Rapidly becoming a mainstream investment proposition, e-commerce is now attracting institutional and state-backed funds in Russia.
Kazakh-born entrepreneur Oskar Hartmann had his first experience of e-commerce in Germany, selling health foods to bodybuilders.
But it was in Moscow where his career really took off, after he spotted a huge market opportunity: no one was selling designer-label clothes online to fashion-savvy Russian women.
“I wanted to go into business and I was looking for something that could become big, that could be developed over the next 20 years,” he says. “I wanted something that would lift the public.”
Raising just £87,000 from his friends and family members, he launched KupiVIP. The company flourished and quickly became Russia’s premier online fashion retailer.
Ironically, the economic crisis that hit in its first year of operation was a boon: high-end retailers with plummeting sales were desperate for new distribution channels.
For all of 2009 KupiVIP was signing up a brand a day, and sales soared. The company clocked up turnover of $50m (£32.4m) last year, and expects to be selling hundreds of millions of dollars’ worth of goods within a few years.
In December 2012, 67pc of Russians aged 12-54 were online, or some 95 million people, according to TNS Gallup – just short of the 70pc-80pc Mr Hartmann estimates is the saturation point, and well up from 24pc in 2006.
This fast growth has piqued the curiosity of Russian angel investors. Raising the first £100,000 to £1m for start-ups is relatively easy, as Moscow has the highest concentration of billionaires in the world.
KupiVIP’s rival KupiKupon is also a daily discounter, and its four Uzbek founders, all in their 20s, raised £1m from an Uzbek billionaire after only a few weeks. Getting the next round of investment, of up to £20m-£30m, is the tricky bit.
Today, there are only a handful of private equity or venture capital funds operating on the Russian market. The biggest is Baring Vostok Capital Partners, which raised a new £1bn fund late last year and stands behind some of Russia’s best-known internet companies, such as Yandex, Russia’s answer to Google. State-backed lenders are also becoming more active.
Last year, investment bank VTB Capital bought a stake in Fast Lane Ventures, an internet incubator that has supported several successful start-ups.
Two government-backed funds also provide money to start-ups: the Russian Venture Company has £1bn of federal cash to co-invest with privately run funds, and state hi-tech agency Rusnano has also brought in several deals.
The big break for hi-tech start-ups came with the successful IPOs of Mail.ru, which raised $912m (£591m) in London in November 2010, and Yandex, which listed on Nasdaq in May 2011 with a valuation of $11bn.
Now the institutional money is starting to arrive. Investments into Russian hi-tech firms more than doubled in value to $550m in 2011, up from $220m the year before, according to data from Fast Lane Ventures. Revenues from Russia’s internet business are growing at 30pc a year and the volume of e-commerce is growing even faster: Russians spent an estimated $18bn on goods bought from online stores last year. Mr Hartmann hopes this will rise to £30-£50bn over the next five years.
“Typically, people start to buy things after they have been online for about three years, and they buy things like fashion after seven years,” he says. “But Russia’s online population is so young that that seven-year wall has yet to hit. When it does, in the next few years, the market here will become the largest in Europe.”
Top 50 Russian start-ups
Russia Now has teamed up with Digital October and PwC to compile a groundbreaking rating of the top Russian start-ups (updated twice annually) in IT (191 companies), hi-tech (22) and life sciences (10).
The rating uses criteria such as the amount of investment capital attracted, corporate legal protection, presence in the media and team to assign a grade from AAA (highest) to CC (lowest).
All companies must be incorporated in Russia, employ no more than 100 people and be no older than four, five or six years (in IT, hi-tech and life sciences, respectively).