondents, ahead of Brazil (24%),
China (23%), India (22%), Japan (22%), Germany (21%) and the United Kingdom (16%)9;
� Small and medium sized enterprises use the more targetable digital advertising methods.
E X H I B I T 7 – O N L I N E A D V E R T I S I N G S H A R E O F T O T A L A D V E R T I S I N G – F R A N C E A N D R U S S I A C O M P A R I S O N
Source: Zenith Optimedia, 2010 for France; AKOR, 2012 and Zenith Optimedia, 2011 for Russia; GP Bullhound
9 Source: Digital River Press Release, 15 May 2012; 250 companies were interviewed, drawn from across Asia, Europe and North America, which operate in the software, gaming software and consumer electronics sectors and have over $250 million in annual revenues
$0.9bn $1.4bn $1.9bn $2.3bn $2.9bn $3.6bn$3.6bn
$4.3bn$5.9bn
$6.9bn$7.9bn
$8.9bn$7.2bn$8.7bn
$11.8bn
$13.7bn
$15.7bn
$17.9bn
FY2010A FY2011A FY2012F FY2013F FY2014F FY2015F
Other
Outdoor
PrintedpressRadio
Television
Onlineadvertising
7%9%
12%
15%17% 18% 19%
21%
5% 5%8%
12%
16%17%
20%
FY2005A FY2006A FY2007A FY2008A FY2009A FY2010A FY2011A FY2012F FY2015F
France
Russia
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E-commerce at an Inflection Point Although the Russian e-commerce sector is still nascent, at 1.5% of the total retail market, this is already
higher than Italy. There is room for huge growth, considering that the online share of retail in more developed
markets is near the 10% mark. In addition, out of the $10bn online sales in 2011, only c.45% came from
regions outside of Moscow and St. Petersburg, inhabited by 85% of the population, and already 70% of the
Internet users, implying that a key driver will be regional growth10.
E X H I B I T 8 – E - C O M M E R C E S H A R E O F T O T A L R E T A I L A N D I N T E R N E T P E N E T R A T I O N I N 2 01 1
Source: Data Insight, 2012, for Russian e-commerce share of total retail; Centre for Retail Research, 2012, for rest of Europe e-commerce share of total retail; Internet World Stats, 2012, for Internet penetration; GP Bullhound
Note: including ticketing and couponing, excluding B2B commerce
According to Data Insight research, the Russian e-commerce market has the potential to grow at an annual
rate of 16% to reach $18bn in revenues by 2015 – or 3% share of total retail. By 2020, it is estimated that the
e-commerce market would have grown to $30bn, at 5% of the overall retail market11.
E X H I B I T 9 – E - C O M M E R C E F O R E C A S T S
Source: Data Insight, 2012; GP Bullhound
Note: including ticketing and couponing, excluding B2B
10 Source: Data Insight, 2012 11 Source: Data Insight, 2012
40%
50%
60%
70%
80%
90%
100%
0% 2% 4% 6% 8% 10% 12% 14%
2011
Inte
rnet
Pen
etra
tion
2011 E-commerce Share of Total Retail
Russia in 2011
Poland
Italy Spain
Benelux
France
SwedenDenmark
Norway
SwitzerlandGermany
UK
Russia in 2015
$8bn$10bn
$18bn
$30bn
FY2010A FY2011A FY2015F FY2020F
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The key growth drivers for Russian e-commerce include:
� More users, especially in the regions outside Moscow and St Petersburg;
� Internet users becoming accustomed to e-commerce – only 16.3m purchased over a six month
period in 2011 out of 54m – 30% of Internet audience, versus 73% in France12;
� Higher revenue per capita – disposable income per capita is forecast to grow at 24% per year
between 2010 and 201413;
� Higher frequency of purchases – as users become more accustomed to shopping online, frequency
of purchases should also increase;
� Increased basket diversity – Russian Internet audience is still dominated by tech-savvy users, who
purchase more computers and consumer electronics products (Exhibit 10). As more product
categories migrate online, such as furniture and home furnishings (4% in Russia vs. 8% in the US)
and auto and parts (5% in Russia vs. 9% in the US), the product range will diversify and average
online spend per user will increase.
