If there ever is an opportunity to create a culture of entrepreneurship in Russia it must be the Runet boom. The percentage of Russian citizens which access the internet at least once every 24 hours has increased from 6.8% in 2005 to 31.9% in 2010. General internet penetration was 46% in 2010 and 75% among people between the age of 12 and 35 and 62% in cities with more than 1 million inhabitants. In these cities 47% has broadband and 20% has mobile internet. In other words the Runet is booming and there is still plenty of room for further growth.
In a few years time Russia will have the largest Internet market in Europe. At the same time we see a new generation entering the labor market, youngsters who have been born in the new Russia and who have a very different mentality than that from their parents and the perestroika generation.These kids got the talent and the opportunity, but they need resources, both in the material and immaterial sense.
Last summer I was so fortunate to be invited to Barcamp Krasnodar, a regular conference organized by the young aspiring geeks themselves, and see for myself the young potential Russia, we hardly ever hear of. A few weeks ago Barcamp Krasnodar's mentor Timothy Post wrote an excellent article for Modern Russia about the opportunity at hand and how local accelerator programs for startups are what is needed to jump start Russia’s innovation drive. Read it, so I don’t need to repeat him.
What follows is a translation of an article about Arkady Moreynis, the founder Glavstart, the first large Russian accelerator program and organizer of the Russian version of ‘Startup Weekend’. The article was published in Kommersant’s bi-weekly ‘Company secrets’ magazine. It’s happening.
The big bang theory
Who is he? Is he the star of the start up community or a man who does the dirty work for venture capital? Arkady Moreynis, the owner of Glavstart dreams about organizing a factory, which will produce a steady stream of startups.
Having flunked his entry exams for the faculty for computational mathematics and cybernetics at the Moscow State University, Araky Moreynis joined the army, where he served on a mobile station monitoring nuclear explosions. In the case of a nuclear blast, his team would be the first to die. Fortunately, all he had to do was to monitor exercises and after his release, sergeant major Moreynis entered Moscow State University with a state allowance.
Years later Moreynis has really been caught in the epicenter of an explosion, not a nuclear explosion, but an ‘investment explosion’. Since the crisis has ended, large IT companies, venture capital and private investors have come alive again and are now ready to invest millions of dollars in prospective internet start ups. These starting entrepreneurs, however, do not have the money, nor the experience to gather a team, write a quality business plan or create a prototype of their project. That’s when Moreynis’ company Glavstart comes in. For a share in between 10 and 49%, the company will invest up to $100 thousand in a startup to turn it into a business that could at a later stage become of interest to investors.
Moreynis’ strategy is not only based on the quality of the startups, but also their quantity. US experience shows that out of 10 startups only a repay themselves and only thanks to 1 out of 10 the angel investor can make a profit.
To gather a critical mass of projects, Moreynis had to create a stand up theatre. This is Startup Weekend. On these regular three-day meetings for startups, Arkady Moreynis plays three roles at the same time. He is event organizer, mentor and investor.
A sorry piece of meat
‘These are our patients’, nods Olga Grinevskaya, marketing manager at Glavstart. A large flock of young people waits for the doors of the ‘Open Youth University’ in Tomsk. With their glasses and stretched sweaters, they look like typical geeks.
Early March Arkady and Olga departed on a road-trip around several Siberian cities to advice the future entrepreneurs how they could present their projects at the upcoming Startup Weekend in Novosibirsk, which will take place at the end of the month. Moreynis, who is wearing a bright flower patterned shirt by Etro looks like the star of a traveling circus. Normally Arkady speaks softly and quietly, but when he takes the stand, he transforms and begins to talk vividly and inspiring.
‘In order to get a person to move, you need to give him a magic pendulum. Today we will hand out pendulums’, Moreynis promises. After he has said some words about Glavstart, he yields the floor to the startups. They all get 2 minutes to present their projects. None of them finish in time. The essence of many projects only becomes clear after questions are asked. Ideas are often not original or they miss a business strategy.
