Digital Entrepreneurship in Russia: How Russia can build a world

1Digital Entrepreneurship in Russia

Digital Entrepreneurship in RussiaHow Russia can build a world-class digital ecosystem

iDigital Entrepreneurship in Russia

Contents

Foreword by Dr. Stephen Collins, VimpelCom iiForeword by Dr. Soeren Grabowski, A.T. Kearney iii

Executive Summary 1

1 Introduction 31.1 Why Russia needs a vibrant digital entrepreneurial ecosystem 31.2 Objectives and methodology 3

2 Russia’s Start-up Market Today 42.1 A high rate of attrition 42.2 Investment in start-ups on the decline 52.3 But the quality of entrepreneurs is rising 72.4 Mixed near-term outlook for Russia’s digital start-ups 7

3 Russia’s Digital Foundations 93.1 Smartphone penetration rising fast 93.2 Consumer market set to grow 93.3 The business market: large and promising 103.4 Strong base of IT engineers 103.5 National winners dominate the Internet business 113.6 Government support for entrepreneurs 11

4 Available Support for Entrepreneurs 124.1 Government-backed accelerators are very active 124.2 Lack of exit routes for investors 134.3 Limited collaboration between universities and industry 144.4 Start-ups see corporations as too closed 14

5 Conclusions and Recommendations 165.1 Sharing expertise 165.2 Expanding markets 175.3 Encouraging investment 175.4 Stimulating innovation 18

Table of Figures 19

iiDigital Entrepreneurship in Russia

Foreword by Dr. Stephen Collins Group chief corporate and regulatory affairs officer, VimpelCom

The success of our business is inextricably linked with the socioeconomic success of the markets where we operate, and Russia is no exception. We are investing billions of rubles to build a high-speed 4G/LTE network to carry the massive growth in data traffic, and helping to put a smartphone into the hands of our customers across the country. When the Russian economy does well, Beeline can do well. Where economies struggle, our business faces challenges. Therefore, it is in our interest to find ways to help drive an innovative, productive, high-employment economy where our customers can prosper and we can provide the digital services to exceed their expectations.

As this study suggests, Russia has many of the building blocks to develop a vibrant digital ecosystem to generate the innovative digital applications that will help deliver this vision. And we have had success. But as the study also shows, the components could perhaps work together even more effectively than they currently do. Pressures from the global economy, reinvigorating investment to enable digital entrepreneurs to see financial benefit from their risk-taking, the development of more business-focused education for our highly respected IT engineers, increased collaboration between all the players (academia, government, corporations, and investors), and a review of the regulatory framework to support homegrown innovators are all factors that could be examined as we seek to grow the Internet segment in Russia.

As we implement our own strategy to build a truly digital business we are very aware of the need to engage more actively with this ecosystem across VimpelCom’s markets, to contribute to their success and the success of the economies in which we operate. Across our footprint we are engaging with talented digital entrepreneurs through mobile app competitions (such as the Eurasia Mobile Challenge), supporting accelerators and incubators, talking with partners, and building out the networks that enable these solutions to reach the end customer.

We are studying the findings and recommendations of this research carefully to see what more we can do. I hope you also find it informative and inspiring, and that it is a helpful contribution to the future of the Internet in Russia.

iiiDigital Entrepreneurship in Russia

Foreword by Dr. Soeren Grabowski Head of Communications, Media, and Technology Practice, A.T. Kearney Russia

Russia recognizes the importance of becoming a major player in the global digital economy. A large developed country with a well-educated workforce, Russia already has a clutch of successful Internet-based companies that are adept at serving both consumers and businesses. The next step is for Russia to build on these foundations and establish a truly world-class and durable digital ecosystem.

Durability is key. The digital economy continues to develop at a rapid pace and will surely see many more waves of disruption that will create both opportunities and challenges for digital champions in Russia and elsewhere. New innovations and technologies such as the Internet of Things, wearable devices, autonomous vehicles, three-dimensional printing, and 5G mobile networks, together with advances in virtual reality, artificial intelligence, and robotics, will transform existing markets and create entirely new sectors both in the business-to-consumer and business-to-business spheres. In many cases, start-ups will be quicker to pursue these opportunities than established businesses preoccupied with their existing day-to-day operations.

Recognizing this fact, leading digital companies across the world increasingly invest in and partner with small, nimble businesses run by visionary entrepreneurs. Start-ups are the lifeblood of a digital economy. Russia, therefore, needs to nurture its start-up ecosystem and ensure its entrepreneurs have the financial, managerial, and technical support they require to build businesses that can drive innovation and value creation across the economy.

This paper draws on a diverse and expert group of sources to make recommendations as to how Russia can support its entrepreneurs in ways that will drive substantial socioeconomic benefits. We look forward to working with Beeline and other stakeholders to help implement these recommendations and ensure that Russia builds the digital economy it deserves.

ivDigital Entrepreneurship in Russia


Executive SummaryIf Russia can generate and nurture world-class digital technology and service providers, the country will create well-paid jobs and attract highly skilled engineers and managers back to Russia, bolstering its broader economy. Recognizing this opportunity, the Russian government is actively supporting the Internet sector by providing grants, launching accelerators, and promoting other initiatives.

Today, about 1,000 digital start-ups are launched in Russia each year, of which about 10 become successful long-term companies. Some, such as Yandex and Mail.Ru, are now worth billions of dollars, while Moscow is ranked 13th worldwide as an ecosystem for start-ups, according to the 2015 Global Startup Ecosystem Ranking developed by Compass.