E X H I B I T 1 0 – E - C O M M E R C E B R E A K D O W N B Y P R O D U C T C A T E G O R Y F O R US A N D R U S S I A ( 201 1 )
Source: East-West Digital News, 2012; eMarketer, 2012; GP Bullhound
Note: excludes travel and virtual goods
12 Source: Data Insight, 2012 for Russia; Médiamétrie — Observatoire des Usages Internet for France estimates, 2012 13 Source: Deutsche Bank, 2011
43%
23%
17%
19%
11%
4%
5%
2%
5%
9%
4%
8%
4%
4%
5%
2%
2%
5%
4%
24%
Russia US
Other
Health & personal care
Books
Office appliances
Furniture & homefurnishingsAuto & parts
Groceries
Toys & hobby
Apparel & accessories
Computer & consumerelectronics
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DIFFERENCES PREVAIL
Online Advertising Skewed to Search “Digital is growing at two-and-a-half times the rate of traditional media and that’s because it’s more flexible and
targeted,” according to Jerry Buhlmann, CEO of Aegis14. In Russia, where digital advertising only gained
significance in the past three years, the market is tilted towards more recent models which are particularly
measurable (pay-per-click rather than display) and targeted (profile/social and behaviour/search). Indeed the
Russian market has leapfrogged traditional display/CPM15, and embraced CPC/CPA16 revenue models, to the
extent that these represent nearly two thirds of all digital advertising revenue, versus less than half in the US.
This may also reflect the fact that most of the advertisers are so far themselves online players, more used to
advertising means with easy-to-track ROI, such as contextual and search. Another reason is due to TV being
a dominant channel for visually-focused advertising and will gradual shift to online display.
E X H I B I T 1 1 – S E A R C H A D V E R T I S I N G S H A R E O F T O T A L O N L I N E A D V E R T I S I N G S P E N D I N T H E US A N D R U S S I A
Source: Zenith Optimedia for Russia, 2011; eMarketer for US, 2012; GP Bullhound
Distribution Logistics Critical to Success in E-commerce The recent explosion of Russian e-commerce (up 25% yoy in 201117), the rapid expansion of online audiences
and purchasers in the regions (regional Internet users up 24% between summer 2010 and spring 201118) puts
enormous pressure on logistics and distribution solutions which are still for the most part inadequate,
particularly outside Moscow and St Petersburg. Outsourced solutions do exist, with successful examples
including the DZB distribution centre (owned by Arvato, the Bertelsmann subsidiary), which handles over 35
million products parcels and mailings a year19 from its Yaroslav warehouse (250km outside Moscow).
Overall though, outsourced solutions are expensive for the etailer, and inadequate for the end customer, as
deliveries are during weekdays only and at imprecise times. Traditional logistics players also still lack the
14 Source: The Sunday Times, 20 May 2012 15 CPM stands for cost per impression 16 CPC stands for cost per click; CPA stands for cost per acquisition 17 Source: Data Insight, 2012 18 Source: Public Opinion Foundation, spring 2012 19 Source: Public sources; company information
48% 49% 49% 48% 47%
63%68% 70% 72% 73%
FY2011A FY2012F FY2013F FY2014F FY2015F
US Russia
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expertise, IT platform and organisation required to deal with e-commerce processes, particularly with
extensive SKUs and the need for 99% availability, higher than what is tolerated in bricks and mortar retail.
As a result, logistics remains one of the key differentiators for success among etailers in Russia, and larger
players increasingly take the issue into their own hands and rely on their own logistic solution. Since our last
report, Wikimart has raised money to accelerate implementation of its own order fulfilment solution and Ozon
has continued to develop its own local centres.
Increasing Hybrid Model Adoption “A logistics infrastructure can also provide a way to circumvent Russian's reluctance to pay with credit cards,”
Eric Sylvers from Informilo points out. Both pureplay online and traditionally offline businesses are looking at
the hybrid approach to address many of the frictions in the Russian e-commerce market – a model that
businesses like Amazon have also started to implement in the West.
