expanding to russia (tech sector)

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•••

••• Follow us on twitter @fabernovel ••• Visit our website and discover what we do: fabernovel.com

•••

••• Expanding to Russia with love

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•••


Just one small step for space agencies…

In 2010, NASA and ROSCOSMOS agreed on a 1 billion dollar deal to send US astronauts to the International Space Station using Soyouz on Baikonur launchpad.

2

Even NASA has a strong confidence in Russian technology and business relations.

… a giant leap for Russian technological credibility

So, how does the new Russian technology sector look like ?

•••

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•••


Table of content

4

1. The Russian Innovation Model

2. A promising economy

3. Developing tomorrow’s potential

4. The Russian Tech Recipes

5. Summary

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•••


Table of content

5





5. Summary

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••


The Russian innovation model

•••

High Voltage Research Installation, Moscow

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•••


Russia has a strong technological and engineering

culture…

7

« To catch up, and to surpass! » Soviet slogan for Science and Technology, introduced by Lenin.

The fate of Soviet civilisation has long been linked to

its success in its Science and Technology field.

Unlike in the US, where they are called geeks,

engineers and scientists are often considered

national heroes.

The Russian innovation model is

leveraging on world-class

scientists, famous mathematicians,

taught in Moscow or St. Petersburg

Universities and science-dedicated

schools.

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••


…in which social networks have and still play a major

role

Russia has a tradition of networks for simple day-to-day survival, due to the

country’s totalitarist past. Since, Russians have developed extensive social

networks with high levels of political capacity, which are important means for the

diffusion of democratic ideas in Russia.

8

Russians view the internet as « the

most valuable source of information,

including word-of-mouth through social

media where their friends or others with

similar interests can share information

with each other.»

Sources:Business Week, DreamGrow/ LLP, ComScore, Synovate, American Journal of Political Science

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•••


Russian constraints drive usages and innovation

9

10 Average number of

hours spent monthly on internet social networks; world

average is 5

1 Worldwide rank in

time spent on social networks

80 millions, of Russian-speaking internet

users

Sources: EWDN, ComScore

2 Worldwide rank in size

of illegal media sharing ($300 million

in music piracy)

Physical isolation Rough climate

Mistrust in State-controlled media

Poor urban planning

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•••


This innovation model gave birth to Yandex, a true

success story

Founded by two Russian mathematicians.

10

Arkady Volozh

Ilya Segalovich They wrote a search algorithm for

Russian-written files in the early 90s.

That’s 6 years before Google’s Page

and Brin started their research at

Stanford University.

With that in mind, some would rather say that Google is the US Yandex, than Yandex being the Russian Google…

Sources: EWDN.com, Yandex Corporate Website

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•••


Google’s twin brother…

440 million dollars revenues in 2010

11

80 web products in total (mostly the same offer as

Google’s)

65% share of search-engine traffic in Russia (Google 2nd

with 22%)

60% share of Russia’s online advertising revenues

66% growth (b/w Q1 2010 & 2011)


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•••


… that even goes beyond its cadet.

• Real-time traffic 4 years before Google

12

• New products: TV Schedule, E-cards, …

• But most of all, a higher precision algorithm than Google’s due to the specificities of the inflective Russian language.

#1 Photos Web Portal

#1 Traffic previsions

#1 Weather

…


So, what about the well-known Russian « copy-paste innovation » model?

•••

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•••


The copy/paste innovation: a perfectly well-accepted

path into innovation

14

A casual glance at new Russian site BigLion shows you that the creators not only copied

Groupon’s business model, but they also just ripped the site design and navigation off

completely, too. The sites look nearly identical, even down to the smallest details.

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•••


We can find many examples of copy-paste innovation in

Russia…

15

“The Russian Internet could almost be described as tabula rasa with huge potential for opportunity and growth. [So] we just looked at what had been done in other countries, chose the models that proved their relevance and then adapted them to the Russian market.”

Marina Treshchova, CEO Fast Lane Ventures

Original company

The Russian copy

Web initiatives in Russia are often perceived as pure and simple copies of successful Western

companies, which business models, designs and brandings are faithfully replicated.

Here are a few examples of the most significant ones :

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•••


… but they eventually leapfrog their original model.

16

Vkontakte looks and feels very similar to Facebook, but…

… Vkontakte has developed some specific and local functionalities that might even raise

strong barriers for Facebook.

This example testifies of how Russian services can emancipate from the original model

by leveraging on their own strengths to build a unique capability.

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•••


Beyond a simple copycat, Vkontakte beats Facebook

because of many key features

• Launched in 2006, it has more than 110

million active accounts (vs. 5 million

facebook users in Russia). It is the 4th

most visited Russian website.

• Facebook faces difficulties

penetrating the market for two reasons:

• Facebook's Russian users are

generally of the wealthier, well-

traveled, cosmopolitan variety, have

foreign friends and tend to live in

Moscow and St. Petersburg.