Strengths and opportunities

• For most proven digital models, Russia has built national winners, which in turn support the development of its digital ecosystem by providing inspiration, a trained workforce, and future entrepreneurs. The presence of local digital giants is contributing to the development of IT talent and tech innovation within Russia. Moreover, labor costs are low; the average salary of a software developer in Russia is $37,000 compared with $118,000 in the United States, according to the 2015 Global Startup Ecosystem Ranking.

• The number of Internet users in Russia grew to about 100 million in 2014, constituting a substantial potential internal market. Fixed penetration has grown close to 50 percent of households, while smartphone penetration is set to rise to more than 80 percent by 2018.

• Local funding is available. Russia has more than 100 venture capital funds focused on digital start-ups.

• The Russian government is highly supportive of the country's Internet segment and is looking to deliver public services digitally to the country's citizens.

Challenges

• As a result of the challenges in the economy, investment in start-ups declined in 2014 and is set to do so again in 2015, possibly contributing, in certain circumstances, to some talented IT engineers and entrepreneurs deciding to leave Russia.

• Entrepreneurs say support from the country’s accelerators, universities, and large businesses could be enhanced to help them tap relevant expertise and distribution networks.

• Market experts and entrepreneurs say regulations can sometimes limit the opportunities for digital start-ups, suggesting that a review of digital information laws, corporate law, and intellectual property rights relating to digital innovation could help accelerate sector growth.

• Nearly two-thirds of Russia’s Internet users live in small and highly dispersed towns and villages, which are more challenging for digital start-ups to serve, reducing their potential market.


Recommendations

Sharing expertise

• Corporations need to engage more with start-ups. Enterprises need to give entrepreneurs better access to their key decision makers.

• Expand business education in technical universities so engineers develop managerial skills. Universities need to partner with corporations to introduce efficient business courses for non-business faculties.

• Make accelerators more robust. Accelerators need to tighten their selection processes and improve their mentorship programs.

Expanding markets

• Increase support for start-ups to scale globally. Accelerators should help start-ups sell abroad by providing access to a network of foreign partners and legal and tax support.

• Combine online and offline solutions to serve more customers. Start-ups may need to adjust their business models to reach customers in the more remote parts of Russia where Internet access is limited or non-existent.

• Consolidate different services and products to drive non-organic growth. Start-ups should look to leverage experience in launching one service or product to launch a complementary product or service.

Encouraging investment

• Mitigate investment risks by creating syndicates led by experienced venture capitalists.

• Consider a review of the regulatory framework impacting investors to identify areas where it could be enhanced to reduce any perceived elements of risk.

Stimulating innovation

• Engage regional start-ups with digital ecosystems in major urban centers. Universities need to build a bridge between leading accelerators and investors and young regional start-ups, while corporations should consider launching initiatives such as competitive start-up events to promote entrepreneurship in regions.

• Encourage collaboration between academia and industry. The government could facilitate collaboration between more universities and international tech giants and local digital companies, set up incubators, and encourage entrepreneurship by students and alumni.

• Investigate if regulation in this area could be more efficient and flexible. Start-ups may need more scope to experiment and innovate, particularly with respect to the use of customer data (where this would not impinge on customer privacy).


1 Introduction1.1 Why Russia needs a vibrant digital entrepreneurial ecosystem

Development of a vibrant digital entrepreneurial ecosystem would help offset demographic challenges, a flat oil production outlook, and capital outflows. In the United States, for example, companies originally backed by venture capital now account for 43 percent of public corpora-tions and 57 percent of the total market capitalization of public companies. These companies create jobs (accounting for 37 percent of the total workforce of public companies), pay taxes, and make a major contribution to the broader health of the economy. Venture capital is also a key growth engine in some smaller economies, such as in Israel.

Russia’s economy can be vulnerable to gyrations in global energy prices. In 2015, ongoing weakness in the oil and gas market, combined with international sanctions, placed the Russian economy on course to shrink by 3.9 percent.1

As the Russian government recognizes, one of the most effective ways to diversify the economy is to strengthen Russia’s position in the fast-growing market for digital technologies and services. If the country can generate and nurture world-class digital players, it will create well-paid jobs and attract highly skilled engineers and managers back to Russia, bolstering its broader economy.

The development of a vibrant digital entrepreneurial ecosystem would help offset the impact of an aging and shrinking population, a flat oil production outlook, and capital outflow. Along with supporting the development of jobs and skills, the digital applications that emerge from this innovation ecosystem can have an impact on important social and environmental challenges, improving efficiency, reducing wastage, and helping serve difficult-to-reach elements of the population.

1.2 Objectives and methodology

To inform the ongoing debate about how to strengthen Russia’s position in the global digital economy, this paper analyzes the country’s existing digital entrepreneurial ecosystem, pinpointing its strengths and weaknesses, before making recommendations.

The paper presents key findings from research conducted by A.T. Kearney and VimpelCom for Make Your Mark, the flagship CSR program of the international telecom operator, which is a major player in the Russian digital economy.2 A.T. Kearney interviewed key market experts, including government representatives, educational institutes, investors, information and communications technology (ICT) companies, and entrepreneurs. It also conducted an online survey of 33 start-ups.

This paper draws on the views of these market experts and participants, together with data obtained from third-party sources such as the World Economic Forum, the International Telecommunication Union (ITU), the Russian Association for Direct and Venture Capital Investments, Russian Venture Company, and industry analysts to present insights into how Russia can build a world-class digital ecosystem.

