Russia’s E-Commerce Boom

In late October KupiVIP, a four-year-old Russian online flash sales site, raised $12 million from MCI Management, a private equity group operating in Central and Eastern Europe, bringing the total amount of capital raised so far to about $140 million.The fast-growing start-up is hoping the injection of massive amounts of capital will help it reach its goals: it’s gunning for $1 billion in sales and an initial public offering on Nasdaq.

KupiVIP is an example of why Russia, Europe’s biggest and fastest-growing Internet market, is red hot. With a skyrocketing number of Internet users, but a still underdeveloped commercial environment, the opportunity to quickly build phenomenally successful domestic e-commerce businesses in Russia is huge.

Russians have low personal debt, with salaries growing rapidly. They spend more time online than most Europeans, and boast the highest number of page views per visitor, according to a September 2011 comScore Media Metrix report. Total Internet penetration was only 39% in 2011, according to comScore, but the Russian Academy of Sciences has given a long-term forecast of 130 million Internet users by 2025, with an 85% penetration rate.

A 2012 e-commerce report by is projecting that the Russian e-commerce market will be worth between $40 billion and $60 billion by 2020. So it is not surprising that both Western venture capital and private equity are pouring into Russia. In the last year:

Ozon, Russia’s Amazon, raised $100 million in funding last September from a consortium that includes Index and Russian, Swiss and Japanese investors. Five months later Ozon used some of that capital to buy Sapato, the local version of Zappos, a U.S. online shoe and accessories business.


· received a $50 million capital injection from KupiVIP, which itself closed a $55 million Series C round in April of last year from marquee investors that included Accel Partners, Balderton Capital and Bessemer Partners and just raised another EU12 million.


·      Online marketplace Wikimart, a competitor of Ozon and KupiVIP, raised $30 million from Tiger Global, a firm that manages hedge and private equity funds, and another investor to improve order fulfillment.


·, the local version of craigslist, secured $26 million in November 2011 and another $75 million in early May from private equity firm Baring Vostok and global venture capitalists Accel Partners, alongside existing investors Kinnevik and Northzone.


·      Swiss private equity fund manager Alpha Associates teamed up with New York-based Insight Capital Partners and Russian players Da Vinci Capital Partners and Runa Capital in June to take an unspecified minority stake with several board seats in B2B Center, Russia’s largest online procurement player


·      The Russian version of Hulu,, which offers streamed premium TV and films from international and local big-name content holders, in September raised a $40 million funding round led by Baring Vostok, along with existing investors ru-Net, Tiger Global, Prof-Media, and Frontier Ventures.


Many of these new entrants are copying successful Internet models. Consider Oskar Hartmann, the entrepreneur behind KupiVIP, which looks and feels very much like and similar sites such as Privalia. Hartmann, Marina Treshchova (see profile on page 10) and Pascal Clement, are the co-founders of Fast Lane Ventures, an incubator which has churned out more than 20 copycat Internet start-ups in just two years and this year exited two of them – Sapato, the online shoe and accessory retailer sold to Ozon, and Shopping Live, a teleshopping channel. Fast Lane Ventures itself has attracted nearly $78 million from a vast base of Russian and international investors who believe in the potential of adapting Western models to the Russian market.


So far the locals are winning. Six out of the top ten Internet sites in Russia, including the three largest, are local, with U.S. giants like Google and Facebook trailing way behind, according to a report by investment bank GP Bullhound.

Strong technical talent is one of the reasons why local players have beaten international players. Another is that success in Russia means adapting and sometimes completely overturning business models that worked almost unchanged when imported from the United States to Western Europe and vice versa.

For starters, Russian’s Cyrillic alphabet provides a barrier to entry. So does consumers’ propensity to shun credit cards and use cash payment on delivery and their desire to see goods before they pay for them.

And, in Russia the battle for the burgeoning e-commerce market is still very much about logistics. Precision logistics helped Amazon’s sales skyrocket in the late 1990s as it became the world’s largest online retailer. Amazon has been much copied to the point that clever logistics and quick deliveries are now the norm for online retailers in the United States and Western Europe.

But for Russian e-tailers it is less about the perfectly-run warehouses pioneered by Amazon that facilitated quick and cheap deliveries and more about the old-fashioned logistics of trucks, roads, delivery men and pick-up points.

KupiVIP grabbed a chunk of Russia’s e-commerce market by copying aspects of, but also by focusing on the fundamentals of getting products to customers.

Heavy investments in the nuts and bolts of logistics have also been key to the success of Ozon, Russia’s largest online retailer, an achievement that earned it the oft-repeated moniker “Russia’s Amazon.” Ozon had sales of 8.87 billion rubles ($286 million) last year, an almost 80% jump from 2010. The company doesn’t release profitability figures; however, Maelle Gavet, Ozon’s CEO (see her profile on pages 9 and 10), say the company aims to have sales of $1 billion within three years.

