Gleb Davidyuk is managing partner of iTechCapital, a Latvia-based fund specializing in the Russian digital market. Previous to iTech Gleb has worked at Scandinavian fund Mint Capital, Alfa Capital and the Central Russia Regional Venture Fund.
How much is Russia’s financial situation affecting its digital industry?
Obviously it’s not a great time right now. It came up sharper in the summer and it continues now.
On the other hand, business is continuous and in certain sectors, such as Internet, it continues as usual. And it’s still booming. All the companies we have are growing – not just in terms of rubles but the dollar equivalent – and that helps a lot. At the end of the day you have to think if you are losing money or making money. And how far you position yourself from the politics. That’s what the Internet is about. That’s why we’re investing in it so heavily.
Are we influenced by the geopolitical environment? Yes we are. Are we losing money because of it? No. And that’s important. The western attitude towards Russia has been changed in respect to the news you consume from CNN or BBC. Flip it and you’ll see the same angle of RT. The message is simple: the U.S. is trying to conquer the globe through its political interests, and Ukraine is just a simple, small element of that. That’s how it’s covered inside Russia. The consequence of that is that the financial systems suffer and the banks are not able to get cheap financing. The economy is now in recession, and if we take offline businesses, they’re in hard times to survive.
Is this a new phenomenon?
We’ve been in this kind of position in 1998 and in 2008, so for us this is a third crisis. We are pretty much prepared to get through it without any significant pain. The stronger guys will become stronger, and the weak guys will disappear from the market. And it’s already happening. The Internet is a slightly different because consumption patterns are different.
The end of last year, already knowing the economic conditions and plans, we decided that during 2015, we wouldn’t easily be able to raise capital. But we should focus on exporting these businesses and technologies on the global markets, and feel comfortable in entering markets such as Southeast Asia or Latin America. From this perspective 2015 is the year of operational performance, and expanding geographically, while keeping the market share high in Russia.
Generally speaking, how enthusiastic are Russian businesses over going global?
There are mental barriers here to going global. We are still afraid of it. Why I don’t know, and we’re still trying to break these barriers, because technologically we are very good. For example, our Internet sector is about five or six years ahead of South East Asia. It’s a great opportunity to export business because we’re effectively operating in the future.
Mentally we are less capable at going global than our European friends. It’s a mentality problem, something we grew up with. It’s very hard to make people think to go global, because they were used to having a very big and deep domestic market for years. Now it’s a very good opportunity for those who would like to export their goods or services, and having a mental barrier is not helping.
Do investors feel as comfortable putting money into Russia these days?
I think there is certainly a drop-off, and it would be stupid for me not to admit that. The VCs backed by institutional money, are now trying to either postpone or sell any mandates they’ve had. But that’s a political or institutional decision. For me, this is another opportunity, because having cash in that kind of market means you can buy cheaper, and have no problem with the pipeline. Therefore, for the emerging market funds, who get used to the risks associated there, and for those not associated with political sources of money, it’s great.
E-commerce ventures, such as Ticketland and ECWID, comprise a big portion of your portfolio. Is it a particularly well-performing sector in Russia today?
Each company should have e-commerce as an integrated part of the business. If you have a commercial profile, and you don’t have a site which is selling, you’re only one-handed. This year it has changed so that every guy in trading must have e-commerce as part of his operations. This is exactly what pushes small and medium businesses to grow, to survive during the crisis. For us this is an opportunity rather than a setback.
There is a tremendous change at the heart of the industry itself. It’s the same as the airline industry. We used to fly with paper tickets; now everyone has electronic ones. And the changes were very fast. These trends will follow in the events business, and we’re seeing the success of breathing new technology into the ticketing sector. During the crisis we grew in every indicator – revenue, number of tickets sold – if I take this company as an example, it’s certainly not suffering from the Russian crisis.
What about the effects E.U. and U.S. sanctions are having on Russia?
They are certainly harming the financial markets, because the investors putting money in the economy with a certain limited set of risks, have also run away because of the sanctions, which was not on the agenda for 10 to 20 years.
If you ask me if it changes the local market? Actually, no. The locals do not feel the sanctions in the shops. We’re not going back to the times of the Soviet Union. I don’t feel a pressure in terms of not getting French cheese, for example. Who’s suffering? The banks. Now they have to borrow on much higher terms. Then the banks are not crediting, and there’s a lack of capital. Generally, yes, the economy is suffering. Because of that certain production areas should suffer because of a lack of financing, and the question will be how active the government will be, because it will have to support the loss of industry in order to keep up the GDP.
I think the government is doing a good job, and it’s been doing a good job over the past five years in incubating a lot of entrepreneurs, and in financing for hundreds of new startups. The question is how far is it willing to go? I think they’re committed for at least another five to 10 years from now. Now everyone is expecting results. And surely you can postpone for another two years your results because of the crisis, but again there should be government-backed success. That’s a pretty serious task.