1 “Russian Economy Shows Signs of a Bottom,” The Wall Street Journal, 19 October 2015. 2 The Make Your Mark program is designed to help young people shape their future by supporting education, inspiring entrepreneurs,

and creating digital solutions for society.

http://www.wsj.com/articles/russian-economy-shows-signs-of-a-bottom-1445273634


2 Russia’s Start-up Market Today2.1 A high rate of attrition

In Russia, about 1,000 digital start-ups are launched each year (see figure 1). Market experts estimate that about half of these are promising projects, of which about 20 percent secure funding within Russia, either from venture capitalists, business angels, or friends and family. Another 1 to 2 percent go abroad for funding. Of the 100 or so Russian-funded start-ups that remain in the country, about half become sustainable, and 10 scale into “star” companies—successful, growing businesses.

Market experts estimate about 20 recent Russian start-ups are known globally. The highest ranked of these (in terms of social and Internet influence) is Avito, a marketplace for advertise-ments and trading, which was ranked 135 in 2014, while Ecwid, a business-to-business (B2B) platform that enables individuals and businesses to create online stores or add stores to existing websites, is ranked 139.3 Video-sharing service Coub (ranked 165) has more than 45 million users, while video-streaming service Ivi.ru (ranked 185) has more than 19 million users.

Estimated number of digital start-ups

Figure 1Few Russian digital start-ups become thriving companies

Note: New start-ups include new projects as well as ones that changed the idea or the name. Figure is not drawn to scale.

Sources: market expert interviews; A.T. Kearney analysis

50 get smalleramounts fromfamily, friends, business angels,or self-financing

400don’t getfunding andeither changeideas, postponelaunch, or give up

5 to 10will go abroad 500

are promising projects

500are low-quality projects

50 will fail

10 will scale into“star” companies

50get substantialfunding from venture capitalists and business angels

50 will besustainable as smallercompanies

1,000are launched each year

3 Rank is calculated on the basis of SR Web and SR Social, which reflects the importance of a start-up on the Internet and its social influence.


Among today’s most successful digital start-ups, 52 percent are focused on the local market, with an even split between B2B and business-to-consumer (B2C) business models (see figure 2). About 54 percent focus on the Web, 27 percent are pursuing Web and mobile, and the remaining 19 percent are mobile only. These mobile-only start-ups, which tend to be pursuing a global market, are typically operating in the travel, transport, social networks, or content markets.

2.2 Investment in start-ups on the decline

Although the Russian venture capital market is the sixth largest in Europe, it accounts for 0.6 percent of the global venture market, according to the 2015 Global Startup Ecosystem Ranking developed by Compass. While the government, venture capital funds, and business angels are major investors, Russian corporations are largely inactive in the start-up market. The government also provides grants to start-ups, amounting to $127 million in 2014, with 25 percent going to the IT sector, according to the Russian Association for Direct and Venture Capital Investments.

Figure 2About half of Russia’s digital start-ups focus on the local market

Sample of successful start-ups

Share ofB2B projects

Number ofstart-ups

Share of local projects

Note: Sample is 91 digital start-ups selected as most successful by Russia Beyond the Headlines from 2012 to 2014. B2B is business to business; SaaS is software as a service; IaaS is infrastructure as a service; ICT is information and communications technology.

Sources: Russia Beyond the Headlines; A.T. Kearney analysis

Services

Transaction platforms

Internet of Things

Total

Payment platforms

Smart home

Smart industry

Advertising and big data

Other smart things

Marketplaces (many to many)

Segment

Other (including ICT)

E-retail

E-travel

Communication and social platforms

SaaS and IaaS

E-health

E-transportation

E-learning

Content (video, music, and games)

E-finance

91

50%

49%

75%

75%

25%

13%

22%

86%

73%

75%

100%

86%

50%

75%

75%

33%

100%

44%

53%

25%

36%

29%

100%

70%

57%

50%

52%

4

4

4

3

2

9

15

8

11

7

4

10

7

1

0

2


Between 2010 and 2012, Russia’s venture capital market boomed, driven largely by the opportunities for cost arbitrage presented by the country’s relatively low salaries. “More money was available than start-ups to invest in,” one market expert said. Local investors tended to back projects based on business models that had been proven elsewhere, such as online commerce and online ticketing, and promised quick monetization in the Russian market.

In 2013, the local bubble collapsed as it became apparent that some start-ups had overesti-mated the size of the domestic market, and venture capitalists were lacking exit opportunities and running low on capital. Many funds started refocusing on foreign markets and interna-tionally scalable projects.

As the country’s economic performance deteriorated, investments into Russian start-ups fell in 2014 to less than $450 million, down from about $600 million in 2013 and $800 million in 2012. In 2014, the number of deals was 31 percent lower than in 2013 at 133 (see figure 3).

20142013

Number of deals Average deal value ($ million)

Figure 3Investments in Russian entrepreneurs have dropped

Digital start-up market overview

Investments ($ million)

+24% -31%-23% -28%

0.4

3.2

5.1

1.0

3.3

1.5

1.2

1.4

0.6

4.3

4.2

31.8

16.4

10.2

8.2

2012 2013 20142012

611

441

792193

133

156

Silicon Valley provides higher amounts, especially in early stages,partly because of higher cost

Note: Deal means obtaining an investment for a specific start-up phase by institutional investor or business angel.

