2012.06.01 gp bullhound research - russian internet update

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2012 Update on Internet in Russia

THE RUSSIAN WEB UNTANGLED

Relentless Audience Growth

Russia’s Internet audience is now the largest in Europe at 51m monthly users,

ahead of Germany which it passed in Q4 2011. Yet with online penetration

below 60% outside Moscow and St. Petersburg, we forecast continued strong

growth in Internet audience in the rest of the country (the “regions”).

Online Monetisation Powering Ahead

Now that Russia has achieved European leadership in online audience, e-

commerce and digital advertising are in its sight. While local issues remain,

the Russian Internet ecosystem continues to develop, and audience

monetisation is ramping up.

Distinctive Development Path

The vibrant local Internet community, largely centred in Moscow and St.

Petersburg, continues to invent Russian-specific ways to define the web, with

social and logistics as key areas of home-grown innovation. Local champions

continue to dominate the Internet in key categories, and have actually

improved their leadership in the past year compared to their international

peers.

Investment Activity Mirroring Market Development

Foreign investments in the Russian Internet space have increased markedly

in the past year, as funds and strategics alike are increasingly keen to position

themselves in such a fast-growing opportunity. Conversely, the local investors’

ecosystem has continued to develop, and several sophisticated specialist

funds have emerged that are now also looking to invest abroad.

Conclusions

We foresee continued double-digit growth in key metrics for the remainder of

this decade. Strong progress has been made in certain sectors such as e-

commerce, by companies who have addressed key local problems. Watch out

for this trend in other sectors in the next 18 months – our picks include online

travel, display advertising and digital content.

GUILLAUME BONNETON

[email protected] London: +44 207 101 7578

SASHA AFANASIEVA

[email protected] London: +44 207 101 7569

INDEPENDENT TECHNOLOGY RESEARCH

SECTOR UPDATE JUNE 2012 DIGITAL MEDIA

Important disclosures appear at the back of this report. GP Bullhound LLP is authorised and regulated by the Financial Services Authority

GP BULLHOUND RUSSIAN INTERNET – THE RUSSIAN WEB UNTANGLED

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INTRODUCTION

Now: Largest European Online Audience

The Russian Internet audience grew around 14% in 20111 to become the largest in Europe, overtaking

Germany. Broadband access is still skewed to larger cities – penetration is 37% in Russia while in Moscow

and St. Petersburg it is at 91% and 76% respectively. The regions’ broadband penetration is around five years

behind and forecast to reach 59% by 2015. Small towns and rural areas benefit from mobile Internet

expansion – currently at 22% of the population2.

E X H I B I T 1 – E U R O P E A N O N L I N E A U D I E N C E A N D G R O W T H

Source: ComScore Media Metrix, 2012; GP Bullhound

Continued Double-Digit Growth

Last year, 93% of new Internet users were not from Moscow and St. Petersburg, but from the regions – this

trend is likely to continue as the gap in Internet penetration is still at around 15%3. More established local

players are leveraging this trend and are investing to expand their regional operations rapidly: for instance

Avito raised $75m in May 2012 to drive audience acquisition4, mostly in the regions; Ozon raised $100m in

September 2011 to strengthen its logistics and distribution network across the country.

Russia’s Internet users are forecast to reach 67.9 million at end 2012, comprising nearly 50% of the country’s

population 5.

E X H I B I T 2 – A N N U A L G R O W T H I N A U D I E N C E P E N E T R A T I O N B Y R E G I O N S I N

R U S S I A

Source: FOM, 2012; GP Bullhound

1 Source: ComScore Media Metrix, September 2010-11 2 Source: VTB Capital, March 2012 3 Public Opinion Foundation, spring 2012 4 GP Bullhound was engaged as an advisor to the company 5 Source: eMarketer, 2012

53m 51m43m

38m24m

23m 22m 18m12m

6m

14%

2% 2%0%

6%

4%

1%2%

4%

Online audience (Dec 2011) Growth y-o-yGrowth (Sep 2010-11)

68% 71%53% 50% 53% 45% 32%

+4.0% +4.0%

+6.0% +5.0% +8.0%+6.0%

+8.0%

72% 75%59% 55% 61%

51%40%

Moscow St.Petersburg

Towns with1m+

population

Towns with500k-1m

population

Towns with100k-500kpopulation

Towns with<100k

population

Villages


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Russian Websites Reaching Mass Scale

Russian websites are steadily reaching the top audience spots in Europe. As of March 2012, out of the top five

European web properties by monthly audience, three were Russian: Mail.ru (first place), Yandex (third place)

and Vkontakte (fourth place).

