Global Business 3rd Edition by Mike Peng

Exercise 62

How does a Russian Internet start-up grow? How does it line up financing? How promising are its prospects?
Wikimart was founded in 2008 by Stanford MBA students Maxim Faldin and Kamil Kurmakayev as an online marketplace for Russia and Russian-speaking countries. Its focus was a B2C platform for Russian retailers who listed goods at no charge but initially paid a minimum 3% fee to Wikimart on each transaction, later reduced to 1.5%. Wikimart also provided services to these retailers, including order fulfillment, accounting and legal support, and e-commerce marketing tools. The company's objective was to become a dominant e-commerce marketplace in Russia and other countries of the former Soviet Union.
Time Line of Financing and Growth
In the first half of 2009, financing of $700,000 was secured from a number of sophisticated angel investors, including Michael van Swaaij who had invested in Skype and eBay Europe; Mark Zaleski and Robert Dighero who had invested in QXL ricardo; Alec Oxenford, founder of OLX, DineroMail.com, and DeRemate; Jose Marin, founder of DeRemate; and Kerim Baran, founder of Yonja.com. By mid 2009, Wikimart's website was attracting 5,000 daily visitors and had more than 1,000 online merchants offering over 370,000 products.
In early 2010, Series A financing was secured from Tiger Global Management, a successful USbased private equity investor specializing in technology start-ups, often in emerging economies. The deal raised $5 million for Wikimart, and resulted in 50% ownership for Tiger, according to a filing with the US Securities and Exchange Commission. In August 2010, Wikimart secured Series B financing of $7 million, again from Tiger Global.
By mid 2010, the company website had 2,000 online merchants generating $1.5 million in monthly revenues for Wikimart. By 2011, it had increased to 2,500 merchants and $3 million in monthly revenues. Of course, online sales were a significant order of magnitude larger. Company revenues would have been greater if the order completion rates could be improved beyond the 68% level prevailing in 2011. Achieving such an increase, however, would remain a major challenge to implementing the company's strategy since retailers often had insufficient inventories to fulfill customer orders.
By March 2011 the company had signed up 2,200 retailers that listed more than 528,000 products through Wikimart's website. The company reported that the site was attracting 2 million visitors per month, although one of the founders stated that the number could be as large as 3 million. Among the products prominent on its website were home goods and appliances, consumer electronics, wine and tobacco, and virtually any product that could be found on Amazon's website, with the best-selling categories being clothing, sporting goods, and children's products. The vast majority of the products were familiar, internationally known brands.
Why Tiger?
One of Wikimart's founders, Kurmakayev, explained in 2011 why the company had chosen Tiger Global from among various potential core investors: "We chose Tiger because they did not impose their views and did not seek to participate in the business management, but are ready for the long-term partnership." Other potential core investors included Accel Partners, a firm based primarily in the United States, with offices in Palo Alto, California, and New York, which had invested in companies like Groupon and Veritas. Accel also had offices in London, China, and India. Another potential core investor was Index Ventures, a US investor with successful investments in technology start-ups such as Skype and Dropbox. It seemed that all of these investment firms might have been looking for the next Google, the hugely successful Internet giant cofounded a decade earlier by Russian-born University of Maryland and Stanford University graduate Sergei Brin.
Business Model
Wikimart's business model centered around creating an Amazon-like online retail platform in the Russianspeaking countries of the former Soviet Union. Similar models had been developed in Korea by Gmarket and in Japan by Rakuten Ichiba. The company's business model offered free space online to merchants while collecting a minimum of 1.5% of each transaction once sales began.
Company Strategy and Organization
The company's strategy included reaching a younger, tech-savvy segment of customers in the Russianspeaking world. The company was headquartered in Moscow, and merchants selling on its site delivered goods only within Russia as of early 2011. One of the partners stressed that Wikimart's objective was to continue developing the Russian market even after they moved to new markets. The company planned to expand overall services to other Russian-speaking countries of the former Soviet Union such as Ukraine and Kazakhstan. The partner reasoned that Russia was the tenth largest European country in terms of GDP but had even greater promise in terms of Internet users. Although Wikimart seemed to have vast potential, the company had not turned a profit by early 2012. However, the cofounders believed that 2013 could be a profitable year. With an objective of eventually attaining 20% to 30% share of the fast-growing online retail market, company executives saw the possibility of annual revenues reaching as high as $15 billion by 2018.