Sources: RusBase, Russian Venture Company; A.T. Kearney analysis

296

184

25

2

414

18

18

13

197

130

254

46

31

31

103 7197

86

50

63

16 3127

4332

49

Late stage Expansion SeedRound B Round A 2012 2013 2014 Silicon Valley in first half of 2014

14.4

33.5

19.0

7.0

5.2

Round B

Expansion

Round A

Seed

Average


2.3 But the quality of entrepreneurs is rising

In Russia, the entrepreneurs establishing start-ups typically belong to one of two broad groups:

• Experienced former employees of tech companies with business acumen, the capabilities to build multi-skilled teams, and some of their own capital

• Recent graduates with strong IT skills but little understanding of market dynamics, limited focus on implementation, and in need of the support provided by mentors and accelerators (see section 4.1)

In recent years, the quality of entrepreneurship has improved, according to market experts, as more digital professionals with valuable experience as digital champions set up start-ups and first-generation entrepreneurs act as mentors. Our online survey found 90 percent of entrepre-neurs have an engineering or IT background, 47 percent have professional experience, and 15 percent have international experience. Their average age is 32, four years younger than in Silicon Valley. Almost 20 percent are women.

However, some promising entrepreneurs are emigrating abroad in search of a more favorable regulatory environment, better salaries (software developers in Russia earn an average of $37,000, compared with $118,000 in the United States) and greater opportunities to expand globally. Still, in the online survey, 68 percent of entrepreneurs say they have opportunities in Russia.

2.4 Mixed near-term outlook for Russia’s digital start-ups

Over the next few years, the level of investment in Russia’s digital start-ups will be influenced by several major trends—some positive, others negative. On one hand, many venture capital funds are nearing the end of their life cycles and are looking to reorient toward the global market. On the other hand, the Russian government is stepping up investment in start-ups, and private investors may become more active in the market, drawn by a growing number of internationally scalable start-ups and low labor costs in Russia.

Figure 4 shows two possible scenarios. In the pessimistic scenario, the recent decline in investment continues dropping to $141 million in 2017. In the optimistic scenario, the market bounces back with funding rising to $410 million in 2017—not far off the 2014 level.

Optimistic scenario

Figure 4The environment for Russian start-ups could bounce back

Digital start-up market

Pessimistic scenario

Sources: RusBase, Russian Venture Company; A.T. Kearney analysis

201420132012 2017F2016F2015F

441611

792

141176220

133

193156

6886107

201420132012 2017F2016F2015F

441611

792

410305220

133

193156 150133120

Number of deals

Investment in $ million


Going forward, market experts believe start-ups in the big data, content, B2B solutions for online retailing, communications, cloud computing, and online travel segments have the highest growth potential within Russia and are the most likely to attract investment (see figure 5).

Services

Transaction platforms

Internet of Things

Segment

Figure 5Several digital segments are favorable for investors

Growth potential for Russian market

CapabilitiesGrowth potential

Customer demand

Payment platforms

Smart home

Smart industry

Advertising and big data

Other smart things

Marketplaces (many to many)

Other (ICT and agro)

E-retail

E-travel

Communicationand social platforms

SaaS and IaaS

E-health

E-transportation

E-learning

Content (video, music, and games)

E-finance

Strategic investor

Local market knowledge

Growth in B2B and B2C

Local and global winners

Di�iculties in getting data

Limited to big cities

Russian Railways and Yandex

Growing capabilities


No local winners

No Russian content

No culture of online study

No local winners

Developed financial market


Biggest local banks

Need to create content

Domestictravel growth

Crisis intravel industry

Strong capabilities

High need to share everything

Mail.Ru and Yandex

Strong technical capability

Demand for local

Local and global companies

Developing tech-nical capability

Demand for local

Local winners

Limited start-up capabilities

Saturated market

Local companies

Limited digital data

Demand for local

Local and global companies

Strong capabilities

Long time to get users

Global winnersto expand

Not strong capabilities


No local winners



No local winners



No local winners

Low availability Limited availability High availability Very high availability

Not rated

High Medium Low

Note: Potential is based on availability of capabilities, customer base, and strategic investors. Capabilities are in terms of market knowledge, availability of IT skills, and availability of digital data. B2B is business to business; B2C is business to consumer.



3 Russia’s Digital Foundations3.1 Smartphone penetration rising fast

The number of Internet users in Russia climbed to 100 million in 2014, amounting to a substantial potential market for digital services (see figure 6). The rollout of 3G mobile services from 2009 and growing smartphone adoption since 2011 have been major factors in expanding Internet usage. In 2014, 57 million smartphones were in use in Russia, and that figure is set to rise to 116 million by 2018—amounting to penetration of more than 80 percent.

Fixed broadband penetration is also rising and is now close to 50 percent of households. However, the sheer size Russia means most rural areas are not served by fixed lines.

3.2 Consumer market set to grow

Although 100 million people in Russia have Internet access, many of them live in small, highly dispersed villages and towns that some start-ups may find difficult to serve. For example, online commerce firms may not be able to economically deliver physical goods to the widely dispersed towns and villages in the eastern side of Russia. The primary customer base for many B2C digital start-ups will be people living in major cities—only about 35 million people out of a total population of more than 140 million.

Still, there are signs that Russians are keen to buy goods and services online. Adjusted for purchasing power, Russians buy more goods and services using their mobile phones than any other Europeans. Moreover, according to the A.T. Kearney NextGen consumer study conducted in 2015, 73 percent of Russians say they are planning to buy apps in the future, the highest percentage in Europe.