• Facebook does not offer content

sharing services

17

Sources:Les Echos, ComScore, Vkontakte.ru

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•••


Vkontakte created a very efficient network, far from its

model

• Millions of free pirated copies of domestic and foreign movies dubbed into Russian make it the biggest illegal downloading website in the world and the biggest pornographic video library.

• The search engine allows users to look for the nearest ‘active’ single woman in the region, and escorts.

18

• The website also plays its part throughout Russian protests through events like “Revolution Square Saturday” that took place after the December elections

Sources:Les Echos, Social Times, BBC

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•••


Table of content

19





5. Summary

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•••


A promising economy

•••

International Business Center, Moscow

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•••


Europe’s largest internet market by number of users...

21

e-commerce size: $8 billion

Online advertising: $1,5 billion

e-commerce size: $45 billion

Online advertising: $3 billion

Sources:EWDN, Obeservatoire de l’e-pub, fevad, ACSEL

50 Million Russian

internet users

42 Million French internet users

Strong growth potential.

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•••


… and the market has yet to expand!

22

46%

Total 2011 internet penetration

Sources: internetworldstats, ITU, census bureau

• Almost three quarters of all Russian Internet users live in the European part of

Russia: a huge market is still to be conquered!

• Considering a target market penetration of 70%, it would represent a total of

100 million internet users.

Use

rs

To

tal

Po

pu

lati

on

0% 2010

25%

50%

75%

2005 2000

46%

15%

2%

Evolution of the Internet penetration in Russia

70%

58% Russia

France

Europe

Some Russian companies have already seized this appealing opportunity…

•••

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•••


From a mail-service website to one of Europe’s largest

Internet groups

Mixed growth model: from innovation, one

fusion and acquisitions.

Multiple sources of investment, both local and

foreign.

24

Official objectives:

COMMUNITAINMENT INNOVATIVE SERVICES

Communications +

Entertainment

Improve the Internet market

Sources: Mail.ru Group Corporate Website

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•••


Mail.ru Group: the Runet colossus

25

Email, IM, social networks

Games Navigational Services

Media projects E-commerce

Mail Agent (IM)

MyWorld (MIR) OK ICQ

Blogs Dating

Futubra

40 MMO 47 games for social

platforms

Search Answers

Maps Mobile

Rating (Analytics)

News Weather

Entertainment Hi-Tech, Auto, Lady,

Kids, Health Cards

Mailing

Travel Goods

Property Money Work

Headhunter Free-lance

Market leader in display advertising, internet communications, and in social.

$325 million revenue in 2010 from

diverse sources:

39%

30%

20%

11%

Advertising

Games

Paid services

Other

Sources: EWDN, Mail.ru Group Corporate Website, Mail.ru Annual Report 2010

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•••


Mail.ru Group has given birth to a financial

giant: DST

• A major late-stage investment fund

• Invest minimum around $100M, for companies valuated at least $1b

• Goal: to give liquidity to tech companies in order to delay their IPO, so that they

can focus on product development instead of liquidity.

• Large network outside Russia via direct partnerships or co-fundings: Facebook,

Zynga,… Accel, Greylock, Kleiner Perkins…

26

Sources: TechCrunch’s 2010 Yuri Milner interview

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•••


DST’s Investments (undisclosed shares)

27

Sources: TechCrunch, WSJ, EWDN

An impressive portfolio including many of the hottest tech firms of the moment…

… probably starting the first bridges between Russian and Western companies.

These connections with the Western World raise the question of the Russian firms internationalization.

•••

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•••


Is Russia’s tech companies weak international presence

a real issue?

• Why do firms internationalize?

29

Growth & Performance Ideas & Innovation

New clients Tax Benefit Economies of scale …

Exclusive information Cultural mix Technological advantage …

But there is plenty of both in Russia!

Their weak international presence is not necessarily a concern, as many examples show

that Russian tech companies successfully internationalize when needed…

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•••


VimpelCom’s strong international presence

30

• 181 million mobile subscribers around the world

• $10.512billion dollars revenue in 2010

• Based in Amsterdam

• 10 Brands

Beeline, Kyivstar, djuice, Wind, Infostrada, Mobilink, Leo, Banglalink, Telecel, Djezzy

A strong international presence, on several continents

Europe Russia, Ukraine, Armenia, Georgia, Italy

Asia Kazakhstan, Uzbekistan, Tajikistan, Kyrgyzstan, Vietnam,

Cambodia, Laos, Bangladesh, Pakistan

Africa Algeria, Burundi, Zimbabwe, Namibia, Central African

Republic

North America Canada

VimpelCom is showing that there’s no such thing as a Russian tech failure to cross Russia’s borders…

Sources: VimpelCom’s 2010 Annual Report, Datamonitor

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•••


Kaspersky, a long-date international actor

• One of the world’s leading antivirus research

and software companies

• Founded in 1997 in Moscow

• Fast expansion to : India, Germany, France, the

Netherlands, the UK, Poland, Romania, Sweden,

Japan, China, South Korea, and the USA.

