identify from the case study the formal and informal institutions

Wikimart: A Russian Version of Amazon' How does a Russian Internet start-up grow? How does it line up financing? How promising are its prospects? Daniel J. McCarthy, Northeastern University Sheila M. Puffer, Northeastern University Arction Puppies SWEDEN ENSES Sud FILA HER Sar Sweet belona KAZAKHSTAN far NORTH MONGOLIA IRAN Map Resources PARSTAR INDU Wikimart was founded in 2008 by Stanford MBA stu- dents 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, account- RUSSIA ing 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 CHINA 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 $5 million for Wikimart and resulted in 50% ownership Dighero who had invested in QXL Ricardo; Alec Oxen- for Tiger, according to a filing with the US Securities ford, founder of OLX, Dinero Mail.com, and DeRemate; and Exchange Commission. In August 2010, Wikimart Jose Marin, founder of DeRemate; and Kerim Baran, secured Series B financing of $7 million, again from founder of Yonja.com. By mid-2009, Wikimart's web- Tiger Global site was attracting 5,000 daily visitors and had more By mid-2010, the company website had 2,000 online than 1,000 online merchants offering over 370,000 merchants generating $1.5 million in monthly revenues products. for Wikimart that by 2011 had increased to 2,500 In early 2010, Series A financing was secured from merchants and $3 million in monthly revenues. Of Tiger Global Management, a successful US-based course, online sales were a significant order of magni- private equity investor specializing in technology tude larger. Company revenues would have been start-ups, often in emerging economies. The deal raised greater if the order completion rates could have been 1 This case was written by Daniel J. McCarthy (McKim d'Amore Distinguished Professor of Global Management and Innovation, Northeastern University) and Sheila M. Puffer (University Distinguished Professor and Cherry Family Senior Fellow of International Business, Northeastern University). The authors would like to acknowledge the excellent research assistance provided by Northeastern University College of Business student Maxim Russkikh. Daniel J. McCarthy and Sheila M. Puffer. Reprinted with permission. 290 improved beyond the 68% level prevailing in 2011. company's business model offered free space online to Achieving such an increase, however, would remain a merchants while collecting a minimum of 1.5% of each major challenge to implementing the company's strat- transaction once sales began. egy as retailers often had insufficient inventories to fulfill customer orders. Company Strategy and Organization By March 2011, the company had signed up 2,200 The company's strategy included reaching a younger, retailers that listed more than 528,000 products tech-savvy segment of customers in the Russian-speak- through Wikimart's website. The company reported ing world. The company was headquartered in Mos- that the site was attracting 2 million visitors per cow, and merchants selling on its site delivered goods month, although one of the founders stated that the only within Russia as of early 2011. One of the partners number could be as large as 3 million. Among the stressed that Wikimart's objective was to continue products prominent on its website were home goods developing the Russian market even after it moved to and appliances, consumer electronics, wine and new markets. The company planned to expand overall tobacco, and virtually any product that could be found services to other Russian-speaking countries of the on Amazon's website, with the best-selling categories former Soviet Union such as Ukraine and Kazakstan. being clothing, sporting goods, and children's pro- The partner reasoned that Russia was the tenth largest ducts. The vast majority of the products were familiar, European country in terms of GDP but had even internationally known brands. greater promise in terms of Internet users. Although Wikimart seemed to have vast potential, the company Why Tiger? had not turned a profit by early 2012. However, the One of Wikimart's founders, Kurmakayev, explained in founders believed that 2013 could be a profitable year, 2011 why the company had chosen Tiger Global from With an objective of eventually attaining 20% to 30% among various potential core investors: "We chose share of the fast-growing online retail market, company Tiger because they did not impose their views and did executives saw the possibility of annual revenues reach- not seek to participate in the business management, but ing as high as $15 billion by 2018. are ready for the long-term partnership. Other poten- The two founders initially assumed separate respon- tial core investors included Accel Partners, a firm based sibilities, with Kurmakayev being in charge of main- primarily in the US, with offices in Palo Alto, CA, and taining relations with retailers and developing the com- New York, that had invested in companies like pany's technology and Faldin being responsible for Groupon and Veritas. Accel also had offices in London, sales, marketing, and business development. As the China, and India. Another potential core investor was company grew, the founders recognized early that they Index Ventures, a US investor with successful invest- had to change to a more corporate-like structure. Fal- ments in technology start-ups like Skype and Dropbox. din became CEO responsible for the operational It seemed that all of these investment firms might have aspects of the business, such as developing metrics been looking for the next Google, the hugely successful and achieving goals. Kurmakayev took on a strategic Internet giant cofounded a decade earlier by Russian- role incorporating forecasting and budgeting, as well as born University of Maryland and Stanford University developing the company's competitive strategy. graduate Sergei Brin. One of the founders claimed that a significant percentage of company costs stemmed from intensive development efforts. Wikimart, although an online Business Model retail business, was basically a technology company. Wikimart's business model centered around creating The vast majority of the 260 employees in 2011 were an Amazon-like online retail platform and business programmers who wrote software code to support the model in the Russian-speaking countries of the former company's online business. They were guided in their Soviet Union. Similar models had been developed in development work with Silicon Valley expertise pro- Korea by Gmarket and in Japan by Rakuten Ichiba. The vided by their investors and consultants. 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 US. 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. 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. Wiki- mart's largest competitor was Ozon.ru, the oldest e-commerce giant of the Russian Internet. Sites like Groupon and Kupi Vip offering group discounts on products and services were also substantial competi- tors, 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 founders believed that the number would grow to 10% to 20% within five to 10 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 5%-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 pop- ular 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 compe- titors being mail.ru and Yandex. Yandex had a Wikimart's Future Analysts noted that start-ups like Wikimart had become attractive for strategic investors as the Inter- net 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 Ama- zon or eBay. Having US investors like Tiger Global that were very familiar with the Russian Internet market could help attract others, 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. As is typical in such cases, timing would be a key factor. Sources: Based on (1) DST smenila nazvanie (DST changes its name), 2010, http://www.vedomosti.ru/companiesews/ 1103680/dst_smenila_nazvanie; (2) A. Hesseldahl, 2012. Zuckerberg is the billion-share man: Who owns what, who makes what in the Facebook IPO, AUThingsD, February 1, http://allthingsd.com/20120201/facebooks-ipo-filing-who-owns- what-who-makes-what/; (3) Forbes, 2011, My stroim Amazon in Russia (We are building Amazon in Russia), July 20, http://www. forbes.ru/tehno-opinion/internet-i-telekommunikatsii/70954- my-stroin-amazon-v-rossii; (4) RT, 2011, Tiger Global ups the ante on Wikimart, March 2, http://rt.com/business; (5) http://bloomberg.comews/2011-05-24/yandex-jumps-after- raising-1-3-billion-in-biggest-technology-ipo-of-the-year.html; (6) http://en.wikipedia.org/wiki/Yandex