E X H I B I T 3 – T O P E U R O P E A N W E B P R O P E R T I E S B Y U N I Q U E M O N T H L Y

V I S I T O R S ( M A R C H 20 12 )

Source: ComScore, 2012; GP Bullhound

In specific categories, Russian properties have growing presence. For instance in just a year the Russian sites

within the top 50 largest European classifieds properties have increased their share from 9% to 14% of total

European visits in the category, while in apparel retail, the share of top Russian online properties has grown

from 3% to 8% (Exhibit 4).

E X H I B I T 4 – S H A R E O F V I S I T S A N D N U M B E R O F R U S S I A N S I T E S I N T H E

E U R O P E ’ S T O P 50 F O R S E L E C T E D C A T E G O R I E S


79.5m73.8m 71.0m 67.0m

46.7m 43.5m 42.8m37.3m 37.0m 35.2m

Mai

l.ru

Gro

up

Axe

lS

pri

ng

er

Ya

nd

ex S

ite

s

vKo

nta

kte

Dai

ly-

mo

tio

n

Ora

ng

eS

ite

s

De

uts

che

Tel

eko

m

MIH

Sit

es

Sc

hib

sted

Sit

es BB

CS

ites

Russian sitesOther European sites

8%

11%

9%

7%

3%

14%

6%

3%

3%

8%

7%

4%

2%

9%

4%

2%

Apparel retail

Books retail

Consumerelectronics retail

Online services

Travel

Classifieds

Entertainment

News

Mar-11 Mar-12

3 5

5 8

5 6

2 3

3 4

7 6

3 4

2 7

Number of Russian sites in category top 50

Mar-11 Mar-12

% of visits to Russian sites in category top 50


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Audience Reaching Critical Mass Powering Monetisation

At nearly 50% monthly reach of the entire Russian population, the Internet is now:

1) A viable marketing channel for national brands, whether global or local;

2) Large enough to justify initial outlay costs for logistics and payments systems.

As a result, all forms of monetisation now strongly outperform audience growth (Exhibit 5).

E X H I B I T 5 – A N N U A L G R O W T H C O M P A R I S O N O F C O R E O N L I N E I N D I C A T O R S

I N R U S S I A (2 0 10 -1 1 )

Source: AKOR, 2012; J’son & Partners Consulting, 2011; Data Insight, 2012; ComScore, 2012; GP Bullhound

Accelerated Online Advertising

In 2011, Russia’s online advertising market grew at 56%. For the first time, it overtook printed press, which,

interestingly, occurred in the UK in 2010 and in the US is only forecast to take place this year.

Television advertising retains a majority share in Russia with its unique ability to reach the mass audience of

this vast country, but the situation in more developed Internet markets indicates that this may well change. For

instance, Ford’s UK digital advertising spend overtook television for the first time in 2011, with newspaper

advertising in third place, but receiving only half of the online budget. “Five years ago”, says Anthony Ireson

(marketing director, Ford Britain), “digital would have been a distant fifth in the marketing pantheon6.”

In addition, as the Internet audience continues to grow, the shift in advertising budgets towards the online

channels will gain further momentum. Already in April 2012, Yandex’s daily audience surpassed that of one of

Russia’s largest free-to-air TV channels, First Channel (“Perviy Canal”), among inhabitants of large cities7.

This will accelerate as TV’s global reach weakens. Indeed overall weekly population reach of TV in ten key

countries including Russia decreased from 71% in 2009 to 48% in Autumn of 2011, as users prefer the more

personalised and flexible channels such as online through PC and mobile devices8.