I would like to make internet radio, where you’ll only hear music from local artists from Tomsk, a skinny lad says.
And who would listen, Moreynis asks?
Artists form Tomsk, the audience jokes.
Another young guy proposes to conduct elections and referenda with the use of mobile phones. He clearly doesn’t know that the chairman of the Central Election Commission, Vladimir Churov, had promised such a service in the spring of 2010, but that the idea was killed shortly after.
Moreynis doesn’t cut costs on the pendulums. Taras Gandzha for example wants to sell an interactive textbook about physics to schools. Instead of a textbook Moreynis recommends him to make a game for Facebook.
‘Each business should be a hamburger, but we’re presented with sorry pieces of meat’, Moreynis explains his pet theory. ‘Each business needs consumers and suppliers. In between them there is the meat, a technical service that allows them to interact. Most startups propose the stuffing only. They do not have the algorithm to involve consumers and suppliers’.
Moreynis is convincing. After all he succeeded in realizing the American ‘silicon’ dream, to start an IT business from scratch and sell it to an investor.
Half for free
Arkady Moreynis got his magic pendulum in 1991. At the time he was employed at the computing center at the Moscow State University, which amongst others worked on the russification of Apple computers. In his free time the future entrepreneur wrote software to transfer voice to a local network. By chance developers from Apple saw the software and bought it for $20.000. At that time you could still buy a one room apartment in Moscow for such money. Arkady Moreynis, however, choose to start his own company called Macsimum, whcih during the 1990 grew into one of the largest Apple software dealers in Russia. But to be fair, in those days there weren’t much Mac users in Russia.
One evening in 1997 Arkady Moreynis met with his old buddy Boris Lozinsky, who was the development director at Consultant Plus. Over a glass of calvados the latter complained that he couldn’t get himself to buy a computer. There just wasn’t a good price comparison website on the Runet. Moreynis immediately recognized the opportunity.
There were already 5 or 6 price comparison websites on the Runet. Their success depended on the amount of products, whose prices were being compared. In order to collect a database of price lists Moreynis offered Moscow computer companies 3 months of free placing. Because he expected that after the free period only about 5 to 10% of the clients would agree to pay and that the amount of products on the website would drop drastically, Moreynis divided the computer stores into two groups. At first, the employees of his company Price.ru would offer free placing to the first group and then three months later to the second group. They repeated this strategy several times. Paying clients had a continuous presence on the website. Those who didn’t pay participated only periodically. More and more computer stores began to pay and the earnings of Price.ru increased by around 20% each year.
At the top of Rambler
Each room in our hotel in Tomsk has a modem, but they won’t work for a Mac. The first thing Moreynis did this morning, internet dependent as he is, was to call Price.ru and find the address of a store where they sell ethernet connectors for a Mac. He also tried Yandex.Market but there he couldn’t find a store close by. Arkady clearly has an axe to grind with Yandex.Market.
Yandex.Market started in 2001 and because of its huge advantage in search traffic (Yandex is Russia’s number one search engine) began to systematically eat out of the market share of Price.ru. Moreynis increased his offerings, but in the years 2007 and 2008 Yandex.Market caught up with Price.ru in numbers of participating companies. Today the ratio is even 4.200 against 2.200 companies.
Price.ru is a cash cow. It brings in a steady flow of earnings, but it doesn’t have the potential for fast growth. ‘I wanted more’, Moreynis says. When in 2005 Rambler media (Russia’s 2nd search engine) offered to buy 51% of Price.ru, the entrepreneur didn’t refuse. His other 49% was sold a few years later. Ramblers motives were clear. Yandex had shown the way by successfully combining search and price comparison. For the whole of Price.ru Moreynis got in between $5m and $10m, a job as development director at Rambler media and 500 employees.