Examples include:
� Russian Amazon equivalent, Ozon offers 15 different methods of payment and delivery, and has
2,000 sales points where online purchases can be paid for and picked up, for its 1.5 million products
catalogue;
� Mobile phone retailer Svyaznoy Group, which has around a quarter of Russia’s mobile phone market,
has launched enter.ru – a hybrid retailer of more than 25 thousand products in multiple verticals
including furniture, sporting goods, children’s wares and jewellery. Customers can purchase online,
through call centre, and in the retailer’s 25 stores or a network of collection points;
� The X5 Retail Group, the country’s largest retail group which operates more than 3,000 retail outlets
throughout the country, generating more than $15bn in annual sales, launched ȿ5.ru. This website
offers a catalogue of 392,000 items that can be picked up at the chain’s offline supermarkets in
Moscow and St. Petersburg;
� Utkonos, the online food retailer that has been in the market for almost ten years, has its own central
warehouse, over 100 pick-up points across Moscow, and a home delivery service20.
Platform Outsourcing Opportunity
Players who develop their own full e-commerce platforms across Russia will also be able to offer outsourcing
services to third party etailers, ranging from distribution and delivery to the full user-acquisition solution.
Indeed the e-commerce sector remains very fragmented in the country with over 25,000 etailers, and the top
50 representing only 16% of total e-commerce, resulting in strong demand for outsourced logistics services.
For instance, Wikimart, and enter.ru both plan to offer logistics and transport services to third parties.
Similarly, KupiVIP, whose own logistics network includes distribution and call centres, fleet of delivery trucks,
generate 25% of the company’s revenues through the white-label service with nine big brands such as Adidas.
Undefined Value Chain in Certain Sectors The value chain in some sectors still feels to us and Russia-focused investors to be in early stages of
development. This is the case in online travel, for example, where there consumer behaviour patterns are still
unclear and several business models are trying to capture the market: packaged tour operators, online travel
agents, online hotel booking specialists, private sales etc. The travel space, deemed to become one of the
largest e-commerce sectors, is being challenged by both pure-play travel (e.g. Ostrovok, OktoGo,
Travelmenu) and non-travel businesses (Mail Group, Ozon), but without a clear leadership and differentiating 20 Source: Public sources; company information
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factors. We envisage that as with generalist e-commerce, this segment will continue to develop and establish
the most appropriate business model for the Russian Internet users.
Content Driving High Social Engagement As we mentioned in our previous research report, the Russian Internet audience is one of the most socially
engaged in the world. The local players, such as vKontakte and Odnoklassniki dominate with 35 million and
28 million unique monthly visitors respectively. Facebook is in fourth place with an audience less than 40%
that of the second player (Exhibit 12).
In terms of total time spent on site, however, Facebook is dwarfed by vKontakte. One of the main reasons for
the length of time users spend on vKontakte is the digital content available through the site, a lot of which is
P2P and not cleared for copyright. In fact in May 2012, the company lost its court appeal against an earlier
ruling that its feature integrating with file-sharing software breaches copyright. According to ComScore, users
spend 29 minutes per month on Facebook, versus 492 minutes on vKontakte21.
E X H I B I T 1 2 – T O P S O C I A L N E T W O R K S I N R U S S I A B Y U N I Q U E M O N T H L Y V I S I T O R S A N D T O T A L M I N U T E S S P E N T ( O C T O B E R 2 01 1 )
Source: ComScore, 2011; GP Bullhound
The implication is that continued integration of digital content within social networks and its effective
monetisation is key to becoming the leader in this space. For instance, Traveltipz, the online travel reviews
aggregator in Russia, has strongly promoted users exchanging reviews through social networks ensuring
higher the quality and relevance of reviews. As a result, 45% of reviews are written by users connected to the
site through social networks versus less than 10% for a comparable European player. Interestingly, in the
Russian e-commerce sector we are seeing similar trends: Ecwid, the Russian based shopping cart software
business, is the second most popular solution on Facebook globally.