They recently enrolled Jackie Chan

as their product spokesman in a

move to conquer China.

31

Sources: Wikipedia, Official Website

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•••


Which countries are mostly targeted by Russian firms?

• Both cultural and

geographical proximity

• No language barrier

• Existing networks

32

Historical Technological Strong potential Proximity

4 types of links to Russian companies:

• Example for innovation

management

• Experimentation

• Innovation harnessing

• Market in development

• Geographical proximity

• Land connection

• Within quick flight reach

• Existing networks from

other industries

Ex-soviet countries USA South East Asia Europe

Examples:

Alongside internationalization, investment power is developing fast in Russia .

•••

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•••


DST is developing, extending its network to Asia

DST Global II

Raised in May 2011

A capital of about $1billion to invest

Expected to be invested in Asia,

following the path of previous

investments (Alibaba, 360buy)

34

Russian tech investments are not only focusing on high profile Western

companies, they are also getting key shares in soon-to-be Eastern giants.

Sources: EWDN.com

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•••


Public initiatives foster the development of investments

in Russia

• 120 billion rubles ($3,72b) from the

Russian Federation

• To give Russia a leading position on the

nanotechnology sector while accelerating

the commercialization of nanotech

products (inside and outside Russia)

• 2010: 44 projects approved, 47.1 billion

rubles invested, total budget of the

projects 146 billion rubles

35

• State funded venture capital company

created in 2007

• $1.25 billion capital to fund VCs

investments using a 5% loan without

asking for stocks in the companies.

• Two goals: Investing in Russian tech

while attracting and developing VC

networks in Russia.

Sources: Rusnano’s 2010 Annual Report, CNET News

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•••


Top VC firms invest in Russia

But also…

Mangrove Capital Partners

General Catalyst Partners

and more…

36

Accel Partners

Andreessen Horowitz

Benchmark Capital

Bessemer Venture Partners

First Round Capital

FLOODGATE

Founders Fund

Greylock Partners

Top 15 VC firms from Forbes 2011 Midas List

Already publicly investing in Russian startups

Kleiner Perkins Caufield & Byers

New Enterprise Associates

Redpoint Ventures

Sequoia Capital

SV Angel

Union Square Ventures

Venrock

… a move that we can expect even more thanks to the growing

relations with DST.

Sources: EWDN, Corporate websites

US VC firms’ investment is clearly expanding to Russia…

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•••


Table of content

37





5. Summary

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•••


Developing tomorrow’s potential

•••

Skolkovo Innovation Center, Moscow

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••



1. An overview of the Russian innovative markets

2. A strong network of incubators supporting new initiatives

3. The Russian boiling innovative ecosystem: Startups

4. Some barriers to keep in mind

39

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•••


Up-to-date Russia: mobile phones are extremely

popular…

There are 1.5 SIM cards per Russian inhabitant

Total population

Total mobile phones

186 million

140 million

Sources: newmediatrendwatch, emarketer, AC&M

A strong mobile phone penetration

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•••


…and are spreading internet technologies!

While households’ internet access grew by 10% in 2011, the household

broadband penetration remained flat: mobile phones internet users

account for most of the new internet users

41

Still, only 7% of subscribers have access to the

3G network

Smartphones penetration is still low (11%) but is

quickly growing: +118% between 2010 and 2011

Sources:informa telecoms&media, newmediatrendwatch

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•••


Mobile phones are creating an opportunity: younger

users are driving mobile internet growth…

42

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

age 12-17 age 18-24 age 25-34 age 35-44 age 45-54 age 55+

internet users

mobile internet users

Users by age (Aug 2011)

Sources:informa telecoms&media, newmediatrendwatch August 2011

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•••


… creating a fast-expanding market for mobile content

At the end of 2010, touch screen phones accounted for about 30% of all phones

sold in Russia

43

The Russian mobile content

market could reach as much as

$1.8 billion this year

In 2013, the overall mobile

content market could exceed $3

billion.

Sources: ewdn, informa telecoms & media, newmediatrendwatch

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•••


Even with homemade solutions, the social network

market is up to date

44

Odnoklassniki.ru

Russia’s 2nd social network

Face detection, dating

Similarities: Classmates

45 million

LiveJournal.com

Blogging, social media

Intellectuals express

themselves freely

30 million monthly in Russia

Vkontakte

Russia’s 1st social network

Similarities: facebook

116 million accounts

MoiMir – ‘My World’

Blogging

Similarities: Myspace

20 million visits per month

Moi Krug – ‘My Circle’

Job seeking, pro networking

Similarities: LinkedIn

1 million users (vs 0.5 on Russian

LinkedIn).

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•••


The e-commerce market is developing

45

The Russian e-commerce market is still emerging but is expected to grow fast in volume and result.

2010 2011 2015 2020

$8 bn $10 bn

$30 bn

$18 bn

Forecast

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•••


What will be driving Russian e-business in the next five

years?