Figure 6A growing number of Russians are using the Internet

Mobile and broadband penetration

Number of Internet users in Russia(million)

Russia Germany Ukraine United States United Kingdom

Sources: World Economic Forum Global Competitiveness Index, International Telecommunication Union, Economist Intelligence Unit, Cisco; A.T. Kearney analysis

Internet penetration(% of population)

201220112010 20142013

63%

0

20

40

60

80

100

200920072005 20132011201020082006 20142012

917062

10097


Russia ranks highly both in terms of mobile commerce spending and digital usage based on an index that considers the share of consumers using their phone to access the Internet and apps, make digital and physical purchases, make calls via apps, and preferring to buy connectivity online (see figure 7).

3.3 The business market: large and promising

Russia has about 4.9 million companies, of which 86 percent have a turnover of less than $1 million. Large corporations (with sales of more than $1 billion) account for 57 percent of the total revenue generated by Russia’s companies. Wholesale and retail is the largest segment, accounting for 35 percent of all Russian companies, while real estate and renting is the second largest segment with 19 percent.

Market experts see B2B services as a promising segment for digital start-ups because of the large potential customer base, Russian companies’ need for innovative services, and the international scalability of B2B projects. However, this market also presents significant hurdles for start-ups, such as the conservative attitude of many businesses, lengthy decision-making processes, and the complexity of IT integration.

3.4 Strong base of IT engineers

Digital start-ups in Russia can draw on a large base of skilled IT engineers; computer science is one of the strongest areas of the Russian education system. Moreover, these engineers are prepared to work for relatively low salaries, meaning digital start-ups in Russia can have lower costs than their counterparts elsewhere (see figure 8 on page 11).

Figure 7 Russia ranks high in digital usage

Dig

ital u

sage

inde

x (%

)

Digital and physical m-commerce spending (euros)0 5 10 15 20 25 30 35 40 45 50 55 60 65 70

20

25

30

35

40

45

50

55

60

Germany

FranceCzech Republic

Belgium

Slovakia

SerbiaRussia

Poland

Norway

Netherlands

Italy

Denmark

California

United StatesUnited Kingdom

Ukraine

SwitzerlandSweden

Spain

No frills

Laggard

Trailblazer

Prospects European average

Austria

orway

P

Swe

Fra

stria

a

Note: M-commerce is mobile commerce.

Sources: A.T. Kearney 2015 NextGen consumer study; A.T. Kearney analysis


However, there are some skill shortages: market participants report a lack of product designers, marketing experts, and sales personnel, while some skilled engineers emigrate (the United States and the European Union offer much higher salaries and easier access to leading global digital players).

3.5 National winners dominate the Internet business

For most proven digital models such as search, social networking, and online commerce, Russia has built national winners, including Yandex and Qiwi, which in turn support the development of the broader digital ecosystem by training staff who could later become entrepreneurs. These national champions have typically used their local knowledge and language skills to outperform global rivals in Russia.

3.6 Government support for entrepreneurs

Russian President Vladimir Putin has highlighted the importance of the Internet economy on multiple occasions. In a December 2015 speech to the Internet Economy Forum, he said: “The significance and impact of the Internet is constantly growing. It is necessary to use the Internet as a whole as a driver of development, modernization of the country.” In addition to promising to provide further support to Russia’s Internet sector, Putin also highlighted the growing number of state and municipal services that are now delivered digitally. “Last year, more than one-third of the state and municipal services were provided in a computerized mode,” he noted.

In many countries, regulations drafted in an earlier era may not be entirely supportive of start-up companies, making it harder for digital start-ups to build sustainable businesses and scale globally. In particular, regulatory control of digital information can be challenging for

Number of developers (‘000)

Number per 1,000 people

Average annual salary ($ thousand)

Figure 8Salaries for IT engineers are relatively low in Russia

Market for software developers

Rank

Note: Ranked by total number of software developers

Sources: Tech Salary Guide, Global Startup Ecosystem Ranking, International Data Corporation; A.T. Kearney analysis

Ukraine

Israel

Germany

149

87

995

UnitedKingdom

3,553

760

India

682

Russia

1,819

3

10

7

11

12

8

1

35

61

37

118

63

60

24

UnitedStates

20

31

8

7

3

5

1

-70%


the development of information portals and social networks. A lack of protection for intel-lectual property can be an additional constraining factor. These are areas that all countries looking to expand their Internet sector could usefully examine to identify workable enhancements.

4 Available Support for Entrepreneurs4.1 Government-backed accelerators are very active

At first sight, Russia has a well-developed support network for start-ups. Its ratio of start-ups to accelerators (143:1) is comparable to the United Kingdom (130:1) and Germany (116:1), while being much better than the United States (287:1) and Israel (360:1). The Russian government, which supports the four largest and most active accelerators, began to establish a regional network of business incubators in 2002, supplemented from 2010 with co-working places, media events, and start-up competitions. These government-run incubators and accelerators are focused on supporting start-ups in the pre-seed and seed phases.

However, Russia’s accelerators have yet to nurture a highly successful company. Market experts say many of these accelerators need to adopt a more rigorous project selection process.

Russian start-ups say they value mentoring, support for international distribution, feedback sessions with investors and experts, and legal and tax advice the most (see figure 9). But respondents noted it can be difficult to get marketing support and feedback sessions with

Importance

Figure 9Mentoring is a vital element of support for Russian start-ups

Supporting programs Availability

Most important elements

Mentoring 68%

Distribution support 64%

Feedback sessions withinvestors and experts 60%

Legal and tax advice 60%

Management coaching 52%

Marketing support 48%

Co-working space 44%

44%

52% 20%28%

48% 36% 16%

24% 32%

48%32%

36%

48%

36%

20%

28%

12%

16%52% 32%

40%

Note: The sample size is limited. Experience: 80 percent of respondents are students and recent graduates, and 20 percent are experienced start-up founders. Regional coverage: 35 percent of respondents are located in Moscow, and 65 percent are located in 10 other big cities.

