[Estonian VC Allan Martinson on a rainy day in Tallinn. Photo by Shel]
Allan Martinson, is a journalist turned venture capitalist and is founder of Martinson Trigon Venture Partners, the first private equity investment firm in the Baltic states. Last October, he served as my guide during a visit to Tallinn, Estonia, after he told me he could introduce me to some interesting people. These turned out to include the nation's president, a former prime minister, Skype's COO among several interesting entrepreneurs. Here are his answers o the questions I asked as part of the SAP Global Survey.
1. You are probably the only VC with investments in Russia, the Baltics and the US. Can you describe your strategy in operating in these three distinctly different cultures?
To be exact, we do not invest into American companies per se, but very often our Russian portfolio companies have an American presence (a sales or head office or at least registration).
Our investment strategy is indeed different in the Baltics than in Russia. When we invest into a Baltic company, we can be sure there will be no big corporate governance, taxation and other general management issues, which are omnipresent in Russia. On the other hand, the ambition of the Baltic companies is often limited to the Baltic/Nordic region while Russian companies have global ambitions from the very beginning. Also, Russia is a huge and fast-growing market of its own.
In other words, Russian companies have huge risks but big ambitions. The Baltic companies are nice and nimble but very limited in growth targets. The best would be to marry the Baltic managerial talent with Russian ambitions but unfortunately those regions have so little interaction that it has proved to be almost impossible.
Most of the leads in the Baltics tend to be related to e-services (both in public and private sector) and consumer internet. Those are rather based on business innovation than technological breakthroughs. The Baltics have one of the highest internet penetration rates in the world and the small size of the countries makes launching new services extremely fast. Also, those nations are very quick adopters of new services which make them ideal testing grounds.
2. Can you give me some examples of successful Baltic social media companies?
- Skype (of course)
- Playtech (the leading developer of software for online casinos)
- Fotki.com (the # 10 global photo sharing site)
- Hansabank's e-banking solution (one of the most advanced internet banks in the wolrd)
- Estonian e-government
- Estonian mobile parking solutions
3. Tell me about the Russian companies. What are their strengths? Name some of the successes.
The Russians are strong in developing software products for professionals. They are often based on really good and innovative technologies, which form the basis of their success. On the other hand, the Russian companies are not so strong in understanding and developing the user's interface and needs of the consumer. That is why most of the Russian success stories are companies whose products target professional users only.
Examples of Russian (or Russian-originated) success stories:
- Acronis (data backup solutions, due to be listed on NASDAQ soon)
- Parallels, Inc. (virtualization technology enabling to run Windows on Apple computers)
In addition, Russia hosts a multitude of fully-owned development centers of American companies who employ between people each - ranging from Intel to Boeing to Sun Micro to Microsoft to T-Systems to IBM.
4. Estonia is among the world's most connected countries. How has social media played with society in general? How about in business and social media?
Estonia is a very small country and this has put certain imprint on social media as well. The country's internet population (~70% of the total) is extremely active in using social networking sites (like rate.ee or Google's orkut.com) and writing comments to the articles of mainstream online media (like newspapers sites or Delfi, the leading portal). However, blogging has not really flown in this country. There are a multitude of blogs, of course, many of them maintained by online or offline opinion leaders, but the impact of blogging on society has been much less than in the U.S.
5. How has your business and strategy been impacted by the recent friction with Russia? Can social media help diffuse the situation or is that a naïve perspective?
My business has NOT been affected by recent frictions - but probably because it is in industries where people normally don't think of nationalities at all. Those industries are also not subject to government regulation. The situation is different in the transit, timber and oil/gas industries, of course.
Social media has done very little to diffuse the situation, rather vice versa. There are a lot of intelligent blogs and commentators on both sides, of course. But a majority of the
6.You were the lead investor in rate.ee, a social network that by some estimates had over 90% of Estonian youth as registered members. How did it get such a huge percent of Estonia's young people? What are the social and political implications of this online network? Does rate.ee expect to maintain members as they grow older?
90% is the correct figure. Rate.ee has registered users in a country of 1.3 million people, an equivalent of Myspace having 80 million American accounts alone. 75% of Rate’s users are active (at least one visit per month) and 55% visit at least once a week. They receive 20 million daily page views.
It is probably natural that 90% of the internet-connected youngsters in ANY country will use some social networking site or sites. In a small nation-states like Estonia it is natural that the users go to local sites where their friends are and where everyone speaks their language. Rate was just in the right place in right time.
There are similar sites in Latvia (draugiem.lv, one.lv), Lithuania (one.lt), Hungary (iwiw.hu) etc which enjoy similar penetrations. So, it is not purely an Estonian phenomena.
7. Rate.ee recently started a social network in Russia. How is it similar and how is it different?
Rate’s Russian site limpa.ru has gained users but only 25% of them are active (have logged in once in 30 days). Limpa’s loyal users are mostly Baltic Russians, which is a different crowd from “true” Russians. They have their own micro communities. They use Latin letters instead of Cyrillic due to absence of Russian keyboards.
There is no established leader in Russian social networking scene yet. Sites like odnoklassniki.ru (classmates), moikrug.ru (“Russian LinkedIn”), have been growing fast but never gained over 1-1.2 m users (less than 5% of Russia’s 30-million strong internet community). Dating sites like loveplanet.ru, mamba.ru and damochka.ru have been more successful by getting 3-5 million profiles and up to $30 m in annual revenue but they cannot be named true social networking sites.
In fact, I should also note thatnote that the Russian livejournal is de facto the leading social network in the country.
8. Can you tell me about social media in Russia and the Baltics? What tools are being used? Do people in Russia and the Baltics have computers and broadband connection?
I think I answered to your question in large extent above. Some penetration statistics:
- Internet penetration in the Baltics is about 50%, (70%) in Estonia. Broadband penetration is about 25% in the Baltics and 40-50% in Estonia.
- In Russia, one must distinguish between Moscow/St Peterburg and the rest of Russia. I believe internet and broadband penetration in those big cities is similar to the Baltics, while Russian overall internet penetration is about 20% and broadband is less than 5%.
However, the mobile penetration is 100% in the Baltics and almost 100% in Russia. For many people in Russia, their cell phones are the first device to access internet.
9. This survey is, of course, designed to help SAP, a global software enterprise whose core competency is in ERP. What advice would you have for them in developing strategy for your section of the world?
I believe SAP has lots of competence on how to do business in these countries already. In Russia, SAP IS the high-end ERP market, and in the Baltics they are the market leaders as well.
In my opinion, they have done very well in Russia, and being German has actually helped as the Russians have lots of positive feelings toward Germany. They have strong partners who know how to navigate Russian waters.
As for further strategy I would strongly recommend SAP look into acquisition possibilities, most of all of a company called 1C which is de facto leader in midsize ERP market in Russia.
10. How much of a barrier is language, between countries in your area? How does that impact social media and business in general?
Language is much more important in Europe than most Americans tend to think. In order to do business in Europe you must be local. You cannot achieve market share for your ERP or social media enterprise if it speaks a foreign language. Period.
11. Looking forward, say five years, how do you think social media will have impacted culture and business in central Europe and Russia?
The impact will be huge and strong but I believe social media here will be more intertwined with traditional media than in the U.S. The main social media sites will be owned and maintained by large media companies, telecoms or oligarchs.