1. ]A
INDEPENDENT TECHNOLOGY RESEARCH
SECTOR UPDATE  JUNE 2012  DIGITAL MEDIA
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 GUILLAUME BONNETON
guillaume.bonneton@gpbullhound.com
We foresee continued double-digit growth in key metrics for the remainder of London: +44 207 101 7578
this decade. Strong progress has been made in certain sectors such as e- SASHA AFANASIEVA
commerce, by companies who have addressed key local problems. Watch out sasha.afanasieva@gpbullhound.com
London: +44 207 101 7569
for this trend in other sectors in the next 18 months – our picks include online
travel, display advertising and digital content.
Important disclosures appear at the back of this report.
GP Bullhound LLP is authorised and regulated by the Financial Services Authority

3. GP B ULLHOUND RUSSIAN I NTERNET – T HE RUSSIAN W EB U NTANGLED
INTRODUCTION
Now: Largest European Online Audience
The Russian Internet audience grew around 14% in 2011 1 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
2
expansion – currently at 22% of the population .
EXHIBIT 1 – EUROPEAN ONLINE AUDIENCE AND GROWTH
53m 51m
14% 43m
38m
24m
23m 22m
6% 18m
12m
4% 4%
2% 2% 2% 6m
0% 1%
Online audience (Dec 2011) Growth (Sep 2010-11)
y-o-y
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
3
trend is likely to continue as the gap in Internet penetration is still at around 15% . More established local
players are leveraging this trend and are investing to expand their regional operations rapidly: for instance
4
Avito raised $75m in May 2012 to drive audience acquisition , 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
5
population .
EXHIBIT 2 – ANNUAL GROWTH IN AUDIENCE PENETRATION BY REGIONS IN
RUSSIA
72% 75%
+4.0% +4.0% 59% 55% 61%
51%
+6.0% +5.0% +8.0% 40%
+6.0%
68% 71% +8.0%
53% 50% 53% 45%
32%
Moscow St. Towns with Towns with Towns with Towns with Villages
Petersburg 1m+ 500k-1m 100k-500k <100k
population population population population
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
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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).
EXHIBIT 3 – TOP EUROPEAN WEB PROPERTIES BY UNIQUE MONTHLY
VISITORS (MARCH 2012)
79.5m
73.8m 71.0m
67.0m
46.7m 43.5m 42.8m
37.3m 37.0m 35.2m
Yandex Sites
Mail.ru
vKontakte
Schibsted
Sites
Sites
Orange
Springer
Deutsche
motion
BBC
Group
Telekom
MIH
Daily-
Sites
Axel
Sites
Other European
Russian sites
sites
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).
EXHIBIT 4 – SHARE OF VISITS AND NUMBER OF RUSSIAN SITES IN THE
EUROPE’S TOP 50 FOR SELECTED CATEGORIES
Number of
% of visits to Russian sites in
Russian sites in category top 50 category top 50
News 2%
3% 3 5
Entertainment 4%
6% 5 8
Classifieds 9%
14% 5 6
Travel 2%
3% 2 3
Online services 4%
7% 3 4
Consumer 7%
electronics retail 9% 7 6
Books retail 8%
11% 3 4
Apparel retail 3%
8% 2 7
Mar-11 Mar-12
Mar-11 Mar-12
Source: ComScore, 2012; GP Bullhound
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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).
EXHIBIT 5 – ANNUAL GROWTH COMPARISON OF CORE ONLINE INDICATORS
IN RUSSIA (2010-11)
56%
25%
20%
14%
Online E-commerce Digital content Audience
advertising revenue
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
6
(marketing director, Ford Britain), “digital would have been a distant fifth in the marketing pantheon .”
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
7
Russia’s largest free-to-air TV channels, First Channel (“Perviy Canal”), among inhabitants of large cities .
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
8
personalised and flexible channels such as online through PC and mobile devices .
