From Russia With Money: How KupiVIP Is Riding The Middle Class Wave

From a slow start in the aftermath of the Soviet Union, Russia is now Europe's biggest internet market with 53 million users (compared to number-two Germany at 51 million), and figures from GP Bullhound and comScore indicate that it is also growing the fastest, at 14 percent (other European countries are at less than six percent it says). On top of that, a growing base of middle class consumers — 15 million today, expected to double to 30 million in the next five years in an e-commerce market that is projected to be worth $40 billion — has translated into a veritable boom in the rise of tech companies.

But not all of that growth means big money just yet.

KupiVIP, the Russian flash-sales site, is on track to make $200 million in net sales this year, on revenues of $300 million. Oskar Hartmann (pictured), KupiVIP's young and bullish CEO and co-founder, who I met while on a tour of Moscow's tech scene this week (another story on that here), believes the company will be making $1 billion in sales annually within the next five years — pretty modest by the standards of Amazon, a company to which KupiVIP is compared, which had revenues of over $48 billion in 2011, but still making KupiVIP one to watch.

A story that Hartmann tells gives an insight into some of the trials and tribulations of building a startup in a country like Russia:

"It was January 21, 2009, and we were just about to get a new financing round. At the time we had negative 200 million euros in the bank," recalls Hartmann. He explains that while VCs in Europe consider a deal done when the term sheet is delivered, and in the U.S. when the shareholder agreement is finalized. But in Russia it's when the money gets wired to a bank account, with the paperwork being effectively meaningless without it. "Then we suddenly got a call from the main investor, who said they'd changed their mind. It was game over for us."

So they got to thinking fast. "We called our retail partners, and asked if they would be willing to give us six months of credit. We worked out a revenue sharing deal with our biggest retailer. And then our existing VC, Mangrove, gave us a bridge loan. Then our company grew by 40 times in the next eight months." He said the VC that dropped out at the last minute later approached them to invest again — possibly in the $55 million round the company secured in April 2011 from Balderton, Bessemer, Accel, Mangrove and others. "And they did."

Since then, KupiVIP ('kupi' means buy in Russian) has been becoming an ever more ubiquitous presence in the market on a business that still counts flash sales as its biggest pillar, but now also includes white-label e commerce sites and a full-priced e-commerce site of its own called ShopTime — all distributed on a logistics network created and owned by KupiVIP that includes warehouses, a fleet of delivery trucks and even delivery men who will bring a product and wait at the door until you try the item on and decide whether you want to keep it, and then pay they guy, in cash, if you do.

Most recently, the white-label service, which KupiVIP started building two years ago, has now begun to grow in earnest: it now has nine big brands signed on (Adidas being one of the most recent, going live just this week), with plans to have 23 by the end of this year, launching two new sites every month. White-label is already providing 25 percent of the company's revenues but they expect that to account for half by 2013.

Hartmann's big idea for KupiVIP is to sell name-brand fashion at deep discounts (as with other consumer goods like electronics and food, name brand clothes from regular stores can be ridiculously expensive) with the aim of building a solution covering middle class women — and men — in "every region, every city."

It definitely fills a hole — nothing like this existed before, and Russian women love to shop and are huge impulse buyers. Two of KupiVIP's biggest assets are more behind the scenes:

The first has been in the creation of that logistics infrastructure. It includes a battery of attractive in-house call center girls (I think some of them may double as models for the site, and one of their incentives was for good performance to get rewarded with photo shoots for the company calendar); plus distribution centers, trucks and a fleet of customer-friendly delivery people who double as sales assistants to work with customers at the point of delivery.

Hartmann says that it had to build this from scratch because existing delivery services were just not up to the task involved: not just sending goods to so many extensive parts of Russia but then being on hand to collect money or the goods if they're not up to scratch. (Ozon, a competitor to KupiVIP, says that 80 percent of its sales are in cash, too.) You can imagine that if another international e-commerce company like Amazon or eBay decide to really make a play for Russia, this is the kind of infrastructure that they would need to either build as well, or buy.

The other is in the area of data collection: the company is picking up an enormous amount of information about what people like to buy and when. This is an area where KupiVIP is already making acquisitions to improve its position, specifically looking for companies that are "supportive of data intelligence, consumer mining and individualization in shopping." That information is already helping them shape the product experience for individual shoppers, Hartmann says.

There are some areas that are no-go for KupiVIP. For one, Hartmann says that the company will not touch electronics and books, which are already being served well by Ozon and others, because he believes startups first and foremost need to "solve problems that are unsolved."

Plus he thinks that even for a company like Ozon these product categories do not make much money. He argues that this was the motivation behind Ozon's purchase of Sapato, Russia's Zappos, in February 2012: to be able to distribute more profitable products over Ozon's own logistics infrastructure. "Books/electronics will always lose money. They want to overlay their delivery engine with profitable products, antiques, fashion and shoes, so it make a lot of sense for Ozon to buy Sapato."

International expansion is another. "We have no interest in extending outside of Russia and the CIS," he says. "There are already huge e-commerce companies in Europe. We would have to build up from zero. We need to look at markets where we can add value in the CIS before looking where we can grow internationally." PriceWaterhouse estimates that the whole of the e-commerce market (including content like games, lottery tickets and money transfer) was worth $9 billion in Russia in 2010 and that this will double by next year. Hartmann also notes that the kinds of market gaps that exist in Russia are in other parts of the world, too — for example Saudi Arabia and India.

How do the financials look today? "We are as profitable as we want to be," Hartmann answers. There is also talk of an IPO in the next two years. The biggest cost, he says, is customer acquisition and delivery, the area that KupiVIP has built out from scratch. (Delivery can cost 20 euros per sale but the company delivers free.) Those margins improve the more the logistics network is used, which is why we will probably continue to see KupiVIP launch ever more services in the future.