46

• The potential market growth in Moscow and St. Petersburg in terms of new users

is reaching its natural limit.

• Most new users will come from other Russian regions, typically recent

Internet users from larger cities making initial online purchases.

Internet users

in 2015

78 million

2010 2015

Moscow+ St. Petersburg

Started using internet before 2011

5.6 5.1

Started in 2011 or after 2.5

Total 5.6 7.5

Regions Started using internet before 2011

8.4 7.6

Started in 2011 or after 13.2

Total 8.4 20.8

Total Russia 13.9 28.3

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•••







47

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•••


A network of incubators demonstrating the recent

dynamism of the startup ecosystem

48

…

A sample of the most active and significant Incubators launched in Russia, that show

the willingness and dynamism of an emerging ecosystem dedicated to innovation and

entrepreneurship.

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••


HSE Incubator

• Founded in 2006 by students and professors of HSE.

• A pool of 6 startups

• Startups get an equipped office space as well as administrative and

consulting support.

• HSE(10K) similar to MIT(100K) startup competition

• Former incubated startups: SmartKniga, Skillopedia.ru, Native Speakers

Club, Roomix, PensiaMarket, TimePad. (19 startups so far)

49

MOSCOW

Sources: Official website

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•••


Academy of National Economy Incubator

• Founded in 2010 by the Academy

• Classic incubator : office, advisors, classes, events.

• Provides an “Accelerator” program with early stage funding

• Lot of partners ranging from Microsoft BizSpark to Yandex, includes investment

partners and a huge number of information partners

50

MOSCOW


………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••


Moscow State University

Student Business Incubator

• Founded in 2010 with a startup competition aiming at recruiting the first batch of

teams (Webils, Maxigen, Introvision, Idata, Web-constructor)

• More than traditional support to its startups, MSU SIB provides exchange

programs with US Ivy League’s universities such as MIT and Harvard.

• Partners have invested more than 50 million rubles in the startups

• The advisory board includes representatives from top-level companies and funds

: Microsoft, Alliance Rosno, Rusnano, Russian Venture Company,…

51

MOSCOW

Sources: Official website, Direct contact

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••


Fast Lane Ventures

• Leading developer of internet companies, Fast Lane Ventures was founded in 2010.

They target B2C markets.

• Has launched 15 internet start-ups,

• Unique model: the ’Fast 50’ enables it to launch a new internet business within 50 days.

• Has attracted $50M from

different investors

• The team brings together

700 internet developers,

and holds classes and

training sessions along

with help in finding funds.

52

MOSCOW


………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••


Farminers Startup Academy

•Founded by former Vice President of Mail.ru, Igor Matzanyuk, in August 2011. The Fund

invests in Russian projects.

•Selected projects receive up to $150,000 USD to prepare a project prototype, an office

space, and computers.

•After three months, the prototype will help the Farm find investors for the project.

•Farminers will generate funds for a period of three to six months in exchange for a 40

percent stake in the project.

•Targets online projects, compatible with mobile devices, and mass-market.

53

MOSCOW

Sources: Official website, lenta.ru

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••


Ingria Technopark Business Incubator

• Founded in 2008 by the Inngria Technopark.

• Among Top 5 most efficient business incubators

in Russia (Forbes)

• Two programs:

• Pre-incubation, 6 months (cost 500 RUR/month)

• Incubation, 11-33 months (cost 1500 RUR/month)

• Network of partners

• 70 residents: IT, Ecology, Biotech, Medicine,

Energy, Material Science.

54

ST PETERSBURG


Ingria future technopark

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••


Tex Drive

• Founded in 2011, TexDrive is a member of the Techstars network, and is supported by

Springboard, two worldwide well-known start-up accelerators.

• TexDrive offers 12-week programs that help start-ups define a business model, find

investors and solve legal issues. Selected projects get $25K at the start, then $100K at the

end of the program, while TexDrive gets a small share of the company in return.

• Own funds and TexDrive investors network represent potentially $3B in venture capital

funds. Investors are local wealthy individuals, entrepreneurs and investment managers.

• First program launched in January 2012

55

MOSCOW

Sources: Official website, Marchmont Capital, EWDN.com

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••


Skolkovo: can Russia build its own Silicon Valley ?

56

• The Skolkovo Innovation Centre, still under construction and completed by 2014, is the most remarkable and emblematic

example of the Russian initiatives to foster innovation and put Russion on the “technology map”.

• The strategic goal of the Skolkovo Innovation Centre is to concentrate international intellectual capital, thereby stimulating

the development of break-through projects and technologies. To help Russian innovators liaise with international VCs,

Skolkovo has also opened offices in UK and in the Silicon Valley.

• Mainly fund by the Russian government, Skolkovo gathers innovation clusters, a technopark, a university and a city-

laboratory, near Moscow. The innovation centre cooperates with a number of foreign tech giants, including Cisco, Ericsson,

Nokia. Microsoft and SAP are launching R&D centres in Skolkovo.

