5 gaps in the Russian startups ecosystem today (waiting to be filled)
The Russian Ecosystem, Part II
Russian entrepreneurs are certainly capable of unique innovation – if that was ever in doubt, take a look at the interactive air-screen Maxim Kamanin, the founder of Displair (see video below), came up with while studying at university. Companies such as Kaspersky Lab, Parallels, Ecwid and Qik have also provided marketable solutions to global problems.
However, many of the most successful Russian startups are those that have taken ideas that already work in other parts of the world and adapted them to fit Russia’s unique environment. Yandex’s search engine is far more popular than Google, while VKontakte outperforms Facebook and Ozon.ru fulfils a similar role to Amazon in the West.
Russian entrepreneurs’ enthusiasm for innovative imitation means that trends observed in the West often catch on in Russia a year or so later. For example, last year we saw rapid development in the gaming industry (e.g. Game Insight, Zeptolab and Pixonic), media (Clipclock, Movavi), e-commerce (Ozon, Wildberries, Lamoda) and travel (Ozon.travel, Ostrovok).
That means that recent trends from the West are a pretty good indicator of the likely areas for growth in the Russian market. This blog sets out five gaps in the Russian market waiting to be filled.
See the Displair and its inventor Maxim Kamanin in action:
1: E-commerce infrastructure
In the West, the boom in e-commerce has been facilitated by services which make it easy for consumers to find what they want, pay for it securely and receive it quickly. Online retailers have developed stylish, easily searchable web and mobile storefronts, and there are also countless price comparison tools to find the best deals.
Sites like Amazon store users’ details, allowing them to make one-click purchases, while most banks offer authentication services. While national post services usually provide an adequate service, there are also many private couriers offering faster, more secure delivery, and consumers are able to track their items.
In Russia e-commerce is growing fast. Online retail spending was $11.1 billion last year, a 36% increase on 2011. This growth is largely fuelled by the rapid increase in internet penetration (61.2 million Russian adults were connected to the web in 2012, a 12% increase on 2011), which is likely to continue, especially outside of major cities.
However, at the moment e-commerce is held back from realizing its full potential by a lack of services already taken for granted in the West.
Lack of mobile stores
For example, although many online retailers now have impressive web storefronts, the same cannot be said for mobile retailers. Despite the increasing popularity of smartphones just 3-5% of visitors to online shops in 2012 came from mobile devices. In comparison, in 2011 18% of visits to US online retailers, and 14% of purchases, came from mobile. One of the main obstacles to mobile e-commerce is the cost of designing attractive storefronts and catalogs for mobile. One Russian startup, ecwid, which designs mobile and desktop storefronts for online retailers, is a global leader in this sector, and recently became the number one facilitator of Facebook commerce.
Lack of payment services
There is also a lack of payment services, capable of receiving money from customers and returning it to them should they be dissatisfied with the product. This problem is even more acute regarding mobile e-commerce, with the significant cost of producing an app capable of processing payments apparently putting off many retailers. However, the experience of Tanuki, a chain of Japanese restaurants, suggests that this problem can be overcome.
A big distribution problem
Distribution is a big problem, and it explains why e-commerce remains concentrated in the regions surrounding Moscow and St Petersburg. Russia’s national postal service is slow, not very reliable and does not usually deliver parcels to people’s homes, so many online retailers have their own courier service. Ozon, Russia’s leading online retailer, uses O-courier, while clothes store KupiVip has its own fleet of drivers to deliver items to customers, who can try them on before paying in cash or returning them immediately.
Most of these services only cover the area around Moscow and St Petersburg, but as demand from the rest of Russia increases, so will the need for speedy, low-cost couriers like Chhotu, an Indian startup trying to solve similar logistical problems there, or Shutl, a London-based company that allows consumers to name the precise time and place that they want to receive their product.
2: Electronic Finance
In the West electronic money is already part of everyday life. People can manage their bank accounts online or using their mobiles, with almost all major banks now offering an app.
Startups like Simple, which offers banking with mobile as the starting point, not an afterthought, Moven, whose new app allows clients to pay for purchases using their mobile and keeps a user-friendly record of all purchases, and Square, whose mobile wallet not only allows you to pay at checkouts using your phone, but also provides tailored recommendations and offers rewards, have also made significant inroads into the financial services market.
Online banking is embryonic
As e-commerce continues to grow rapidly and more and more Russians come online, the demand for e-money services will only increase. However, at the moment online banking is yet to catch on widely, while only Sberbank offers a mobile banking option. QIWI offers a range of payment processing services, including a wallet app which allows users to pay for goods and services with 7000 providers. There are also some early stage startups trying to gain a foothold. Instabank is currently testing a system similar to Simple, but which allows users to make transactions via Facebook and 2Can offers a card reader which can be attached to your mobile in order to receive payments.
But Russians LOVE loyalty cards
E-money will eventually catch on in Russia. Banks will have to start offering convenient online and mobile banking options, and if they don’t, startups will have the chance to bypass mainstream banks completely, as Simple is doing in the US.
