Putin Effect Russia's Struggling Start-Ups

Russia's start-up scene was flourishing until it annexed the Crimea and its economy took a beating. Most start-ups are struggling but one owned by Germany's Rocket Internet could turn the crisis to its advantage.
Uncertainty is the biggest enemy of many start-ups.

Alexander Naslednikov’s only interest in international politics is how it affects his Moscow-based business. He works almost around the clock for his start-up, Gbooking, which is used by service providers such as hairdressers as an online booking service.

The 34-year old, who was born in the Soviet region now known as the country of Belarus, moved his business from Haifa to Russia’s capital in February 2014. That was a strategic decision at the time, he said.

A few weeks later, Russia's president Vladimir Putin also made a strategic decision, when he sent his troops into the Ukrainian peninsula of the Crimea, annexing the territory.

Since then, the value of the ruble has fallen dramatically against the dollar and euro and investors are estimated to have shifted as much €130 billion, or $148 billion, out of Russia.

Let's wait until this chaos is over. And make sure that you expand your business to markets outside of Russia. Russian investor

Start-ups, which need a stable economic climate and venture capital from investors, are in a difficult situation as a result.

Mr. Naslednikov doesn't want to believe in a crisis, although his business is already being affected. He recently had a conversation with a Russian business angel investor. Mr. Naslednikov had been successful with this class of private investor, raising more than $1 million for Gbooking.

In the most recent encounter, however, things were different. Instead of offering the money he had hoped for, the investor said,“Let's wait until this chaos is over. And make sure that you expand your business to markets outside of Russia.”

In October, Mr. Naslednikov will try his luck with the investor again.

He set up his company in 2012 in Israel, the country of his father. The entreperneur had often wondered why there was no standardized online booking platform for appointments with hairdressers, car repair shops or doctors. His answer was his company, which Mr. Naslednikov calls the “Amazon for service providers.”

 

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Companies offering their customers an appointment through the website pay Gbooking a monthly fee. About 300 service providers have registered. Mr. Naslednikov had hoped for more, but in recent weeks many potential customers said they preferred to wait until the worst is over. “This uncertainty is our biggest enemy,” he said.

Last summer, he put together a new team of seven people. Mr. Naslednikov's newest employee is from Paris and is tasked with marketing Gbooking in France. They work in the former Red October chocolate factory in Moscow. Today the space is called Digital October. Signs show the names of dozens of start-ups whose employees work shoulder-to-shoulder. It’s in one of the few areas in Moscow frequented by young, so-called hipsters.

Mr. Naslednikov decided to return to Russia because he saw great potential for an online business here. About 80 million Russians use the Internet, which makes the country No. 1 in Europe. Moreover, he likes the way the government supports start-ups.

At the moment, the Russian government is starting to build a campus for start-ups near Moscow. About 15,000 people are expected to work there by year’s end. The government is already providing entrepreneurs with financial support, tax advantages and mentors.

The mainstream reporting about Russia is often utterly prejudiced, politically motivated and factually false. Dimitri Alimov,, Russian investor

The Russian start-up scene has developed rapidly. In 2013, start-ups in Russia raised about $650 million, which was three times as much as in 2011, according to consulting firm PricewaterhouseCoopers. In Germany, by comparison, about $350 million in venture capital went to start-ups in 2013, according to the inter-trade organization Bitkom.

A World Bank ranking shows conditions for Russia's start-up scene are favorable, at least in theory.

In the bank’s “Doing Business Report 2015,” the largest country in the world by land mass ranked 34th among 189 countries in the category of “Founding Companies,” even ahead of the United States. In Russia’s second-largest city, St. Petersburg, it takes only seven working days on average to set up a company. In Germany, it takes more than twice as long.

What use are favorable conditions for start-ups in Russia if no fresh money is flowing? During the Ukraine crisis year of 2014, Russian start-ups received 20 percent less venture capital than the year before, according to Arseni Dabbak, managing director of the industry analysts Rye, Man & Gor Securities.

Some entrepreneurs have given up hope and have emigrated with their teams to the United States, Cyprus or the Baltic countries, he said.

Media are also responsible for the current crisis, said Russian investor Dimitri Alimov, whose Moscow company Frontier Ventures is a large supplier of start-up money. Before talking about Internet firms, he first wanted to know what Handelsblatt’s position was on the Ukraine crisis. Mr. Alimov said he had read on a Russian website that German journalists are paid by U.S. intelligence agencies.

“The mainstream reporting about Russia is often utterly prejudiced, politically motivated and factually false,” Mr. Alimov said.

 

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American investors in particular give these stories credence, get scared and scale back their operations in Russia, he said. That’s fatal because foreign investors have traditionally been the driving force behind the start-up scene, he added.

In recent months, things have gotten even worse, Mr. Alimov said. He supports Russian companies but now has an eye only for firms that earn money outside Russia: “If it weren't for the crisis, we wouldn't do that.”

Niels Tonsen, an entrepreneur based in Russia, but originally from Bielefeld in northwest Germany, has pinned his hopes on the Russian market. After almost four years, the co-founder and chief executive of online fashion shop Lamoda finds that his business is moving forward.

The economic crisis? It could actually help Lamoda, Mr. Tonsen said, because the weak ruble means Russians are less inclined to buy their clothes during trips abroad and instead prefer to purchase them at home. And with money scarce, he offers jeans for €15.

Mr. Tonsen has also noticed foreign investors have become more cautious and restrained. But he is relaxed, because he doesn't need any new investor money at the moment. Lamoda, partially owned by German Internet firm Rocket Internet, took in $130 million in June 2013. The money came from an American holding company — at a time when the Crimea was still Ukrainian.

 

Maximilian Nowroth is a reporter for Handelsblatt. To contact the author: [email protected].