• The innovation clusters cover the following fields

:

• Information technologies

• Energy Efficient technologies

• Nuclear technologies

• Biomedical technologies

• Space technologies and communication

• At the moment, the Skolkovo Foundation already

supports an estimated 350 Russian innovation

companies, with 220 of those coming from 30

different regions in Russia. Plans are to increase

the number of residents to 500 companies this

year.

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••







57

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••


Already some extremely innovative companies are

coming out of this ecosystem

58

A selection of some highly innovative start-ups “made in Russia” that offer a disruptive value proposition, and testify of the dynamism of Russian entrepreneurs.

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••


Yota

• Yota (4G internet) is the first Russian high-speed wireless network based on Mobile WiMAX.

59

Yota offers fixed, nomadic, and fully mobile wireless

broadband Internet access, through dedicated mobile devices.

Yota also offes to stream movies, TV programs, and online

music in its mobile services catalogue.

It focuses on high density urban areas.

• Those actors have entered the telecom market by providing access only, differentiating with disruptive

distribution models.

• Yota operates in Russia, Belarus and Nicaragua.

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•••


Displair

• DisplAir offers an interactive non-screen display which ‘floats’ in

mid-air.

• The ‘air screen’ consists of vapor particles which do not leave any

traces of moisture

• It can be seen, heard, smelled and touched

• Images on the display can be static or animated, in 2D or 3D

• The device shows potential for use in advertising, entertainment,

education, and medicine. For instance, the multitouch management

of the image creates opportunities for brands to promote new

products with visual, tactile and olfactive experience.

• Displair has been producing and selling its first prototypes since

2010. The device may cost as little as a few thousand US dollars

when manufactured in large quantities.

• Displair won numerous Innovation Prizes, of which Innovate Russia

that gave them the resident status at Skolkovo and the

Technovations Cup, another national innovation cup.

60

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•••


ResumUP

• ResumUP is a service for personal data visualization aimed to set a new standard in

career management, online and social recruiting.

• Basically, it gathers your data from multiple sources (LinkedIn and Facebook Connect so

far) and transform it into a clear visualization.

• Then with a special algorithm, it can rank your profile and match it to job offers.

• ResumUP is expected to launch as a recruiting service but could expand its services as a

plugin to other websites.

61

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••


Good Roads

• Goodroads is a mobile mapping

service that collects data about road

surface quality. The system is paired

with an iPhone application which

gathers data and runs an algorithm that

evaluates road conditions.

62

The project was launched in 2011 and won

the Opera Software Startups Award.

The site was created by a team of students at

the St Petersburg State Polytechnical

University, helped by the QD incubator.

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••







63

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••


The Russian Business “Folklore” : myth or reality ?

64

WTO membership is expected to shine light on the regulations and corruption that dog the Russian economy.

Elvira Nabiullina, Russia's minister of economic development, left, and Pascal Lamy of the

W.T.O at a ceremony in Geneva, on December 6th 2011.

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•••


Business in Russia still faces many challenges

Foreign investors and business developers are often discouraged by the historical

barriers that are still deeply attached to the common image of the Russian economy

:

• Rules of law that fail to match countries such as the U.S. and Western Europe;

• Bureaucracies are confusing and cumbersome;

• Corruption is rampant and is even seeping into the education system;

• Powerful oligarchs dominate key industries;

• Few Russian people actually speak English;

• And secrecy in R&D is the norm…

65

Even if those threats are still a reality, it’s yet possible to do business in Russia.

Thanks to public and private initiatives that have risen so as to align with Western

standards and enable Russia to attract foreign investors and develop international

partnerships, those barriers have been substantially lessened.

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••


Legal Framework

66

Sources: The Global Integrity Report 2010

The Russian legal framework is

undergoing severe and major

improvements.

But Russia also exhibits a significant

implementation gap, meaning that many

laws on the books are poorly enforced.

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•••


Intellectual property

67

• Since the dissolution of the Soviet Union, the Russian Federation has sought to address

important issues surrounding intellectual property and its protection. In a number of areas

these efforts have led to greater recognition of intellectual property rights and now

provide for a greater degree of protection.

• Although the level of IP protection in Russia does not yet match the sophistication of most

European jurisdictions, fundamental IP rights are recognized in Russia. A substantial

basic regulatory framework exists within which companies may attain protection of their

intellectual property assets.

The case of pirate softwares

Pirated software accounted for 65% of the volume of all software units installed on

PCs in Russia for the year — down 2% from 2009 but nevertheless representing a

commercial value of approximately $3 billion.

A survey conducted by BSA as part of its study of piracy levels in Russia indicates that

the majority of Russian respondents understand the benefits of licensed software,

including the factors of reliability (86 percent) and access to technical support (69

percent). However, more than half of Russian respondents do not have a clear

understanding of what constitutes legal and illegal use of software.

Sources: Business Software Alliance (BSA) in its 2010 report on global piracy.