Content Monetisation Still Nascent Currently, Russia’s digital content distribution is severely hampered by well publicised piracy issues. Evidence
of this includes:
� Only 10% of e-books are consumed legally22, and only 26% of users have ever paid for video content
with the majority having paid for only a single download23;
21 Source: ComScore, October 2011 22 Source: Litres.ru, 2011 23 Source: J’son & Partners Consulting, 2011
Unique monthly visitors (Oct 2011)
4m11m17m28m35m
17,220m
9,492m
544m 319m 40m
vKontakte Odnoklassniki MoiMir Facebook Twitter
Total minutes spent
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� 58% of users who consume online videos do so via the less vKontakte, versus 30% for the next
legitimate content distributor24;
� The big global players are still outside of Russia due to piracy issues, including iTunes, Spotify. The
notable exception is Deezer, who have announced entry to Russia in December 2011 on the back of
the global partnership with Orange.
Since the last report local players, such as Tvigle and ivi.ru in video content, have continued to try and find
ways to bring Russian Internet users to the legal side, including advertising, “freemium” and micropayments
models. Monetisation will follow through once the legal content distribution services have reached sufficient
scale and recognition. Key drivers include:
1) Russian users are becoming more accustomed to micropayments and “freemium” models online through
social gaming – in 2010, casual and social gaming spend per Internet user was $10 in the Russia vs. $8
in the US25;
2) Content rights owners view Russia as a lost market due to piracy and are likely to provide content at
lower cost to content distributors who offer at least some monetisation;
3) Active anti-piracy policies will gradually reduce availability of free content;
4) New distribution platforms are providing a better user experience and more valuable functions, for
instance ebook business, Bookmate (part of Dream Industries), provides social reading and sharing to
engage users;
5) Recent studies suggest that 13 million Russian Internet users are willing to pay for content online, but do
not always understand whether content is legal or not – as well recognised and trusted players emerge,
uses will be more inclined to consume legally distributed content26.
Subsequently, we anticipate online content monetisation to intensify with revenues forecast to reach $4.5bn by
2012.
E X H I B I T 1 3 – D I G I T A L C O N T E N T R E V E N U E S
Source: J’son & Partners Consulting, 2011; GP Bullhound
24 Source: VTB Capital, March 2012 25 Source: Bank of America Merril Lynch, December 2010 26 Source: FOM, 2011
$2.8bn$3.3bn
$3.9bn$4.5bn
2009A 2010A 2011A 2012F
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CONTINUED MARKET DEVELOPMENT
Growing Foreign Investment Activity In 2011, we have seen continued investment in Russia Internet, both from local and foreign investors. More
active foreign funds in the region include:
� Accel Partners: KupiVIP, Ostrovok, Avito;
� Balderton Capital: KupiVIP, Elecsnet;
� Bessemer Venture Partners: KupiVIP, entered into a partnership with the Skolkovo Foundation (a
Russian Government-financed technology hub);
� eVenture Capital Partners: Fast Lane Ventures, Prinme, Heverest, Sapato;
� General Catalyst: Ostrovok;
� Index Ventures: Ozon;
� Investment AB Kinnevik: Avito, Lamoda;
� Intel Capital: Softkey, AlterGeo, Sapato, Akella;
� Mangrove Capital Partners: Oktogo, KupiVIP, Drimmi; KupiBonus; HomeMe; Enter Media,
Quintura;
� Northzone Ventures: Avito;
� Tiger Global Management: Digital Access, Biglion, Anywayanyday, Yandex;
� Ventech: Oktogo, Pixonic, WomansJournal.
For foreign players, Russia is one of the fast-growing opportunities and particularly for European investors, the
region happens to be the closest of the BRIC countries both geographically and culturally. Investment focus
has been predominantly on already proven business models, in sectors such as e-commerce, gaming and
software.