The two founders initially assumed separate responsibilities, with Kurmakayev being in charge of maintaining relations with retailers and developing the company's technology, while Faldin was responsible for sales, marketing, and business development. As the company grew, the founders recognized early that they had to change to a more corporate-like structure. Faldin became CEO responsible for the operational aspects of the business, such as developing metrics and achieving goals. Kurmakayev took on a strategic role incorporating forecasting and budgeting, as well as developing the company's competitive strategy.
One of the founders claimed that a significant percentage of company costs stemmed from intensive development efforts. Wikimart, although an online retail business, was basically a technology company. The vast majority of the 260 employees in 2011 were programmers who wrote software code to support the company's online business. They were guided in their development work with Silicon Valley expertise provided by their investors and consultants.
Russia's Internet Industry and Wikimart's Competition
The overall Russian e-commerce market was estimated at $7 billion to $9 billion in 2011, a substantial increase over the $6 billion in 2010, growth that attracted many competitors. Exponential future growth, with forecasts of 40% annually, saw estimates of up to a $50 billion market by 2018. Such forecasts added luster to the already attractive Russian online retail market. Wikimart's largest competitor was Ozon.ru, the oldest e-commerce giant of the Russian Internet. Sites like Groupon and KupiVip offering group discounts on products and services were also substantial competitors, and both had attracted relatively large investments from US firms. The order fulfillment challenge for Wikimart noted earlier was due to retailers relying on relatively poor IT technologies. One of Wikimart's founders noted that the online retail industry in Russia required huge investments in IT and supply chain. In 2012, only 1.5% of all Russian retail purchases took place online, but the cofounders believed that the number would grow to 10% to 20% within five to ten years.
Some Russian companies, such as mail.ru, had already become powerful Internet players within Russia. That firm's parent, the mail.ru Group, was formerly known as Digital Sky Technologies and was an early-stage investor in Facebook, owning between 5% and 10% of that company by 2011 according to various reports. It had invested $200 million in 2009 and an additional $500 million in 2011. This is another example of the globalization of private investments. This time, however, the participants were a Russian investment group taking a stake in a US online venture. Mail.ru itself was an extremely successful publicly traded Internet company. Other successful Russian online companies included Vkontakte and Rambler. Vkontakte was a private company that offered social network services and was notable for design and functionality that mimicked Facebook. As of February 2012, Vkontakte reportedly had 116.6 million user accounts and was the fourth most popular Russian Internet website. Rambler was a search engine that offered Web 2.0 services such as e-mail aggregation and e-commerce, with its main competitors being mail.ru and Yandex. Yandex had a reported 64% market share of the Russian search provider space and was the fifth largest search engine worldwide with 1.7% of global searches as of September 2011. The company had enjoyed a decade of success before going public in 2011 on NASDAQ in the United States. Its IPO raised $1.3 billion and its stock price soon traded up by 55%. The price of $1.3 billion valued the company at about $8 billion. Wikimart's Future Analysts noted that start-ups like Wikimart had become attractive for strategic investors as the Internet expansion in Russia accelerated. In 2012, the number of Internet users in Russia was not large but was expected to grow by approximately 10% per year. Some analysts expected that if Wikimart continued to increase revenues and profits, it could soon be targeted by strategic investors such as Amazon or eBay. Having US investors like Tiger Global that were very familiar with the Russian Internet market could be very positive in attracting other investors, including strategic investors who might invest funds with the intention of acquiring Wikimart at some point. Wikimart's founders and other major shareholders, such as Tiger Global, might eventually have to decide between selling the company to a strategic investor or continuing to maintain control while growing the company to its full potential. And as is typical in such cases, timing would be a key factor.
Case Discussion Questions
Why was Wikimart able to secure financing during its early stages of growth? Put it differently: If you were an angel investor or private equity investor, what special qualities of Wikimart would attract you?