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••


Russia’s Underground e-market

• Russian social networks host the biggest illegal media library in the world. Experts estimate

that Majors are losing up to 10 million dollars per day on that market. The website was

sentenced to fines at the beginning of 2012 for copyright infringement.

68

Sources:Les echos, ewdn, thecmuwebsite

Informal Commercial Vkontakte groups

Dec 2010 Nov 2011

Mobile devices 170000 256000

Fashion 105000 170000

Watches 102000 150000

Children's goods 80000 16000

Cosmetics 70000 105000

Services 55000 83000

Jewelry 35000 74000

• Vkontakte groups enable illegal

trades and e-commerce. 150

informal groups have more than

100,000 members on the website.

• Oborot.ru, Russia’s leading online

resource and event organizer for e-

commerce, announced in October

2011 the creation of the Electronic

Commerce Association, which aims

“to facilitate the development of

online retail businesses and define

the principles of civilized business.”

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•••


Payments are still an issue

• The Russian economy still suffers from a lack of standardization in payments

means, leading to what might appear as a payment jungle.

• Russian consumers face a lack of trust when it comes to online payments.

• To this day, Russians still prefer to deal in cash for the majority of their purchases.

• Cash-on-delivery is the most popular method of payment for online transactions in

Russia : the online user agrees to come pick the item up and pay for it with cash.

• Russian social networks introduced new payment instruments, including virtual

currencies and credit cards. More than 50 internet payment solutions are now

available.

• President Medvedev signed a law in June 2011 that addresses legal regulation of

e-money. New obligations, such as obtaining licenses and increasing authorized

capital, have forced many sites to shut down their online payment systems.

• Odnoklanisski’s solution couldn’t be integrated in the social commerce sphere and

new legislations have stopped official e-payments on Vkontakte. Vkontakte

interrupted Ozon’s integration in its payment system.

69

Sources:The Moscow Times, ewdn

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•••


Corruption still dogs the Russian economy

70

147th

25th

73rd

24th 75th

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•••


Table of content

71





5. Summary

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••


The Russian Tech Recipes

•••

Goose with apples, a Russian specialty

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•••


What is specific about Russia?

Russia has a strong scientific culture.

Russia is the largest country in the world: with very diverse density of population… and has still to complete the equipment of its low density areas.

Russia is facing a social and technology gap inherited from more than half a century of communism.

Russia is well-known for its extremely tough weather.

73

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•••


Lots of constraints means a lot of creativity

74

Grigori Perelman, the mathematician who solved the Poincaré Conjecture.

Russians digging a passage to their home after a snow storm in Odessa.

A railroad near Baikal Lake.

Constraints and speed lead to technological breakthrough such as Displair

Brilliant mathematicians

New ways to reach

underdeveloped areas

A sense of emergency in

bridging the technology gap

Intense indoor usages

Alcoholism is still a major issue in Russia, reducing male life expectancy.

Health issues

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••


Brilliant mathematicians create an expertise in algorithms

For example: Yandex’s search algorithm is said to be better than Google’s.

Why ?

Due to the specificities of the Russian language (strong inflectivity of the language), they had to

devise a way to understand the meaning of a sentence by splitting the assembled words and then

read each one of them.

Results ?

Even though this technology is not required in Western languages, it has proved to be more

efficient on research. Something Google lacks in its Russian search.

75

The crafting of high precision algorithm is one of the most mathematical part of IT Services. In Russia, the training of top-notch mathematicians in specialized schools has permitted the emergence of a field of expertise in algorithmic.

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••


Brilliant mathematicians know how to crack the code…

and protect it!

The expertise developed by Russian mathematicians in algorithmic is not only used in data

analysis, it has been used for a long time in cryptology and hacking.

Russian hackers are world-known for their creativity and expertise.

And when it comes to data security, who is the most relevant expert if not the person who

knows how to hack into your system? Even some cryptographic technics are named

after Russia: Russian copulation, for example, is a method of rearranging plaintext before

encryption.

It is now a business in Russia: groups of hackers are paid to test the security of IT

infrastructures.

Examples of Russian cryptography and hacking expertise:

76

Sources: Friedrich Ludwig Bauer, Decrypted Secrets

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••


Crypto AG is a Swiss-based company, but Russian-

based technology

• Crypto Telecommunication Security is «the preferred top-security partner for civilian and

military authorities worldwide ».

• Its business office are located in Switzerland, but its technical teams are based in Russia,

tapping into one the best security experts pools in the world.

• They conceive and commercialize top-security communication solutions.

• They are about to launch a new product: Nume. It will allow mass market to benefit from

encryption-based technology to secure their personal lines.

• Nume is certified on multiple Defense standards across the globe (China, South America,

Indonesia, India, Middle-East,…).

77

Sources: corporate website

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••


A company specialized in hackproofing: StopTheHacker

• StopTheHacker’s proprietary technology helps solve web-scale security

problems involving malware on websites, hacker attacks and other types of

online abuse.

• It uses machine learning (ML) and artificial intelligence (AI) techniques, which

are monetized on a SaaS model.