To get around Russians’ propensity to avoid credit cards, Ozon has 2,000 sales points where online acquisitions can be paid for and picked up and is aiming to boost that soon to 5,000 covering every city with more than 50,000 inhabitants. About 80% of Ozon’s sales are paid in cash with the rest split between credit cards and other payment methods.

In its latest investment round, Ozon raised $100 million last year from Index Ventures and other investors. It used part of the money to improve the company’s logistics infrastructure and expand service, says Gavet.

“One of the key things we liked about Ozon is that the logistics present a very big barrier to entry,” said Giuseppe Zocco, a co-founder and partner at Index Ventures, which first invested in Ozon in 2007, along with Cisco Systems and German publisher Axel Springer.

The need to make heavy investments in logistics as well as marketing and customer service has made e-commerce in Russia more suitable for private equity investors rather than venture capitalists, says Dmitry Chikhachev, managing partner at Runa Capital, a Moscow-based venture firm. Runa Capital only considers investments in companies that facilitate e-commerce rather than those that do it.

Still, many foreign VCs seem willing to write big checks. And, “the fact that Western companies have not gained a foothold leaves the door open for us to innovate in other areas,” says Ozon CEO Gavet. “Like Amazon, we started out as a book store, and like them, have grown to become a marketplace for a huge range of goods, whether fulfilled by us or by others. But unlike Amazon we’ve branched out into other areas such as – our online travel agency. We can help you plan a trip, buy tickets for planes and trains, book any one of 150,000 hotels worldwide and purchase related products – such as travel insurance. Our brand is trusted and respected in Russia, which makes it easier for us to introduce new product lines and verticals, and harder for Western competitors.”

Data Insight, a consultancy focused on Russian e-commerce, predicts the first big wave of social e-commerce — using social media for direct sales rather than just the promotion of products — will be next.

“The link between social media and e-commerce will grow more and more over time,” says Index Ventures’ Zocco. “It’s in its infancy. Part of it [is that a] relatively small percentage of people who are online are familiar with e-commerce, but over time there will be more overlap. There is some use of social media in e-commerce, but it’s not a driver right now.”

The convergence will accelerate as Russian consumers increasingly turn to their network of friends and acquaintances on social media for recommendations rather than random strangers on a website, he says.

In Russia only a relatively small percentage of the people who are online engage in e-commerce, but over time the potential will be huge, a fact that has not escaped the swelling group of investors targeting Russia.

The profits to be made from serving Russia’s consumers are clear, thanks to successes like search engine Yandex, which raised $1.4 billion last May in an initial public offering on Nasdaq and, an operator of Russian social networking, instant messaging and online game sites, which raised $972 million when it went public in London in 2010.

After the Yandex IPO the Internet space in Russia overheated, say some industry observers. They call it a gold rush and question whether the current valuations are merited. For one thing, growing market penetration is set to become a whole lot tougher. Until recently e-tailers strapped for resources could concentrate on covering Moscow and Saint Petersburg, which accounted for 44% and 11% of online sales respectively in 2011, according to Data Insight. Ignoring the rest of the country is no longer a viable option as market growth is two times faster outside the two cities and in 2015 the regions are forecast to pass Moscow and Saint Petersburg in online sales. Ozon in 2011 generated for the first time more than 50% of sales outside Moscow and Saint Petersburg.

“Looking forward, the player that manages to execute well outside Moscow and Saint Petersburg will play an important role in the Russian e-commerce landscape,” says Sasha Afanasieva, an associate at GP Bullhound.

Classified ads, commerce and travel show the most promise. Ozon has its own travel site and many others are jockeying for position, including (which in July attracted a $13.6 million investment from Accel Partners, General Catalyst and others), OneTwoTrip (which gained a $16 million investment from Atomico in October),,, anywayanyday,, Travelatte and Oktogo.

Ostrovok is targeting Russia and the countries that formerly made up the Soviet Union. “I think we are going to focus on that for the next three to four years,” says CEO Serge Faguet, a Russian native who dropped out of Stanford University to launch a start-up in Silicon Valley and briefly worked for Google before starting Ostrovok. “It’s a very large and interesting market where we believe it is possible in three to four years to build a company that will be worth three to four billion dollars.”

To get there, Faguet says Ostrovok will need to raise tens, if not hundreds, of millions of dollars. “Economies of scale is important in this market,” he says. “There will be one big player dominating and then all the others are going to be much smaller.”

There are massive opportunities for a number of big players, although Russia is a challenging place, says SonaliDe Rycker, a London-based partner at Accel Partners, an early investor in KupiVIP. “There’s a lot of friction, but the flip side is if you crack it, it is hard for others to get in.”




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