6 Source: The Sunday Times, 20 May 2012 7 Source: East-West Digital News, 29 May 2012; for audience between 12 and 54 years of age 8 Source: Accenture survey covering Brazil, China, France, Germany, India, Japan, Russia, South Africa, Sweden and USA, September 2011

56%

25%20%

14%

Onlineadvertising

E-commerce Digital contentrevenue

Audience


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E X H I B I T 6 – R U S S I A , O N L I N E A D V E R T I S I N G S H A R E O F T O T A L A D V E R T I S I N G

Source: AKOR, 2012; Zenith Optimedia, 2011; GP Bullhound

With online at around 17% of total advertising spend in 2012, Russia is approximately four years behind

France and Germany (Exhibit 7). We see a number of factors contributing to the increase of this share to

c.20% by 2015 – similar to that of France today:

Internet businesses, such as online retail, continue to attract users through online advertising,

powered by the growing investment in the sector;

Traditional brands switch to digital advertising to reach out to a rapidly growing audience across the

whole of the country;

Foreign businesses continue to enter the Russian market – Digital River’s survey reports that Russia

came out on top of the list of countries where the companies questioned are seeking to expand

internationally in the next two years. It was named by 31% of respondents, ahead of Brazil (24%),

China (23%), India (22%), Japan (22%), Germany (21%) and the United Kingdom (16%)9;

Small and medium sized enterprises use the more targetable digital advertising methods.

E X H I B I T 7 – O N L I N E A D V E R T I S I N G S H A R E O F T O T A L A D V E R T I S I N G –

F R A N C E A N D R U S S I A C O M P A R I S O N

Source: Zenith Optimedia, 2010 for France; AKOR, 2012 and Zenith Optimedia, 2011 for Russia; GP Bullhound

9 Source: Digital River Press Release, 15 May 2012; 250 companies were interviewed, drawn from across Asia, Europe and North America, which operate in the software, gaming software and consumer electronics sectors and have over $250 million in annual revenues

$0.9bn $1.4bn $1.9bn $2.3bn $2.9bn $3.6bn$3.6bn

$4.3bn$5.9bn

$6.9bn$7.9bn

$8.9bn$7.2bn

$8.7bn

$11.8bn

$13.7bn

$15.7bn

$17.9bn

FY2010A FY2011A FY2012F FY2013F FY2014F FY2015F

Other

Outdoor

Printedpress

Radio

Television

Onlineadvertising

7%

9%

12%

15%

17% 18%19%

21%

5% 5%

8%

12%

16%17%

20%

FY2005A FY2006A FY2007A FY2008A FY2009A FY2010A FY2011A FY2012F FY2015F

France

Russia


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E-commerce at an Inflection Point

Although the Russian e-commerce sector is still nascent, at 1.5% of the total retail market, this is already

higher than Italy. There is room for huge growth, considering that the online share of retail in more developed

markets is near the 10% mark. In addition, out of the $10bn online sales in 2011, only c.45% came from

regions outside of Moscow and St. Petersburg, inhabited by 85% of the population, and already 70% of the

Internet users, implying that a key driver will be regional growth10.

E X H I B I T 8 – E - C O M M E R C E S H A R E O F T O T A L R E T A I L A N D I N T E R N E T

P E N E T R A T I O N I N 2 01 1

Source: Data Insight, 2012, for Russian e-commerce share of total retail; Centre for Retail Research, 2012, for rest of Europe e-commerce share of total retail; Internet World Stats, 2012, for Internet penetration; GP Bullhound

Note: including ticketing and couponing, excluding B2B commerce

According to Data Insight research, the Russian e-commerce market has the potential to grow at an annual

rate of 16% to reach $18bn in revenues by 2015 – or 3% share of total retail. By 2020, it is estimated that the

e-commerce market would have grown to $30bn, at 5% of the overall retail market11.

E X H I B I T 9 – E - C O M M E R C E F O R E C A S T S

Source: Data Insight, 2012; GP Bullhound

Note: including ticketing and couponing, excluding B2B

10 Source: Data Insight, 2012 11 Source: Data Insight, 2012

40%

50%

60%

70%

80%

90%

100%

0% 2% 4% 6% 8% 10% 12% 14%

2011

In

tern

et P

enet

rati

on

2011 E-commerce Share of Total Retail

Russia in 2011

Poland

Italy Spain

Benelux

France

SwedenDenmark

Norway

Switzerland

GermanyUK

Russia in 2015

$8bn$10bn

$18bn

$30bn

FY2010A FY2011A FY2015F FY2020F


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The key growth drivers for Russian e-commerce include:

More users, especially in the regions outside Moscow and St Petersburg;

Internet users becoming accustomed to e-commerce – only 16.3m purchased over a six month

period in 2011 out of 54m – 30% of Internet audience, versus 73% in France12;

Higher revenue per capita – disposable income per capita is forecast to grow at 24% per year

between 2010 and 201413;

Higher frequency of purchases – as users become more accustomed to shopping online, frequency

of purchases should also increase;

Increased basket diversity – Russian Internet audience is still dominated by tech-savvy users, who

purchase more computers and consumer electronics products (Exhibit 10). As more product

categories migrate online, such as furniture and home furnishings (4% in Russia vs. 8% in the US)

and auto and parts (5% in Russia vs. 9% in the US), the product range will diversify and average

online spend per user will increase.

E X H I B I T 1 0 – E - C O M M E R C E B R E A K D O W N B Y P R O D U C T C A T E G O R Y F O R US

A N D R U S S I A ( 201 1 )

Source: East-West Digital News, 2012; eMarketer, 2012; GP Bullhound

Note: excludes travel and virtual goods

12 Source: Data Insight, 2012 for Russia; Médiamétrie — Observatoire des Usages Internet for France estimates, 2012 13 Source: Deutsche Bank, 2011

43%

23%

17%

19%

11%

4%

5%

2%

5%

9%

4%

8%

4%

4%

5%

2%

2%

5%

4%

24%

Russia US

Other

Health & personal care

Books

Office appliances

Furniture & homefurnishings

Auto & parts

Groceries

Toys & hobby

Apparel & accessories

Computer & consumerelectronics


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DIFFERENCES PREVAIL

Online Advertising Skewed to Search

“Digital is growing at two-and-a-half times the rate of traditional media and that’s because it’s more flexible and

targeted,” according to Jerry Buhlmann, CEO of Aegis14. In Russia, where digital advertising only gained

significance in the past three years, the market is tilted towards more recent models which are particularly

measurable (pay-per-click rather than display) and targeted (profile/social and behaviour/search). Indeed the

Russian market has leapfrogged traditional display/CPM15, and embraced CPC/CPA16 revenue models, to the

extent that these represent nearly two thirds of all digital advertising revenue, versus less than half in the US.

This may also reflect the fact that most of the advertisers are so far themselves online players, more used to

advertising means with easy-to-track ROI, such as contextual and search. Another reason is due to TV being

a dominant channel for visually-focused advertising and will gradual shift to online display.

E X H I B I T 1 1 – S E A R C H A D V E R T I S I N G S H A R E O F T O T A L O N L I N E

A D V E R T I S I N G S P E N D I N T H E US A N D R U S S I A

Source: Zenith Optimedia for Russia, 2011; eMarketer for US, 2012; GP Bullhound

Distribution Logistics Critical to Success in E-commerce

The recent explosion of Russian e-commerce (up 25% yoy in 201117), the rapid expansion of online audiences

and purchasers in the regions (regional Internet users up 24% between summer 2010 and spring 201118) puts

enormous pressure on logistics and distribution solutions which are still for the most part inadequate,

particularly outside Moscow and St Petersburg. Outsourced solutions do exist, with successful examples

including the DZB distribution centre (owned by Arvato, the Bertelsmann subsidiary), which handles over 35

million products parcels and mailings a year19 from its Yaroslav warehouse (250km outside Moscow).

Overall though, outsourced solutions are expensive for the etailer, and inadequate for the end customer, as

deliveries are during weekdays only and at imprecise times. Traditional logistics players also still lack the

14 Source: The Sunday Times, 20 May 2012 15 CPM stands for cost per impression 16 CPC stands for cost per click; CPA stands for cost per acquisition 17 Source: Data Insight, 2012 18 Source: Public Opinion Foundation, spring 2012 19 Source: Public sources; company information

48% 49% 49% 48% 47%

63%68% 70% 72% 73%

FY2011A FY2012F FY2013F FY2014F FY2015F

US Russia


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expertise, IT platform and organisation required to deal with e-commerce processes, particularly with

extensive SKUs and the need for 99% availability, higher than what is tolerated in bricks and mortar retail.