• StopTheHacker has just received a $1.1 million initial funding from a group of

Russian investors but also Brian NeSmith (CEO of Blue Coat Systems).

78

Sources: EWDN

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••


Telecom sector proves Russian ability to adapt to

important constraints

• Even with the high demand of Russian population for telecommunication

infrastructure, telecom companies were facing two main issues in their expansion:

• Low solvability of the majority of the population

• High cost of implementation due to

• Ancient buildings

• Foreign and isolated Russian backcountry

• Russia now seems to have tackled these issues and numbers of landlines,

internet users and mobile users are skyrocketing.

Examples:

79

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••


Inango devised a new way to cut implementation costs

• Inango offers complete solutions for service providers

looking to connect entire communities to the Internet.

80

• Inango solutions are targeted at populations living in higher density areas

(high-rise apartment buildings) and where sensitivity to cost is high.

• They connect to a high-speed backbone at a local point of presence (typically

based on optical fiber) and provide ways of connecting to each individual house-

holder.

• They use a simple yet efficient technology: they transmit and receive data

over existing coaxial cables.

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••


Vimpelcom’s rise shows the effiency of Russian

infrastructure development strategy

• In 2001, their strategy was to expand Vimpelcom’s infrastructure in all the regions of Russia.

They quickly became one of the largest carrier in Russia in terms of subscriber base.

They eventually used this experience to expand to emerging markets.

81

Russia

Ukraine, Kazakhstan,

Uzbekistan, Tajikistan,

Armenia, Georgia,

Kyrgyzstan

Vietnam, Cambodia,

Laos, Algeria,

Bangladesh, Pakistan,

Burundi, Zimbabwe,

Namibia, Central African

Republic

Example of a successful expansion in Cambodia:

May 2009: Launch of commercial operations (9th entrant)

December 2010: 80% of total population covered

650k mobile subscribers (3rd largest operator)

Sources: 2010 Annual Report

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••


The Health sector is proving Russia’s ability to catch up

• The Russian Health sector has been facing many issues:

• A low male life expectancy

• Under utilization of the primary health care system by adult males

• A low quality of pre-natal and natal care

• High abortion rates, most of which performed outside health care facilities

• The Russian government has now seized the issue with multiple plans to modernize the sector.

• Part of which is a 1 billion-dollar bill to digitalize the public health-service.

• And a partnership with the U.S. on health issues

• Many private initiatives have emerged from these opportunities.

Examples:

82

InErPharm

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••


Maxygen Mobile DNA Tests

• Maxygen develops a technology of mobile DNA

testing that can detect any infectious disease only

in 10 minutes only for $10 with the use of a simple

small device and a single-used cartridge.

• Part of MSU SBI, the three founders are alumni of

Moscow State University. Valery Ilinsky, CEO,

has a degree in Virology from MSU, and has

multiple experience abroad, including the Institute

of molecular Cancer Research (Zurich),

Department of tropical and infectious diseases

(Washington).

• The startup has ranked very well many

competitions, including a second position in

Intel’s Global Challenge.

83

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••


InErPharm reduces the toxic effect of cancer treatment

• InErPharm is a Russian startup from MSU SIB, that will commercialize a treatment

reducing the toxic effect of chemotherapeutic drugs.

• Basically, the treatment consists in loading drugs into the red cells of the patient.

• The solution not only soften the side effects of cancer treatment, but it contributes to a

longer life expectancy for cancer patients.

84

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•••


One of the fastest countries in technology adoption

Russians have a very intense use of Internet, explained mainly by their lack of trust in regular information channels.

85

Sources: Internet World Stats, TNS , PC.org, EWDN

This fast technology adoption is driven by two main factors:

Russian top managers believe in developing technologies that do not strictly follow their company official guidelines.

At home At work

//localhost/Users/kevin/Dropbox/Pr%C3%A9sentations Pilote D++/Modules/M5 DP Maison.pptx

//localhost/Users/kevin/Dropbox/Pr%C3%A9sentations Pilote D++/Modules/M7 DP au travail.pptx

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•••


Social media is the spearhead of technology adoption

86


10M users connect daily 23.4M users connect daily

(25% of French online population) (30% of combined RU, UA, KZ, MD, BY

online population)

4h30 monthly use average 10h monthly use average

VS.

Russian Twitter users…

… have tripled in one year

… are more active than the international

average, with 27% posting at least one tweet in

four months

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••


Russian Internet is reaching milestones before Western

Internet

Russia has already reached the point where Internet ad spending has

overtaken print (41.8 billion rubles vs. 40.4).

In comparison:

- UK reached this point in 2010

- USA is expected to reach it in 2012

87


advertising

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••


Technology gap forces Russia to explore alternative and

innovative solutions

88

Sources: Finextra, Moscow Times

• While Western Europe was catching up on the on credit cards penetration in the late 80s, credit

cards remained unknown in USSR until the mid 90s.