First, Moreynis united Rambler.ru and Price.ru. Then he changed the design of Ramblers homepage to a vertical search listing, the first on the Runet in which search results were grouped by categories (stores, news etc.) Fair enough, Ramblers market share didn’t grow. According to Liveinternet.ru Ramblers share of search queries was 8.3% at the start of 2008. At the end of the year its share had dropped to 6.6%.
When in February 2009 Mark Opzoomer left his post as general director of Rambler Media, Arkady Moreynis applied for the top job. The board of Profmedia, which owns Rambler media, however, preferred a person with more experience in a large cooperation and the board invited the vice-president for marketing at Vimpelcom, Olga Turisheva (last autumn she was replaced by the general director of Afisha, Nikolai Molibog). Moreynis was free again.
The great Combinator
The example for Arkady Moreynis is the American entrepreneur Paul Graham. Having sold his company Viaweb to Yahoo! for $50m, Graham started the Y Combinator fund in 2005. Graham invests about $17 to $20 thousand in internet startups and then attracts investors for the following round. The results are impressive. Last year Y Combinator found investors for 64 projects. This year both the co-owner of Digital Sky Technologies, Yuri Milner, and the founder of the SV Angel fund Ron Conway announced that they will invest $150 thousand in each ‘graduate’ of Y Combinator. Without looking.
Arkady Moreynis had proposed the shareholders of Rambler to invest in prospective startups, but at his job he didn’t find much understanding. After he left the company and after a holiday in Tunis, he returned to Russia with the grand idea to launch a factory for startups modeled after Y Combinator. Moreynis founded the company Glavstart and announced that he is ready to invest several millions of his own dollars in internet projects.
Similar attempts have been made in Russia and all have collapsed. In 2007 the shareholders of Video International founded the fund InVenture, which in return for a minority share invested up to $300 thousand in projects at the very early stages of development. Its former general director Alexander Loktev told us that the fund did invest in several startups, but that in 2010 the shareholders began to experience problems in their own core businesses and the finances dried up. InVenture was closed. Only one of its projects has survived; Yagoodza, an aggregator for online stores selling designer goods. http://yagoodza.ru/
In 2008 a group of internet entrepreneurs created a fund called Addventure. At first the fund invested $20-50 thousand in startups in their most early stages, but they changed their concept shortly thereafter. Today Addventure is prepared to invest $500.000 and more in projects that are already in operation. What’s more, half of their investments go to businesses which are thought of by the funds founders themselves and in which they own a majority share. We came to the conclusion that Y Combinator’s model will not work in Russia. There are plenty of people with a high potential and ideas, but when it comes to the organization of business processes, these startups cannot deliver, says the managing partner of AddVenture Sergey Karpov. In comparison to the US, Russia has not yet developed the infrastructure necessary for the support of starting entrepreneurs and the natural selection of projects. That must be why the first thing that Moreynis plans to do is to create a system that will assist startups.
People with money
In spring 2010 on a trip to Istanbul Arkady met with an American, who founded Startup Weekend a popular event that gathers thousands of startups from around the world.
For a reasonable price Moreynis bought the license to organize Startup Weekends in Russia. Being part of global network will make it easier for the graduates of Glavstart to visit international events, where they may get access to foreign investors. The first Startup Weekend, which took place in Moscow in the summer of 2010, created the effect of a bombshell. The event was visited by hundreds startups and several tens of mentors, famous internet entrepreneurs and top managers of IT companies.
The most active among these mentors are the product development director at ‘Rambler-Afisha’, Dmitry Stepanov, the director of internet projects development at STS media, Askar Tuganbayev, and the director of business development at Microsoft Russia, Evgeny Agronik. Their main motivation is to search for new ideas and employees for their own companies. It is always interesting to share knowledge. It’s a form of self-realization, says Dmitry Stepanov.
Before Moreynis people with money did not throw parties for startups. With his money, connections and rich background, Arkady made startups into a trendy theme and instantly became the star of the startup community, admits Vitaly Akimov, the founder of StartupPoint, a community for internet entrepreneurs. StartupPoint, GreenfieldProject and other small companies also organize meetings for investors and startups , but they are no comparison to Startup Weekend when it comes to their size and the quality of the mentors.