As a result, logistics remains one of the key differentiators for success among etailers in Russia, and larger

players increasingly take the issue into their own hands and rely on their own logistic solution. Since our last

report, Wikimart has raised money to accelerate implementation of its own order fulfilment solution and Ozon

has continued to develop its own local centres.

Increasing Hybrid Model Adoption

“A logistics infrastructure can also provide a way to circumvent Russian's reluctance to pay with credit cards,”

Eric Sylvers from Informilo points out. Both pureplay online and traditionally offline businesses are looking at

the hybrid approach to address many of the frictions in the Russian e-commerce market – a model that

businesses like Amazon have also started to implement in the West.

Examples include:

Russian Amazon equivalent, Ozon offers 15 different methods of payment and delivery, and has

2,000 sales points where online purchases can be paid for and picked up, for its 1.5 million products

catalogue;

Mobile phone retailer Svyaznoy Group, which has around a quarter of Russia’s mobile phone market,

has launched enter.ru – a hybrid retailer of more than 25 thousand products in multiple verticals

including furniture, sporting goods, children’s wares and jewellery. Customers can purchase online,

through call centre, and in the retailer’s 25 stores or a network of collection points;

The X5 Retail Group, the country’s largest retail group which operates more than 3,000 retail outlets

throughout the country, generating more than $15bn in annual sales, launched Е5.ru. This website

offers a catalogue of 392,000 items that can be picked up at the chain’s offline supermarkets in

Moscow and St. Petersburg;

Utkonos, the online food retailer that has been in the market for almost ten years, has its own central

warehouse, over 100 pick-up points across Moscow, and a home delivery service20.

Platform Outsourcing Opportunity

Players who develop their own full e-commerce platforms across Russia will also be able to offer outsourcing

services to third party etailers, ranging from distribution and delivery to the full user-acquisition solution.

Indeed the e-commerce sector remains very fragmented in the country with over 25,000 etailers, and the top

50 representing only 16% of total e-commerce, resulting in strong demand for outsourced logistics services.

For instance, Wikimart, and enter.ru both plan to offer logistics and transport services to third parties.

Similarly, KupiVIP, whose own logistics network includes distribution and call centres, fleet of delivery trucks,

generate 25% of the company’s revenues through the white-label service with nine big brands such as Adidas.

Undefined Value Chain in Certain Sectors

The value chain in some sectors still feels to us and Russia-focused investors to be in early stages of

development. This is the case in online travel, for example, where there consumer behaviour patterns are still

unclear and several business models are trying to capture the market: packaged tour operators, online travel

agents, online hotel booking specialists, private sales etc. The travel space, deemed to become one of the

largest e-commerce sectors, is being challenged by both pure-play travel (e.g. Ostrovok, OktoGo,

Travelmenu) and non-travel businesses (Mail Group, Ozon), but without a clear leadership and differentiating 20 Source: Public sources; company information


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factors. We envisage that as with generalist e-commerce, this segment will continue to develop and establish

the most appropriate business model for the Russian Internet users.

Content Driving High Social Engagement

As we mentioned in our previous research report, the Russian Internet audience is one of the most socially

engaged in the world. The local players, such as vKontakte and Odnoklassniki dominate with 35 million and

28 million unique monthly visitors respectively. Facebook is in fourth place with an audience less than 40%

that of the second player (Exhibit 12).

In terms of total time spent on site, however, Facebook is dwarfed by vKontakte. One of the main reasons for

the length of time users spend on vKontakte is the digital content available through the site, a lot of which is

P2P and not cleared for copyright. In fact in May 2012, the company lost its court appeal against an earlier

ruling that its feature integrating with file-sharing software breaches copyright. According to ComScore, users

spend 29 minutes per month on Facebook, versus 492 minutes on vKontakte21.

E X H I B I T 1 2 – T O P S O C I A L N E T W O R K S I N R U S S I A B Y U N I Q U E M O N T H L Y

V I S I T O R S A N D T O T A L M I N U T E S S P E N T ( O C T O B E R 2 01 1 )


The implication is that continued integration of digital content within social networks and its effective

monetisation is key to becoming the leader in this space. For instance, Traveltipz, the online travel reviews

aggregator in Russia, has strongly promoted users exchanging reviews through social networks ensuring

higher the quality and relevance of reviews. As a result, 45% of reviews are written by users connected to the

site through social networks versus less than 10% for a comparable European player. Interestingly, in the

Russian e-commerce sector we are seeing similar trends: Ecwid, the Russian based shopping cart software

business, is the second most popular solution on Facebook globally.