• The aversion for non-physical money inherited from decades of comunism didn’t help the

penetration of credit cards in Russia.

• With the rise of Internet payments and e-commerce, they had to find new ways to pay…

From cash payment terminals

to mobile-payment

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••


Cash payment terminals, a solution invented in a society

without credit cards

• Facing a surge in the number of internet users, internet companies tried to invent a way to

pay online without a credit card.

• They invented these cash payment terminals where you can credit your virtual account

directly with cash.

89

• This process explains a lot why the Russian e-commerce market is still positionned so far

behind the Western one.

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••


Mobile payments are pushed by the industry leaders as a

way to catch up on non-physical money

90

• MasterCard Worldwide ranked Russia top tech-savvy for new payment technologies.

31% (12% contactless)

Russia

Use of mobile payment 6% UK

VS

• Russia’s three leading mobile operators (Megafon, MTS, Vimpelcom) have announced in January they will

provide their subscribers with full common access to their respective mobile payment systems.

• ‘Easy Payment’ and ‘Ruru’, the most important payment systems, are already open beyond the

respective subscriber bases of MTS and Vimpelcom. They are accessible to any bank card holder

and can be replenished from the corresponding bank account.

• In comparison with Western countries, Russia is way ahead in m-payments adoption:

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••


Table of content

91





5. Summary

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••


•••

••• Summary

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••


Opportunities to seize

• With a skyrocketing number of Internet and mobile users, and an embryonic commercial market built on it, Russia offers gigantic opportunities ready to be seized.

• So far, Russians fail to find partners in the Silicon Valley despite their attempts to build sustainable relationships, whereas Europeans are still culturally and geographically closer to Russians.

93

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•••


Russia offers clearly identified specialties

• Algorithm expertise solving Big Data issues

• IT Security and Defense (Cryptography, Hacking, Hackproofing)

• Agile infrastructure deployment in emerging countries

• Innovative technologies in Health and e-Health solutions

• Fast technology adoption

• Large adoption of mobile payment

94

Russia as a Pool of Experts

Russia as a Test Laboratory

Russia as an Observatory

Whether you are an industry leader or a startup, here are 3 ways you can

benefit from Russia:

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••


Russia is a Pool of Experts

Russia is a Pool of Experts

95

Hire Russian specialists and develop partnerships with experts in order to:

• Specialize in algorithmic

• Tackle Big Data issues

• Use new solutions from Russian Health and e-Health

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••


Russia is a Test Laboratory

Russia is a Test Laboratory

96

Benefit from Russian specificities and from the early-stage development of a booming market:

• Detect the glitches in your infrastructure security solutions with specialized hackers

• Test efficiently new services thanks to Russians quickness of adoption

• Anticipate the evolution of mobile and mobile-payment usages in Western Europe

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••


Russia is an Observatory

Russia as an Observatory

97

Russia is an innovative place, with a growing number of initiatives to watch:

• Alternative solutions to well-known issues

• Intensive use of social networks

• A strong growth market

• A fast building ecosystem

We believe in Russia, in its entrepreneurs who are hungry for success. We also believe in the Russian market. We look at Russia as a key investment market for us, and we are definitely committed to it.

•••

…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...

…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...

David Waroquier, Mangrove Capital Partners

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••

••• Follow us on twitter @fabernovel ••• Visit our website and discover what we do: fabernovel.com 99

Moscow [email protected]

Our Moscow office

helps you evaluate your

potential in Russia.

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••

••• Follow us on twitter @fabernovel ••• Visit our website and discover what we do: fabernovel.com 100

Paris 17 rue du Faubourg du Temple

75010 Paris +33 1 42 72 20 04

[email protected] ……….………………………………………………………………………………………………

San Francisco 169 11th street,

San Francisco CA 91 103, USA +1415 626 6406

[email protected] ……….………………………………………………………………………………………………

……….………………………………………………………………………………………………

New York 412 Broadway, Floor 2,

Ny NY 10013 +1415 298 0209

[email protected]

Moscou 3-iy Monetchikovskiy Peureulok

17, Stroenie 2 Moscow 11054 +7 (903) 009 02 75

[email protected]

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...........

•••


April 2012 • Expanding to Russia with love •

Caroline Pandraud Project Analyst [email protected]

Tom Boeken Junior Project Manager [email protected]

Kevin Smouts Junior Project Analyst [email protected]

…………………………………………………………….…………………………………………………

Contact …………………………………………………………….…………………………………………………

17 rue du Faubourg du Temple

75010 Paris

+33 1 42 72 20 04

www.fabernovel.com

Aknowledgements …………………………………………………………….…………………………………………………

Adrien Henni, Alina Lotfullina, Yury Mitin

…………………………………………………………….…………………………………………………

Cyril Vart VP Strategy & Development [email protected]

expanding to russia (tech sector)

Business

us yandex

us astronautsto

russian mathematicians

russian google sources

russian constraints

russian worldwide rank

russian tech recipes

inflective russian language