Building Companies During A Downturn

Despite an economic downturn, collapsing oil prices and Western sanctions following Russia’s dealings in Crimea, Oskar Hartmann, a scheduled speaker at NOAH 2015 has created three new companies in Russia in the last three years. All are thriving.

Hartmann: ‘The only answer to tough times is to do more, work more, try harder’

While new car sales are plunging, Hartmann’s CarPrice, a C2B online exchange that allows Russian consumers to sell their used cars to dealers in 30 minutes or less, has generated over a €100 million in sales in its first 18 months. Aktivo, a commercial property crowdfunding platform launched three months ago, allows people to earn income by investing in shares of large commercial properties. Hartmann has also opened a chain of 70 brick-and-mortar “dollar stores” – that sell everything at one price, which he says “has proven to be the most crisis-resistant business model in the world.”

“If you try and build companies during difficult times how special it would be if you can manage, in spite of everything, to build something meaningful,” says Hartmann, a 33-year-old father of three. “That is how people become heroes.”

Hartmann first made a name for himself by launching Russian flash sales site KupiVIP, one day before this 25th birthday, raising more than $100 million in venture capital between 2008 and 2012 from Western investors including Accel Partners, Acton Capital, Balderton, Bessemer Venture Partners, the European Bank of Reconstruction and Development, Intel Capital and Mangrove Capital Partners.

After Ukraine, VC Money Dried Up

He went on to copy other successful Western Internet models and adapt them to the local market at an unprecedented clip. Fast Lane Ventures, an incubator he established in partnership with entrepreneurs Marina Treshchova and Pascal Clement, churned out some 20 new Russian Internet start-ups in just two years, including, a Russian online shoe and accessory retailer similar to the U.S.’s Zappos, which was snapped up by Russian online retailer Ozon and Shopping Live which sold a stake to Home Shopping Europe.

But then a recession set in, Russia began skirmishing with Ukraine, the West implemented sanctions and the volume of venture capital invested in the market fell by anywhere from 28% to 33%, according to reports, with big-name Western funds scaling back or pulling out of the market.

However Hartmann remains convinced that there are still plenty of opportunities in Russia. He points to the announcement in October that Naspers, the South African conglomerate, increased its stake in Russia-based Avito, the third-largest classifieds site in the world, by investing an additional $1.2 billion.

As for Hartmann himself, in addition to holding the title of president at his three new ventures, he remains president of KupiVIP.

Even In A Downturn People’s Needs Have To Be Met

“I am still basically engaged as ever,” says Hartmann, speaking by phone from the flash sales sites’ Moscow office. “The company is doing well, I am very happy with the development.”

KupiVIP is profitable and “is still growing fast,” says Hartmann. He says the flash sales site grew 70% year-on-year. “The main reason is that we are part of a bigger market trend,” he says. “Some people ask how can I continue building even though GDP is declining and we have sanctions and all these difficulties. But even in a downturn people’s basic needs have to be met and fashion seems to be one of them. People never stop buying fashion. When you look at Ukraine even when people were in close proximity to war, the fashion sales were impressive. Women continued to buy dresses.”

The ability to buy brand names at a discount is appealing during a recession, says Hartmann, because “people don’t want to downgrade their lifestyle, they want the current one but at a lower price.” Flash sales also fit into two other key trends: a move away from pull marketing because people know less and less what they want to buy and want to discover new things, and the move to fast fashion. “We offer 50,000 new products every day,” says Hartmann. “This all combines into a powerful offer and the off-line stores can not compete.”

There Will Be More Winners

So why is the bloom off the rose? Venture capitalists no longer seem to think that flash sales is the Next Big Thing. “That is because flash sales sites were supposed to become the next multi-billion-dollar companies,” says Hartmann. Very few did but “it is still a very large business. If you look at, for example, Germany, e-commerce’s total gross profit is $10 billion and 75% is fashion. It is much bigger than people think and the shopping club model is a key component. There will be more winners.”

The car market represents another good opportunity. People want to buy good cars but in a downturn they can’t afford new ones. Indeed, new car sales in Russia have dropped 40% in the last few years while demand for used cars surges.

CarPrice provides used-car buyers with free valuations within seconds. More than 1,000 dealers from across Russia determine the best price during an average 30-minute online auction. When the offered price is accepted by sellers, they collect the amount due to them in CarPrice outlets.

Alongside Hartmann’s own personal investment, the site raised an initial round of around $2 million in funding from Russia’s Almaz Capital, Germany’s and France’s Kima Ventures, among others. In July it closed a $40 million Series B round led by Baring Vostok Private Equity Fund V, with participation from Almaz Capital and other investors. The funding will be used to expand CarPrice’s footprint in Russia and for international expansion.

The Only Answer To Tough Times Is To Do More

Meanwhile, Aktivo, another of his new ventures, is finalizing its first deal, involving an $18.3 million property. “Think of it like taking buildings public,” says Hartmann. “You buy fractional ownership and get a passive income for life. This appeals to Russian people who lack any instrument to gain certainty in the future. The Russian pension system is not working and currency is very vulnerable. Even successful people are quite worried at the moment,” says Hartmann. “Investing in real estate gives them security.”

And for all his belief in the power of online commerce, Hartmann sees big profits in brick-and-mortar shops that cater to cash-strapped consumers, so he is trying his hand at traditional commerce as well.

“The only answer to tough times is to do more, work more, try harder,” says Hartmann. “If you fast forward five years from now there will be winners. There are fewer people active here now so the people who are active can achieve more. “

He points to Japan, which has had negative GDP growth since 1995, as an example. “If you look at the three richest people in Japan today, all three built a company during the last 20 years. It doesn’t mean that building a company during a downturn is a good time to build a business, it just means it still can be done.”



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