Content Monetisation Still Nascent

Currently, Russia’s digital content distribution is severely hampered by well publicised piracy issues. Evidence

of this includes:

Only 10% of e-books are consumed legally22, and only 26% of users have ever paid for video content

with the majority having paid for only a single download23;

21 Source: ComScore, October 2011 22 Source: Litres.ru, 2011 23 Source: J’son & Partners Consulting, 2011

Unique monthly visitors (Oct 2011)

4m11m17m28m35m

17,220m

9,492m

544m 319m 40m

vKontakte Odnoklassniki MoiMir Facebook Twitter

Total minutes spent


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58% of users who consume online videos do so via the less vKontakte, versus 30% for the next

legitimate content distributor24;

The big global players are still outside of Russia due to piracy issues, including iTunes, Spotify. The

notable exception is Deezer, who have announced entry to Russia in December 2011 on the back of

the global partnership with Orange.

Since the last report local players, such as Tvigle and ivi.ru in video content, have continued to try and find

ways to bring Russian Internet users to the legal side, including advertising, “freemium” and micropayments

models. Monetisation will follow through once the legal content distribution services have reached sufficient

scale and recognition. Key drivers include:

1) Russian users are becoming more accustomed to micropayments and “freemium” models online through

social gaming – in 2010, casual and social gaming spend per Internet user was $10 in the Russia vs. $8

in the US25;

2) Content rights owners view Russia as a lost market due to piracy and are likely to provide content at

lower cost to content distributors who offer at least some monetisation;

3) Active anti-piracy policies will gradually reduce availability of free content;

4) New distribution platforms are providing a better user experience and more valuable functions, for

instance ebook business, Bookmate (part of Dream Industries), provides social reading and sharing to

engage users;

5) Recent studies suggest that 13 million Russian Internet users are willing to pay for content online, but do

not always understand whether content is legal or not – as well recognised and trusted players emerge,

uses will be more inclined to consume legally distributed content26.

Subsequently, we anticipate online content monetisation to intensify with revenues forecast to reach $4.5bn by

2012.

E X H I B I T 1 3 – D I G I T A L C O N T E N T R E V E N U E S

Source: J’son & Partners Consulting, 2011; GP Bullhound

24 Source: VTB Capital, March 2012 25 Source: Bank of America Merril Lynch, December 2010 26 Source: FOM, 2011

$2.8bn$3.3bn

$3.9bn

$4.5bn

2009A 2010A 2011A 2012F


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CONTINUED MARKET DEVELOPMENT

Growing Foreign Investment Activity

In 2011, we have seen continued investment in Russia Internet, both from local and foreign investors. More

active foreign funds in the region include:

Accel Partners: KupiVIP, Ostrovok, Avito;

Balderton Capital: KupiVIP, Elecsnet;

Bessemer Venture Partners: KupiVIP, entered into a partnership with the Skolkovo Foundation (a

Russian Government-financed technology hub);

eVenture Capital Partners: Fast Lane Ventures, Prinme, Heverest, Sapato;

General Catalyst: Ostrovok;

Index Ventures: Ozon;

Investment AB Kinnevik: Avito, Lamoda;

Intel Capital: Softkey, AlterGeo, Sapato, Akella;

Mangrove Capital Partners: Oktogo, KupiVIP, Drimmi; KupiBonus; HomeMe; Enter Media,

Quintura;

Northzone Ventures: Avito;

Tiger Global Management: Digital Access, Biglion, Anywayanyday, Yandex;

Ventech: Oktogo, Pixonic, WomansJournal.

For foreign players, Russia is one of the fast-growing opportunities and particularly for European investors, the

region happens to be the closest of the BRIC countries both geographically and culturally. Investment focus

has been predominantly on already proven business models, in sectors such as e-commerce, gaming and

software.