From our discussions with investors, other factors that play an important role in the process include:
1) Clear market leadership – Yandex and Mail.ru have shown that it is difficult to displace the incumbent
even for players like Google and Facebook;
2) Strong growth of 10%+ per month – businesses view Russian Internet as an emerging market and
expect monetisation growth to reflect that, particularly if profitability has yet to be reached;
3) User loyalty – investors’ perception is that it is relatively easy to amass a large audience quickly given
the number of new users each month curious to try new online services and offerings. It is essential to
demonstrate high user stickiness / return rate;
4) Detailed metrics and KPIs dashboard – given the relative lack of independent analytics data on the
Russian Internet sector, investors expect strong internal measurements and analytics;
5) Strong management team – due to the scarcity of top quality Internet management, Russian Internet
market is currently experiencing high turnover (similar to Western Europe in the early 90s). Experienced,
stable management teams, with effective incentive schemes are considered a huge plus for investors;
6) Bulletproof legal and accounting – transparency of ownership and legal structure and framework are
critical.
Increasingly Sophisticated Local Investors Russian venture capital funds have started to compete with top tier international VCs for deals abroad and
winning, examples include:
� Almaz Capital has been active in the US software sector, investing in Recovery-as-a-Service
solutions provider, nscaled, security software company, Vyatta, mobile video software business, Qik;
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� Kite Ventures has made foreign investments in gaming publishing and payments, including German-
based Hitfox, Sponsorpay, and e-commerce properties and services, such as Denmark-based
TradeShift, US-based Merchantry and UK-based Made.com;
� Runa Capital, focused on software businesses, has made several investments including in French
app analytics platform, Capptain, US-based SaaS business, Jelastic, UK-based Cloud platform
provider, ThinkGrid, US-based time management app, BigTime;
� Ru-net Holdings has been highly active in Asia, with investments in India, and Germany, investing in
Delivery Hero,
� New Generation Investment announced that it would like to start investing into the start-up scene in
France;
� VTB Capital is now looking to invest in digital media outside of Russia.
Others have continued to ramp up operations, such as Fast Lane Ventures, one of the most successful
accelerators, who has witnessed its first successful exits (Shopping Live and Sapato), and has launched
numerous promising new models, including Heverest, an outdoor clothing and equipment etailer, already
showing impressive growth and metrics.
E X H I B I T 1 4 – P R I V A T E P L A C E M E N T S I N R U S S I A N I N T E R N E T B U S I N E S S E S B Y Q U A R T E R L Y V O L U M E A N D V A L U E
Source: Capital IQ, GP Bullhound, 2012
12
3 32
64
6 6
15
7 7
12
4
Q1
2009
Q2
2009
Q3
2009
Q4
2009
Q1
2010
Q2
2010
Q3
2010
Q4
2010
Q1
2011
Q2
2011
Q3
2011
Q4
2011
Q1
2012
Q2
2012
Quarterly Private Placement Transactions
$8m $1m $4m
$39m$20m
$11m$1m
$37m
$14m
$100m
$15m$34m
$128m
$100m
Q1
2009
Q2
2009
Q3
2009
Q4
2009
Q1
2010
Q2
2010
Q3
2010
Q4
2010
Q1
2011
Q2
2011
Q3
2011
Q4
2011
Q1
2012
Q2
2012
Quarterly Private Placement Transaction Value
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Conducive Trade Sale Environment The flow of exits is increasing as more global strategics perceive Russia as a region they cannot miss out on given the lack of growth in Western Europe and US for international players to reinforce their activities in fast
growing regions, such as Russia. In addition, local online businesses are now becoming of scale as a result of
continued investment over the last few years and are consolidating within their sectors. Recent exits include:
� Naspers’s acquisition of Slando, online classifieds website;
� WPP’s acquisition of Promo Digital, digital marketing services agency;
� Ozon’s acquisition of Sapato, online shoe retailer;
� Rambler Holding’s acquisition of Kanobu, online gaming content.
Conclusions In past year the Russian Internet market has passed key inflection points, and double-digit growth of key
metrics is set to continue for the rest of this decade:
� Audience – regional penetration still below 60%;
� Advertising – currently online advertising is still mainly implemented by Internet and technology
players, with strong potential growth as traditional brands migrate their budgets online;
� E-commerce – even by 2015, online share of retail will be lower than Poland today;
� Digital content – currently dwarfed by piracy issues, but growing extremely fast from a low base.