Widespread adoption of e-money will provide opportunities for startups in website and app design, and also for programmers to design effective authentication systems. Russians love loyalty cards, and often carry dozens in their wallets. This creates an opportunity for virtual wallet apps, which allow users to store all their loyalty cards on their phone.
The potential for financial services in Russia has not gone unnoticed, with one venture company, the Life Financial group, setting up a $10 million fund to be invested in startups attempting to take advantage of these opportunities, while QIWI recently raised $213 million in a Nasdaq IPO.
3: Digital Health
Digital Health startups worldwide attracted $1.4 billion in 2012, a 46% increase on 2011, and John Nosta, from Forbes.com reckons that 2013 will be the Year of Digital Health. He predicts that the combination of new technologies, increasing connectivity, access to a vast amount of health-related data and the need to reduce already skyrocketing costs will pave the way for startups that allow individuals to take control of their own health needs, including their lifestyle, diagnosis and treatment.
While digital health in Russia is still held back by a lack of funding, connectivity and access to government data, all these things are improving.
One startup, Cardio-Control, has devised a system allowing individuals to measure their own electrocardiographic (ECG) data which it hopes will bring down Russia’s high death-rate from cardio-vascular illnesses. Another new firm, NormaSugar offers diabetic clients a glucose meter and Knopka Zhizni produces mobile phones with an emergency button which, when pressed, puts the user straight through to a health centre.
In 2012, 6 projects connected with digital health received a total of $11.6 million in venture funding (see PwC’s MoneyTree report).
4: Digitization of life
In parts of the West, the Far East and the Gulf life is increasingly digitized.
Building and home automation ensure that lighting, heating, air conditioning, appliances and security systems are used effectively. Smart traffic lights keep traffic flowing, while smart parking places help drivers to find a free space and smart CCTV cameras identify anomalous behaviour. 3G and 4G coverage is expanding, allowing people to be constantly online, while augmented reality apps allow users to explore cities in new ways.
Moscow: smart city by 2016
Moscow’s government has incorporated many of these ideas into its plans to turn the capital into a ‘smart-city’ by 2016. It plans to install 1700 ‘smart’ traffic lights, as well as a network of smart parking spaces, which would communicate with an app to show drivers that the space is available.
The city’s authorities also plan to dramatically extend the network of smart CCTV cameras in residential areas and around municipal facilities, and to introduce a crime-monitoring system similar to CompStat in New York, which brings together data from across the city to produce weekly crime reports detailing where and when crimes are taking place.
There are also plans to integrate hotspots into city features such as benches, advertising boards and bins, while by 2016 high speed internet access is supposed to be extended to 65% of the population, and 4G coverage expanded to cover 95% of the city.
Increased use of building and home automation promises to improve convenience, comfort, energy efficiency and security in the city’s buildings and policymakers also hope that the introduction of hi tech data units into 75% of households by 2016 will greatly increase the amount of useful data available.
The plans are very ambitious and targets are unlikely to be met. However, any progress towards increased digitization of life presents innovative entrepreneurs with opportunities in data collection and processing, app design and the development of new technologies. One Russian startup already achieving success in this field is doroga.tv, from Nizhny Novgorod. Its system, which allows the public to track the location of buses and traffic jams is already used in 6 Russian cities, and it was also trialled in New York.
E-government, which uses IT to provide and improve government services, transactions and interactions with citizens, businesses and other arms of government, is growing in popularity across the world. It incorporates government portals providing citizens with information, the integration of many paper documents into fewer electronic ones and ways of paying for and receiving government services via the web.
Between 2010 and 2012, Russia climbed from 49th to 27th place in the UN’s World e-government development rankings. This suggests that progress is being made, but Russians still have to carry multiple documents and often must queue for a long time in order to receive government services, while complicated and time-consuming bureaucracy is cited by many as one of the main obstacles to business in Russia.
Mobile access to government services and e-ID
As part of Moscow’s ‘smart city’ plans, the government intends to introduce ways for residents to access services through their mobiles, payment terminals and even their televisions! It also plans to reduce the length of time it takes to register a business from 5 days to just 3 minutes, by integrating the 5-12 documents currently required into one electronic one. There are also plans on a national level to add multiple functions to the new national ID card, which is scheduled to start replacing internal passports from 2015.
The advance of e-government presents startups with a range of opportunities. Software developers, programmers, app designers and data analysts all have an important role to play.
Some companies will gain lucrative government contracts, such as Avtodoria, a Kazan based startup whose innovative system allows the authorities to track down rule breaking drivers, while others will provide related services, such as apps which streamline the process of paying taxes or receiving pensions, or programs which analyse the vast datasets made available to the public.
Conclusion: good opportunities for investment in Russian startups
Progress in Russia is rarely smooth. However, once the country is on a certain trajectory, it is very difficult to make it change course. That’s why the 5 trends outlined above represent good opportunities for investment in Russian startups.
The demand for services related to e-commerce infrastructure, electronic finance, digital health, digitization of life and e-government is sure to increase during the next few years. At the moment many projects in these sectors are at an early stage. Some will fail, but those that succeed could earn brave, smart investors a significant profit.[Photo: Adam Baker, Flickr]
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