From our discussions with investors, other factors that play an important role in the process include:

1) Clear market leadership – Yandex and Mail.ru have shown that it is difficult to displace the incumbent

even for players like Google and Facebook;

2) Strong growth of 10%+ per month – businesses view Russian Internet as an emerging market and

expect monetisation growth to reflect that, particularly if profitability has yet to be reached;

3) User loyalty – investors’ perception is that it is relatively easy to amass a large audience quickly given

the number of new users each month curious to try new online services and offerings. It is essential to

demonstrate high user stickiness / return rate;

4) Detailed metrics and KPIs dashboard – given the relative lack of independent analytics data on the

Russian Internet sector, investors expect strong internal measurements and analytics;

5) Strong management team – due to the scarcity of top quality Internet management, Russian Internet

market is currently experiencing high turnover (similar to Western Europe in the early 90s). Experienced,

stable management teams, with effective incentive schemes are considered a huge plus for investors;

6) Bulletproof legal and accounting – transparency of ownership and legal structure and framework are

critical.

Increasingly Sophisticated Local Investors

Russian venture capital funds have started to compete with top tier international VCs for deals abroad and

winning, examples include:

Almaz Capital has been active in the US software sector, investing in Recovery-as-a-Service

solutions provider, nscaled, security software company, Vyatta, mobile video software business, Qik;


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Kite Ventures has made foreign investments in gaming publishing and payments, including German-

based Hitfox, Sponsorpay, and e-commerce properties and services, such as Denmark-based

TradeShift, US-based Merchantry and UK-based Made.com;

Runa Capital, focused on software businesses, has made several investments including in French

app analytics platform, Capptain, US-based SaaS business, Jelastic, UK-based Cloud platform

provider, ThinkGrid, US-based time management app, BigTime;

Ru-net Holdings has been highly active in Asia, with investments in India, and Germany, investing in

Delivery Hero,

New Generation Investment announced that it would like to start investing into the start-up scene in

France;

VTB Capital is now looking to invest in digital media outside of Russia.

Others have continued to ramp up operations, such as Fast Lane Ventures, one of the most successful

accelerators, who has witnessed its first successful exits (Shopping Live and Sapato), and has launched

numerous promising new models, including Heverest, an outdoor clothing and equipment etailer, already

showing impressive growth and metrics.

E X H I B I T 1 4 – P R I V A T E P L A C E M E N T S I N R U S S I A N I N T E R N E T B U S I N E S S E S

B Y Q U A R T E R L Y V O L U M E A N D V A L U E

Source: Capital IQ, GP Bullhound, 2012

12

3 32

6

4

6 6

15

7 7

12

4

Q1

2009

Q2

2009

Q3

2009

Q4

2009

Q1

2010

Q2

2010

Q3

2010

Q4

2010

Q1

2011

Q2

2011

Q3

2011

Q4

2011

Q1

2012

Q2

2012

Quarterly Private Placement Transactions

$8m$1m $4m

$39m

$20m$11m

$1m

$37m

$14m

$100m

$15m

$34m

$128m

$100m

Q1

2009

Q2

2009

Q3

2009

Q4

2009

Q1

2010

Q2

2010

Q3

2010

Q4

2010

Q1

2011

Q2

2011

Q3

2011

Q4

2011

Q1

2012

Q2

2012

Quarterly Private Placement Transaction Value


14

GP Bullhound LLP

Conducive Trade Sale Environment

The flow of exits is increasing as more global strategics perceive Russia as a region they cannot miss out on

given the lack of growth in Western Europe and US for international players to reinforce their activities in fast

growing regions, such as Russia. In addition, local online businesses are now becoming of scale as a result of

continued investment over the last few years and are consolidating within their sectors. Recent exits include:

Naspers’s acquisition of Slando, online classifieds website;

WPP’s acquisition of Promo Digital, digital marketing services agency;

Ozon’s acquisition of Sapato, online shoe retailer;

Rambler Holding’s acquisition of Kanobu, online gaming content.

Conclusions

In past year the Russian Internet market has passed key inflection points, and double-digit growth of key

metrics is set to continue for the rest of this decade:

Audience – regional penetration still below 60%;

Advertising – currently online advertising is still mainly implemented by Internet and technology

players, with strong potential growth as traditional brands migrate their budgets online;

E-commerce – even by 2015, online share of retail will be lower than Poland today;

Digital content – currently dwarfed by piracy issues, but growing extremely fast from a low base.