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
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EXHIBIT 6 – RUSSIA, ONLINE ADVERTISING SHARE OF TOTAL ADVERTISING
$17.9bn
$15.7bn
Other
$13.7bn
Outdoor
$11.8bn
Printed
$8.7bn press
$7.2bn $8.9bn Radio
$7.9bn
$6.9bn Television
$5.9bn
$4.3bn
$3.6bn Online
$2.9bn $3.6bn advertising
$1.4bn $1.9bn $2.3bn
$0.9bn
FY2010A FY2011A FY2012F FY2013F FY2014F FY2015F
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%),
9
China (23%), India (22%), Japan (22%), Germany (21%) and the United Kingdom (16%) ;
 Small and medium sized enterprises use the more targetable digital advertising methods.
EXHIBIT 7 – ONLINE ADVERTISING SHARE OF TOTAL ADVERTISING –
FRANCE AND RUSSIA COMPARISON
France
21%
20%
Russia 19%
18%
17% 17%
16%
15%
12% 12%
9%
7% 8%
5% 5%
FY2005A FY2006A FY2007A FY2008A FY2009A FY2010A FY2011A FY2012F FY2015F
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
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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
10
Internet users, implying that a key driver will be regional growth .
EXHIBIT 8 – E-COMMERCE SHARE OF TOTAL RETAIL AND INTERNET
PENETRATION IN 2011
100% Norway
Sweden
Denmark
90%
2011 Internet Penetration
Switzerland
UK
Benelux
80% Germany
France
70%
Italy Spain
60% Russia in 2015
Poland
50%
Russia in 2011
40%
0% 2% 4% 6% 8% 10% 12% 14%
2011 E-commerce Share of Total Retail
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
11
e-commerce market would have grown to $30bn, at 5% of the overall retail market .
EXHIBIT 9 – E-COMMERCE FORECASTS
$30bn
$18bn
$10bn
$8bn
FY2010A FY2011A FY2015F FY2020F
Source: Data Insight, 2012; GP Bullhound
Note: including ticketing and couponing, excluding B2B
10
Source: Data Insight, 2012
11
Source: Data Insight, 2012
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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
12
period in 2011 out of 54m – 30% of Internet audience, versus 73% in France ;
 Higher revenue per capita – disposable income per capita is forecast to grow at 24% per year
13
between 2010 and 2014 ;
 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.
EXHIBIT 10 – E-COMMERCE BREAKDOWN BY PRODUCT CATEGORY FOR US
AND RUSSIA (2011)
4% Other
2%
5%
4% 24% Health & personal care
4%
5% Books
5% 5%
2%
11% 4% Office appliances
8%
9% Furniture & home
17% furnishings
2%
4% Auto & parts
19% Groceries
43% Toys & hobby
23%
Apparel & accessories
Computer & consumer
Russia US
electronics
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
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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
14
targeted,” according to Jerry Buhlmann, CEO of Aegis . 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
15 16
Russian market has leapfrogged traditional display/CPM , and embraced CPC/CPA 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.
EXHIBIT 11 – SEARCH ADVERTISING SHARE OF TOTAL ONLINE
ADVERTISING SPEND IN THE US AND RUSSIA
72% 73%
68% 70%
63%
48% 49% 49% 48% 47%
FY2011A FY2012F FY2013F FY2014F FY2015F
US Russia
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
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and purchasers in the regions (regional Internet users up 24% between summer 2010 and spring 2011 ) 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
19
million products parcels and mailings a year 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
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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
20
warehouse, over 100 pick-up points across Moscow, and a home delivery service .
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
21
spend 29 minutes per month on Facebook, versus 492 minutes on vKontakte .
EXHIBIT 12 – TOP SOCIAL NETWORKS IN RUSSIA BY UNIQUE MONTHLY
VISITORS AND TOTAL MINUTES SPENT (OCTOBER 2011)
35m 28m 17m 11m 4m
17,220m
9,492m
544m 319m 40m
vKontakte Odnoklassniki MoiMir Facebook Twitter
Total minutes spent Unique monthly visitors
(Oct 2011)
Source: ComScore, 2011; GP Bullhound
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:
22
 Only 10% of e-books are consumed legally , 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
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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
25
in the US ;
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,
26
uses will be more inclined to consume legally distributed content .
Subsequently, we anticipate online content monetisation to intensify with revenues forecast to reach $4.5bn by
2012.
EXHIBIT 13 – DIGITAL CONTENT REVENUES
$4.5bn
$3.9bn
$3.3bn
$2.8bn
2009A 2010A 2011A 2012F
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
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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.