In our view, the Internet ecosystem has had sufficient time to learn and adapt to local challenges and the
winners today are not only coping but thriving with specific models:
1) E-commerce - logistics ownership is paramount with the emergence of the hybrid model;
2) User-generated content / reviews – integration with rewards and social networks has proven key in driving
growth;
3) E-commerce enablers – effective combination of social and cloud features.
We foresee that business models will settle in the other sectors also, namely online travel, digital content
distribution and display advertising.
Finally the sector has become more attractive to foreign investors with increasing investment activity over the
last twelve months. We have also seen noticeably more coverage and great improvements in infrastructure
around Internet, for instance logistical platforms, online data measurements and analysis. Now that Russia
has firmly entered the mainstream of European Internet, we expect more positive news flow from the sector:
� Russian companies starting to acquire Internet properties abroad, attracted by lower valuations,
technology, and audiences, in particular in other fast-growing economies;
� More Russian websites joining Yandex Mail and vKontakte among the European top ten;
� Russian e-commerce companies finally joining their audience – based peers and registering on the
European map.
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Selected Private Placements
Annouc. Date Company Investor
Transaction size ($m) Commentary
May-12 Avito
Accel Management; Baring Vostok Capital Partners Northzone Ventures; Investment AB Kinnevik
$75.0m Online classif ieds
Apr-12 Fast Lane Ventures eVenture Capital; VTB Capital $25.0m Venture Capital incubatorApr-12 MallStreet Company Kima Ventures - Online hypermarketMar-12 Moe Delo Klever Asset Management $4.0m Online SME bookkeeping serviceMar-12 Shoptime KupiVIP $50.0m Online retail clothing storeMar-12 Wikimart Tiger Global Management $30.0m Online marketplace
Feb-12 Digital Access Tiger Global Management; ru-Net II
$30.0m Online video service under the name ivi.ru
Feb-12 OktogoVentech; Mangrove Capital Partners; ABRT Venture Fund; VTB Capital
$10.0m Online hotel booking service
Jan-12 Ostrovok - - Online hotel booking service
Jan-12 RentHome Fast Lane Ventures - Online short term vacation and travel rentals across Russia and CIS
Dec-11 Biglion Tiger Global Management LLC $25.0m Daily deals siteDec-11 Ecw id Runa Capital $1.5m E-commerce shopping cart softw are for SMEs
Dec-11 PinmeeVenture Capital Partners; Direct Group; Fast Lane Ventures
$1.3m Online photo sharing service
Nov-11 Heverest eVenture Capital Partners $5.7m Online sports clothing and equipment retailerSep-11 Lamoda Investment AB Kinnevik - Online retailer of shoesAug-11 VitaPortal Fast Lane Ventures $1.0m Online healthcare media publishing
Jul-11 OstrovokAccel Management; General Catalyst Partners; The Founders Fund
$13.6m Online hotel booking service
Jun-11 Sapato
eVenture Capital Partners; Intel Capital; Investment AB Kinnevik; Direct Group; Fast Lane Ventures
$12.0m Online retailer of shoes
May-11 Travel Menu Almaz Capital Partners; Runa Capital
$1.6m Online travel agency offering packaged tours
Apr-11 Ostrovok General Catalyst Partners; Kite Ventures
$1.0m Online hotel booking service
Apr-11 Lamoda
Holtzbrinck Ventures; Investment AB Kinnevik; Tengelmann Warenhandelsgesellschaft
- Online retailer of shoes
Apr-11 Metabar Runa Capital $1.0m Application for brow sers
Apr-11 KupiVIP
Accel Management; Bessemer Venture Partners; Mangrove Capital Partners; Russia Partners Management; Balderton Capital
$55.0m Online fashion private sales retailer
Apr-11 OktogoVentech; Mangrove Capital Partners; ABRT Venture Fund $5.0m Online hotel booking service
Apr-11 OzonAlpha Associates; Baring Vostok Capital Partners; Index Ventures; Rakuten; ruNet
$100.0m Online hypermarket
Mar-11 Biglion ru-Net II - Daily deals site
Mar-11 Tulp - $3.0m Online city library that helps people to find the best places to eat, shop, drink
Mar-11 Wikimart Tiger Global Management $7.0m Online marketplaceSource: Capital IQ; GP Bullhound, 2012
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