Sources: online survey conducted by A.T. Kearney and VimpelCom in September and October 2015; A.T. Kearney analysis

Difficult or impossible to get support % of respondents who answer important or very important Difficult to

evaluate Easy or very easy to get support


investors and experts. Some 52 percent of respondents say they hadn’t applied for support from accelerators either because it isn’t available (typically responses from regional universities) or does not bring sufficient value (responses from Moscow).

4.2 Lack of exit routes for investors

While funding in the pre-seed and seed phases is still available for Russian start-ups, investors have few exit routes. Today, global digital players typically have limited interest in investing in Russia, while potential strategic investors within Russia tend to be inactive and there are few opportunities for an initial public offering (IPO). The lack of exit routes has created a liquidity bottleneck in the start-up funding cycle and could contribute to a further decline in venture capital investment. Seed and round A funding are relatively easy to obtain, but it becomes progressively harder for a start-up to secure the funds it needs to grow into a major business (see figure 10).

Figure 10Mature start-ups have a hard time finding investors

Life cycle of a Russia start-up project

Scale upStart up Mature company and exit of VC fund

Note: VC is venture capital; M&A is mergers and acquisitions; PE is private equity; IPO is initial public o�ering.


Stand up

Grow and expand to other markets

Refine the product,and build a customer base

Find astrategicinvestor

Developa mature business

Have an idea,and gather the team

• Most VC funds operating in round A and fewer in round B

• Overheated market of local projects with governmental liquidity support by special funds

• About 45 out of 50 VC funds are either loss-making or own zombie assets

• Oversupply of small amounts (less than $20,000) from government funds, business angels, family, and friends

• Struggle to get larger amounts for sophisticated tech projects

• Loss-making nature of deals

• Easier exit of global projects in overseas markets

• Rare acquisition of local projects by international players to expand in Russia

• Long time to sell project locally (more than two years)

• Few examples of establishing own company because of predominance of strong monopolies (for example,Life.SREDArecently lost its bank license)

Three to six months One to two years Two to three years One to two years

• Foreign VC funds game because of a lack of expertise in later rounds of local funds

• Few foreign VC funds interested in local products

• Big interest for internationally scalable projects resulting in additional deals in overseas VC markets

Seed fund

GovernmentPrivate VC funds (with government support)

Foreign VC funds Local winners and monopolies

Round A Round B Round C M&A IPOPE

Duration

Start-upstages

Investment rounds and availability in Russia

Key players

Oversupply of money Struggle for money Deficit of money


4.3 Limited collaboration between universities and industry

Collaboration between universities and industry helps businesses to innovate, adapt to change, and become more globally competitive. In fact, there is a strong correlation between the degree of collaboration between academia and enterprises and a country’s overall competi-tiveness, according to indexes produced by the World Economic Forum (see figure 11).

Most Russian universities do not yet effectively collaborate with industry, pursuing an approach to education focused on theory rather than practical application. Russia scores 3.6 on a seven-point index measuring university-industry collaboration on R&D behind the United States with 5.8 and Israel with 5.5. Low prestige and pay for academic work may also hamper innovation by Russia’s universities. In the online survey of entrepreneurs, most respondents agree that Russian universities are equipping students with the skills they need to work in IT but could do more to support collaboration and entrepreneurship (see figure 12 on page 15).

However, several Moscow universities have started to collaborate with international tech giants or local digital companies such as Yandex and Qiwi. Some universities—most notably, Skolkovo, National Research University Higher School of Economics, and Moscow State University—have also launched incubators with the goal of fostering a collaborative culture in the academic environment, supporting the start-up ecosystem, and generating revenue for the university.

4.4 Start-ups see corporations as too closed

There is relatively little interaction between start-ups and established corporations in Russia. Market experts say corporations rarely act as strategic investors, thereby contributing to the exit bottleneck in the early-stage market. The vast majority (about 90 percent) of corporate investments in start-ups are now in the seed phase, with average deal value declining drastically

Figure 11Partnerships between industry and academia boost competitiveness

Sources: World Bank; A.T. Kearney analysis

Uni

vers

ity a

nd in

dust

ryco

llabo

ratio

n in

R&

D

Global Competitiveness Index

3.6 3.7 3.8 3.9 4.0 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 5.0 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.81.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

South Africa

UnitedStatesUnited Kingdom

United Arab Emirates

Ukraine

Switzerland

Sweden

Spain

Russia

Saudi Arabia

New Zealand

SingaporeNetherlands

Portugal Norway

Mexico

Poland

Malaysia

Slovenia

Lithuania

Greece

Germany

Georgia

France

Finland

Estonia

Denmark

Czech Republic

Hungary ChinaIceland

India

Indonesia

Israel

Japan

Kazakhstan

Latvia

Azerbaijan

Ireland

Bulgaria

Canada

Croatia

Armenia

Australia

Bangladesh

Italy Turkey


from 2012 to 2014. Already limited, corporate venture investments declined by about 50 percent from 2012-2013 to 2014 (when only about $30 million was disclosed) as a result of the economic challenges and ruble devaluation (see figure 13).

Figure 13Corporate venture investments have dropped in Russia

Notes: VC is venture capital. Statistics collected by the Russian Association for Direct and Venture Capital Investments based on information provided by VC funds, which are not obliged to share all data. Therefore, all corporate VC investments may not be captured.