EXHIBIT 14 – PRIVATE PLACEMENTS IN RUSSIAN INTERNET BUSINESSES
BY QUARTERLY VOLUME AND VALUE
Quarterly Private Placement Transactions
15
12
7 7
6 6 6
4 4
3 3
2 2
1
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
$128m
$100m $100m
$39m $37m $34m
$20m $15m
$11m $14m
$8m
$1m $4m $1m
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
Source: Capital IQ, GP Bullhound, 2012
13 GP Bullhound LLP

15. GP B ULLHOUND RUSSIAN I NTERNET – T HE RUSSIAN W EB U NTANGLED
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.
14 GP Bullhound LLP

16. GP B ULLHOUND RUSSIAN I NTERNET – T HE RUSSIAN W EB U NTANGLED
Selected Private Placements
Transaction
Annouc. size
Date Com pany Investor ($m ) Com m entary
Accel Management; Baring
Vostok Capital Partners
May-12 Avito $75.0m Online classifieds
Northzone Ventures;
Investment AB Kinnevik
Apr-12 Fast Lane Ventures eVenture Capital; VTB Capital $25.0m Venture Capital incubator
Apr-12 MallStreet Company Kima Ventures - Online hypermarket
Mar-12 Moe Delo Klever Asset Management $4.0m Online SME bookkeeping service
Mar-12 Shoptime KupiVIP $50.0m Online retail clothing store
Mar-12 Wikimart Tiger Global Management $30.0m Online marketplace
Tiger Global Management; ru-
Feb-12 Digital Access $30.0m Online video service under the name ivi.ru
Net II
Ventech; Mangrove Capital
Feb-12 Oktogo Partners; ABRT Venture Fund; $10.0m Online hotel booking service
VTB Capital
Jan-12 Ostrovok - - Online hotel booking service
Online short term vacation and travel rentals across
Jan-12 RentHome Fast Lane Ventures -
Russia and CIS
Dec-11 Biglion Tiger Global Management LLC $25.0m Daily deals site
Dec-11 Ecw id Runa Capital $1.5m E-commerce shopping cart softw are for SMEs
eVenture Capital Partners;
Dec-11 Pinme Direct Group; Fast Lane $1.3m Online photo sharing service
Ventures
Nov-11 Heverest eVenture Capital Partners $5.7m Online sports clothing and equipment retailer
Sep-11 Lamoda Investment AB Kinnevik - Online retailer of shoes
Aug-11 VitaPortal Fast Lane Ventures $1.0m Online healthcare media publishing
Accel Management; General
Jul-11 Ostrovok Catalyst Partners; The $13.6m Online hotel booking service
Founders Fund
eVenture Capital Partners;
Intel Capital; Investment AB
Jun-11 Sapato $12.0m Online retailer of shoes
Kinnevik; Direct Group; Fast
Lane Ventures
Almaz Capital Partners; Runa
May-11 Travel Menu $1.6m Online travel agency offering packaged tours
Capital
General Catalyst Partners; Kite
Apr-11 Ostrovok $1.0m Online hotel booking service
Ventures
Holtzbrinck Ventures;
Investment AB Kinnevik;
Apr-11 Lamoda - Online retailer of shoes
Tengelmann
Warenhandelsgesellschaft
Apr-11 Metabar Runa Capital $1.0m Application for brow sers
Accel Management; Bessemer
Venture Partners; Mangrove
Apr-11 KupiVIP Capital Partners; Russia $55.0m Online fashion private sales retailer
Partners Management;
Balderton Capital
Ventech; Mangrove Capital
Apr-11 Oktogo $5.0m Online hotel booking service
Partners; ABRT Venture Fund
Alpha Associates; Baring
Apr-11 Ozon Vostok Capital Partners; Index $100.0m Online hypermarket
Ventures; Rakuten; ruNet
Mar-11 Biglion ru-Net II - Daily deals site
Online city library that helps people to find the best
Mar-11 Tulp - $3.0m
places to eat, shop, drink
Mar-11 Wikimart Tiger Global Management $7.0m Online marketplace
Source: Capital IQ; GP Bullhound, 2012
15 GP Bullhound LLP

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