Besides that, Moreynis managed to lure the Russian Facebook, Yandex, HeadHunter and Muz-TV (Russia’s MTV) into his circle. Glavstart promises these companies to find projects and employees.
During a regular Startup Weekend in Moscow, sometime in autumn 2010, Arkady Moreynis noticed a vivid, short haired guy dressed in a leather jacket. I am Kolya from Kovrov, the guy introduced himself. ‘I work in scrap metal, but they say that you can make a lot of money in the internet business too’. At that moment Arkady understood the scale of the movement.
Seven Startup Weekends have already been held. In Moscow, St. Petersburg, Kazan and Novosibirsk around 400 startups have presented their projects. Only 11 of them have received investments. In most cases these investments were made by private investors among the mentors.
In the end of last year Arkady Moreynis introduced the developers of Webvisor to Yandex. Webvisor http://webvisor.ru/ is a Russian cloud solution for tracking visitor behavior analysis and usability of websites.
Webvisor got $300.000 from the search engine. Moreynis didn’t make any money on this deal himself. “The most important thing to do now is to create a flow of startups. Startup Weekend is only the platform, not a business, the owner of Glavstart assures us.
The business of Arkady Moreynis is the resale of startups, in which he has invested his own money. At the moment there are 3 such projects. “From one to another” (“Друг другу”) is a social network, which members help each other with useful services. You can simply say thank you or buy points that you can transfer to the person that helped you. ‘Sometimes it is awkward to award someone with real money’, Moreynis explains. The points can be spent at online stores, with which the network is affiliated.
DataLite is the Russian equivalent of Gooddata, a business data presentation tool for small businesses, which recently attracted $15m in investments. http://www.gooddata.com
The most mature project is ‘ Sea of Salons’ (Море салонов) a system for online reservation for beauty parlors. ‘At first the idea was to offer the software to the beauty parlors for free and we would make money with advertisements for beauty products.’ ‘But then Arkady came and everything changed’, says the co-owner of Sea of Saloons Yuri Petrov. We will start charging the saloons for our services after 3 months and the visitors will be lured to the site with discounts on hours, when the saloons aren’t completely booked. (Consumers and suppliers! Remember the hamburger?)
The website is done. In March the managers of Sea of saloons began their tour around the hairdressers. The partners also plan to copy this project to other sectors, where it is equally important for business owners to keep their employees occupied throughout the day. (car wash, restaurants etc.. ) For 3 million rubles Glavstart acquired a 45% share in this project. The money is supplied in trenches corresponding to the implementation of the stages of the business plan.
In the beginning of 2012 Moreynis plans to attract another round of investments in ‘Sea of Saloons’. By his estimates every invested dollar will ideally yield five dollars. Glavstart plans to keep a share of 10% to 15% in all of its projects, just in case the project turns exceptionally successful. One example of a successful investment is social publishing site Scribd. In 2007 Y Combinator bought a 6% share in the project for $12.000. Their value is currently estimated a $10m. ‘Investments at the very early stages may yield stunning returns, but they are also very risky’. ‘Western funds call them ‘dead valley’, says Sergey Karpov, whose fund intends to buy the ‘grown up’ projects from Moreynis.
At the moment Moreynis financial resources are still limited. Glavstart doesn’t have any other shareholders yet. Of course it would be much easier to create another Price.ru on the basis of ‘Sea of Saloons’, but that would be boring. “Am I a trembling creature, or have I the right? “ Arkady Moreynis quotes Raskolnikov, the main character from Dostoyevsky’s Crime and Punishment. ( Raskolnikov asks whether he is just a worm like the rest of men or whether he is destined for greater things ) In 2011 Glavstart plans to invest into 15 projects (currently 8 are under review), in 2012 into 30 projects and in 2013 into 50 projects. The first successful deals should already take place in the beginning of 2012. At such a rate the market will explode.