Sources: Russian Association for Direct and Venture Capital Investments; A.T. Kearney analysis

Not exhaustive

Number of corporate VC funds VC investment by sector ($ million) Number of VC investment deals

+14% -50%

Focus only on digital sector

Industrial funds

Digital sector

Other industries

Average deal value ($ million)

Start-up deals Seed deals

201420132012 201420132012 201420132012

30

90%

0.5

42

0.8

1.4

20

64%80%

16

50%

50%

32

16%

84%93%

28

7%

+36%

81%

21

19%

69%

32

31%

64%

39

36%

Figure 12Most entrepreneurs say universities could provide more support

Most universities equip you to work ascompetent engineers or IT specialists

Most universities provide theopportunity to get experience abroad

Most universities provide e�icientEnglish language courses

Most universities cooperate closelywith business (such as internships)

Most universities support the spirit ofcollaboration and entrepreneurship

Most universities provide high-qualitymanagement and marketing programs

Most high schools promote necessityof innovation and collaboration

Notes: The sample size is limited. Experience: 80 percent of respondents are students and recent graduates, and 20 percent are experienced start-up founders. Regional coverage: 35 percent of respondents are located in Moscow, and 65 percent are located in 10 other big cities.


Strongly agree Agree Difficult to say Do not agree at allDo not agree

Quality of education programs

12%44% 36% 8%

20%24% 28% 24%

24%16% 32% 24%

12%16% 36% 36%

20%16% 60% 4%

20% 60% 16%

4%

4%

4%

24% 48% 20%8%


Still, the number of corporate VC funds is rising, suggesting growing recognition of the potential of start-ups among Russian enterprises. Some telecom operators and technology companies in Russia are also entering into business partnerships with start-ups, while providing educational support through partnerships with universities, business support such as an accelerator, and hosting competitive events designed to highlight the best new projects and talent. The potential intangible benefits include building a better business environment, positive public relations, and improved reputation, while practical benefits might include creating a more entrepreneurial culture, support in tackling specific business problems, and aid in expanding into new markets and services.

However, start-ups still perceive corporations as fairly closed. In the online survey, most respondents say corporates have not typically developed a culture of collaboration and co-creation, are opaque, and can be difficult to partner with. They identified marketing support as a key area where corporates add value by giving start-ups quick access to a customer base to test a hypothesis or for service promotion. Entrepreneurs would also like easier access to decision makers, quicker decisions, more flexibility in models of cooperation, and a greater appetite for risk on early-stage projects. Fifty-two percent of start-ups say that to achieve success, they need to partner with corporate business, while 36 percent say it doesn’t matter.

5 Conclusions and RecommendationsRussia has the human resources it needs to build a vibrant digital start-up ecosystem, but the country could do more to realize its full potential in this respect. Among the many factors at work, digital entrepreneurs identify limited access to investors and funding and limited cooperation with corporates as the biggest barriers they face (see figure 14 on page 17). These barriers are particularly apparent in the regions beyond Moscow’s relatively strong digital ecosystem. To help the economy grow and boost its domestic market, Russia needs to take steps to address both these barriers. To that end, this section recommends some key actions for stakeholders in Russia’s digital ecosystem.

5.1 Sharing expertise

Greater engagement between corporates and start-ups. Enterprises need to give entrepreneurs better access to their key decision makers. Greater engagement with start-ups will help Russian enterprises become flexible, innovative, and nimble, thereby maintaining their competitiveness in an increasingly digital economy. Both corporates and VC funds need to provide Russian start-ups with more managerial support and expertise either through the provision of non-executive directors or informal mentors.

Expand business education in technical universities to enable engineers to gain managerial skills. Universities need to partner with corporations to introduce efficient business courses for non-business faculties. Universities also need to partner with other universities to develop joint business programs.

Make accelerators more robust. While the Russian government’s active support for accelerators is very welcome, they need to tighten their selection processes and improve the support they provide to entrepreneurs. In particular, mentorship programs need to be improved and accelerators need to become more orientated to addressing the needs of the market.


5.2 Expanding markets

Increase support for start-ups to scale globally. Accelerators should help start-ups sell abroad by providing access to a network of foreign partners and legal and tax support. Russia also needs more VC funds with a focus on expansion investment. The government could also support international expansion by simplifying currency controls and looking to enhance regulations, while corporations could help with international distribution.

Combine online and offline solutions to serve more customers. Start-ups may need to adjust their business models to reach customers in the more remote parts of Russia where Internet access is limited or non-existent. Corporations could also help with marketing and distribution in regions.

Consolidate different services and products to drive non-organic growth. Start-ups should look to leverage experience in launching one service or product to launch a complementary product or service. At the same time, corporations could achieve economies of scale and scope by acquiring start-ups or specific product sets.

5.3 Encouraging investment

Mitigate risks by creating syndicates led by experienced VCs. Investors can lower risks by establishing syndicates with experienced VC funds leading the deal. Investments by such syndicates could be supported by government grants: The government shouldn’t take equity to safeguard start-ups’ flexibility and attractiveness for private investment. VC funds also need

Figure 14Lack of access to investors and corporations deters start-ups

To what extent are the following factors significantproblems for start-up success in Russia?

How available are funds from the following investor groups in Russia?

