Ahead of the competition
When Filip Engelbert and Jonas Nordlander, two mild-mannered Swedes, first arrived in Moscow in 2007, they quickly learnt the difference between the Swedish and the Russian way of doing business.
As the new managers and part-owners of a small Russian classified website, Mr Engelbert and Mr Nordlander were faced with the unfortunate task of sacking the chief executive. The Scandinavians approached this by sitting the manager down for an amicable chat and giving him a 24-hour grace period before any dismissal papers were signed.
The next day, they say, the company car was gone and the former-CEO was demanding thousands of dollars in cash for the intellectual property rights and URL the pair had actually acquired when they bought the company.
After more than two years of disputes and court cases, Russian judges eventually sided with the Swedes, awarding them all the domain names and trademarks – plus the car.
“It took two and a half years to sort everything out through the legal system,” Mr Engelbert says. “When we got the car back I actually drove it for a week, but I decided it was bad karma so I sold it.”
It was a rough introduction to Russia, but these days both he and Mr Nordlander are sitting pretty. They have transformed the site, now called Avito.ru, into Russia’s leading classified site.
In crisp shirts, blazers and blue jeans – and looking very much at home in the opulent dining room of Moscow’s Café Pushkin, famed for its 19th century-style interior – the two recount how they turned the small site into the Russian equivalent of Craigslist, the online classified site that started in the US and expanded worldwide.
Using a model familiar to most western internet users, the site allows consumer-to-consumer trading. It is also one of several Russian internet companies to have staved off big-name foreign competitors thanks to an understanding of the local market.
With a team of 100 employees, Avito is the number-one classified site in Russia measured by numbers of visitors, with 5.5m unique visitors per week. By comparison, Slando, its nearest rival, which was recently sold to South Africa’s Naspers, has 1.8m visitors.
Mr Engelbert and Mr Nordlander say a classified ads site – allowing users to buy and sell used cars, clothing and electronics – works particularly well in Russia because of the consumer boom the country has experienced during the past decade on the back of high oil prices.
“What we came to realise is that Russia had had 10 years of insane consumption, but people haven’t had anywhere to sell things [they no longer want]. We, just by luck, found a window where there was insane demand,” says Mr Nordlander, now CEO at Avito but formerly one of the founding members of Tradera.com, the Swedish auction site that was acquired by Ebay in 2006. Mr Engelbert, a former investment banker, serves as executive director, with a focus on sales and investor relations.
Rules for Russia● A business model that has proved successful in the west can succeed in an emerging market. “So many people told us Avito wouldn’t work in Russia” – as the country had no history of classified ad sites and sceptics thought its consumers would react to the idea differently. “What works in the west works in the east.”
● Remember that emerging markets outperform developed markets during the boom years, and underperform during the downturn. Use the slowdown to pare back your business and cut out unnecessary operations.
● Recognise that success takes time, and be prepared for the unthinkable: You really, really have to endure.”
● Aim to be self-reliant: “Operate under the assumption that nothing is easy and no one can be trusted. It just makes life easier.”
The two entrepreneurs, who were acquaintances in Sweden, became business partners after being invited to Russia by Vostok Nafta, the Swedish investment company which had taken an interest in the original website.
Vostok Nafta holds 24 per cent of Avito, while Sweden’s Kinnevik Investments owns 52 per cent and Northzone Ventures, an early investor in online music streaming service Spotify, owns 7 per cent.
Mr Engelbert and Mr Nordlander, meanwhile, hold a collective 14 per cent stake, while the remaining 3 per cent is divided among other members of management and minority shareholders.
While the initial aim was to create both a classified and an online business directory in the style of US site Yelp, they realised that during the global financial crisis in 2008 that they were better off focusing on one business, and decided that the classified market had fewer existing competitors and offered more potential for growth. “The crisis was a good thing. We had to smarten up,” says Mr Nordlander.
They started marketing Avito quietly in Moscow and St Petersburg, and at the start of 2010 rolled out a Rb15m television advertising campaign in the two cities that propelled the company from 3m unique visitors to 8.5m unique visitors within nine months.
The company also took advantage of Russia’s maturing contextual search market by not buying contextual ads for general search terms such as “car” – which are priced more expensively for advertisers because they are so popular – and instead opting for more specific search terms such as “blue Ford”, which are cheaper.
“People were paying $1 for some words. We were paying kopecks,” Mr Engelbert says.
Since the start of 2010, Avito has expanded the advertising campaign to 28 cities. The company has rolled out the site’s operations slower than they would have in a country like Sweden both because of the challenges of navigating Russia’s vast market – which spans 11 time zones and has a reputation for a notoriously bad postal service – and to maintain the right balance between supply and demand. Sellers, for instance, are likely to give up posting if they do not get offers on the first few items they post, while buyers are unlikely to continue using the site if categories show a dearth of items on offer.
The company is now focusing on revenue generation, something it had neglected during the early years in order to cement its market position. In 2010, turnover at Avito reached $1m, a figure it surpassed this year in the first quarter. Total 2011 sales are likely to reach $10m, the company predicts.
Mr Engelbert and Mr Nordlander are still trying to decide to what extent they want to introduce advertising on the site – something they had initially shied away from for fear of scaring off users – and whether they will start charging people for posting more expensive items, such as cars, as Craigslist does.
While the site’s automobile section generates the most traffic on the site, the most popular category for selling and buying is women’s clothing.
Another big category is household pets – which is forbidden on Craigslist in the US but which the duo has embraced wholeheartedly.
Asked to look back at his first week in Russia and the fiasco that ensued when he tried to sack the CEO, Mr Engelbert laughs and calls it a “learning-by-doing” experience.
He says that after four years in Moscow, he now knows to do as the Russians would. Next time, he says, he will have the dismissal papers “stamped then and there”.