In our view, the Internet ecosystem has had sufficient time to learn and adapt to local challenges and the

winners today are not only coping but thriving with specific models:

1) E-commerce - logistics ownership is paramount with the emergence of the hybrid model;

2) User-generated content / reviews – integration with rewards and social networks has proven key in driving

growth;

3) E-commerce enablers – effective combination of social and cloud features.

We foresee that business models will settle in the other sectors also, namely online travel, digital content

distribution and display advertising.

Finally the sector has become more attractive to foreign investors with increasing investment activity over the

last twelve months. We have also seen noticeably more coverage and great improvements in infrastructure

around Internet, for instance logistical platforms, online data measurements and analysis. Now that Russia

has firmly entered the mainstream of European Internet, we expect more positive news flow from the sector:

Russian companies starting to acquire Internet properties abroad, attracted by lower valuations,

technology, and audiences, in particular in other fast-growing economies;

More Russian websites joining Yandex Mail and vKontakte among the European top ten;

Russian e-commerce companies finally joining their audience – based peers and registering on the

European map.


15

GP Bullhound LLP

Selected Private Placements

Annouc. Date Company Investor

Transaction size ($m) Commentary

May-12 Avito

Accel Management; Baring Vostok Capital Partners Northzone Ventures; Investment AB Kinnevik

$75.0m Online classifieds

Apr-12 Fast Lane Ventures eVenture Capital; VTB Capital $25.0m Venture Capital incubatorApr-12 MallStreet Company Kima Ventures - Online hypermarketMar-12 Moe Delo Klever Asset Management $4.0m Online SME bookkeeping serviceMar-12 Shoptime KupiVIP $50.0m Online retail clothing storeMar-12 Wikimart Tiger Global Management $30.0m Online marketplace

Feb-12 Digital AccessTiger Global Management; ru-Net II

$30.0m Online video service under the name ivi.ru

Feb-12 OktogoVentech; Mangrove Capital Partners; ABRT Venture Fund; VTB Capital

$10.0m Online hotel booking service

Jan-12 Ostrovok - - Online hotel booking service

Jan-12 RentHome Fast Lane Ventures -Online short term vacation and travel rentals across Russia and CIS

Dec-11 Biglion Tiger Global Management LLC $25.0m Daily deals siteDec-11 Ecw id Runa Capital $1.5m E-commerce shopping cart softw are for SMEs

Dec-11 PinmeeVenture Capital Partners; Direct Group; Fast Lane Ventures

$1.3m Online photo sharing service

Nov-11 Heverest eVenture Capital Partners $5.7m Online sports clothing and equipment retailerSep-11 Lamoda Investment AB Kinnevik - Online retailer of shoesAug-11 VitaPortal Fast Lane Ventures $1.0m Online healthcare media publishing

Jul-11 OstrovokAccel Management; General Catalyst Partners; The Founders Fund


Jun-11 Sapato

eVenture Capital Partners; Intel Capital; Investment AB Kinnevik; Direct Group; Fast Lane Ventures

$12.0m Online retailer of shoes

May-11 Travel MenuAlmaz Capital Partners; Runa Capital

$1.6m Online travel agency offering packaged tours

Apr-11 OstrovokGeneral Catalyst Partners; Kite Ventures


Apr-11 Lamoda

Holtzbrinck Ventures; Investment AB Kinnevik; Tengelmann Warenhandelsgesellschaft

- Online retailer of shoes

Apr-11 Metabar Runa Capital $1.0m Application for brow sers

Apr-11 KupiVIP

Accel Management; Bessemer Venture Partners; Mangrove Capital Partners; Russia Partners Management; Balderton Capital

$55.0m Online fashion private sales retailer

Apr-11 OktogoVentech; Mangrove Capital Partners; ABRT Venture Fund


Apr-11 OzonAlpha Associates; Baring Vostok Capital Partners; Index Ventures; Rakuten; ruNet

$100.0m Online hypermarket

Mar-11 Biglion ru-Net II - Daily deals site

Mar-11 Tulp - $3.0mOnline city library that helps people to find the best places to eat, shop, drink

Mar-11 Wikimart Tiger Global Management $7.0m Online marketplaceSource: Capital IQ; GP Bullhound, 2012


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2012.06.01 gp bullhound research - russian internet update