Limited access toinvestors and funding

Limited cooperationwith corporate business

Limited availability ofsupporting networks

Ine�icient regulatoryframework

Limited availability andquality of IT specialists

Limited availabilityof digital information

Undeveloped fixed andmobile infrastructure

Notes: VC is venture capital. The sample size is limited. Experience: 80 percent of respondents are students and recent graduates, and 20 percent are experienced start-up founders. Regional coverage: 35 percent of respondents are located in Moscow, and 65 percent are located in 10 other big cities.


Not a problem at all Quite a problem Difficult to answer

Very significant problemSignificant problem

24% 44% 16%16%

20% 32% 20%24%

32% 32%24%

4%

8% 4%

24% 24%32%12% 8%

28% 12%32%12% 4%

16% 12%24%40% 8%

16%40%32% 8%8%

Private investorsand business angels

Business accelerators

Local VC funds

Foreign investors

Government

44% 20%

16%

16%

12%

16%

36%

56% 28%

60% 24%

64% 24%

64% 20%

Not possible or difficult to get funding

Difficult to answer

Easy or very easy to get funding


VimpelCom Author

Chris Burgess, corporate responsibility director, Amsterdam [email protected]

to promote transparency and collaboration to enable “non-specialized” private investors to participate in syndicates. These measures would alleviate the bottleneck in later stage funding.

5.4 Stimulating innovation

Engage regional start-ups with the digital ecosystems in the major urban centers. Universities need to build a bridge between the accelerators and investors in Moscow, St. Petersburg, and Novosibirsk and regional young start-ups, while corporations should consider launching CSR initiatives, such as competitive start-up events, to promote entrepreneurship in regions.

Encourage collaboration between academia and industry. The government needs to facilitate collaboration between more universities and international tech giants and local digital companies, set up incubators, and encourage entrepreneurship by students and alumni.

Make regulation more efficient and flexible. The government could explore how to provide start-ups with the scope to experiment and innovate, particularly with respect to the use of customer data (where this does not impinge on customer privacy). A regulatory environment that encourages digital innovation will help attract investors and reduce the risk of emigration among talented engineers and entrepreneurs.

A.T. Kearney Authors

Soeren Grabowski, principal, Moscow [email protected]

Mariia Koleonidis, consultant, Kiev [email protected]

Barbara Weiten, consultant, Munich [email protected]


Table of FiguresFigure 1: Few digital start-ups become thriving companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Figure 2: About half of Russia's digital start-ups focus on the local market . . . . . . . . . . . . . . . . . . 5

Figure 3: Investments in Russian entrepreneurs have dropped . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Figure 4: The environment for Russian start-ups could bounce back . . . . . . . . . . . . . . . . . . . . . . 7

Figure 5: Several digital segments are favorable for investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Figure 6: A growing number of Russians are using the Internet . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Figure 7: Russia ranks high in digital usage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Figure 8: Salaries for IT engineers are relatively low in Russia . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Figure 9: Mentoring is a vital element of support for Russian start-ups . . . . . . . . . . . . . . . . . . . . .12

Figure 10: Mature start-ups have a hard time finding investors . . . . . . . . . . . . . . . . . . . . . . . . . . .13

Figure 11: Partnerships between industry and academia boost competitiveness. . . . . . . . . . . . .14

Figure 12: Most entrepreneurs say universities could provide more support . . . . . . . . . . . . . . . .15

Figure 13: Corporate venture investments have dropped in Russia . . . . . . . . . . . . . . . . . . . . . . . .15

Figure 14: Lack of access to investors and corporations deters start-ups . . . . . . . . . . . . . . . . . . .17


About A.T. Kearney

A.T. Kearney is a leading global management consulting firm with offices in more than 40 countries. Since 1926, we have been trusted advisors to the world’s foremost organizations. A.T. Kearney is a partner-owned firm, committed to helping clients achieve immediate impact and growing advantage on their most mission-critical issues. For more information, visit www.atkearney.com.

About VimpelCom

VimpelCom is an international telecom company operating in 14 countries with headquarters in Amsterdam. It is one of the world’s largest integrated telecommu-nications services operators providing voice and data services through a range of traditional and broadband mobile and fixed technologies in Russia, Italy, Algeria, Pakistan, Uzbekistan, Kazakhstan, Ukraine, Bangladesh, Kyrgyzstan, Tajikistan, Armenia, Georgia, Laos, and Zimbabwe. VimpelCom's operations around the globe cover territory with a total population of approximately 740 million people. VimpelCom provides services under the Beeline, Kyivstar, WIND, Mobilink, banglalink, Telecel, and Djezzy brands. As of September 30, 2015, VimpelCom had 217 million mobile customers and 5.8 million fixed-line broadband customers on a combined basis. VimpelCom is traded on the NASDAQ Global Select Market under the symbol VIP.

For more information, please follow us on Twitter (@VimpelCom), read our blog (blog.vimpelcom.com), or visit our website (www.vimpelcom.com).

About Make Your Mark

Make Your Mark is a groupwide program launched by VimpelCom in 2014 focused on “Helping Young People Shape Their Future.”

Make Your Mark enables VimpelCom to make significant positive impact on society by involving all of the group's businesses in contributing initiatives and projects under a common theme. It incorporates ongoing projects, but is also leading to the creation of many more.

The aim is to help the next generation find solutions to the challenges the future will bring, such as climate change, resource scarcity, rising population, and the pressure this will generate on access to the fundamentals of society including healthcare, education, employment, and food. The goal of Make Your Mark is to empower young people to make a positive difference through inspiring social entrepreneurship, particularly in the digital arena, and enabling increased access to education.

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Documents

Digital Entrepreneurship in Russia: How Russia can build a world