Since the departure of foreign corporate IT solutions from the Russian market, Russian companies have been actively developing local alternatives. However, it has not been possible to fully replace lost foreign products. Pavel Bronfman, Russian Business Development Program Director at MUIV.LAB 2023 (organized by Startech.vc and Sergei Vitte Moscow University), explains why.
Problems and opportunities
Developing IT solutions for businesses is more complicated than b2c. This niche also promises more prospects when it comes to target consumers’ financial capabilities. As digital transformation accelerates, b2b attracts more emerging IT companies, with 50% to 77% of all startups in Russia focused on b2b, according to different sources.
In the past 18 months, the interest in this industry has only grown. With foreign vendors having left the market, Russia is facing a technological gap. There is a shortage of b2b solutions that needs to be filled with products fully built on Russian software. The most sought-after niches include infrastructure software, cybersecurity solutions, business apps and recommender systems.
The vacant niches could not but attract the attention of emerging Russian IT companies. Now many are actively developing substitute b2b products although it has been challenging to create full-scale alternatives of major foreign solutions. This may be due to a number of external and internal factors.
External factors
External factors include the macroenvironment – a range of economic, political, scientific and technological realities in which software development is conducted. They cannot be influenced, but it is important to know them and take them into account from the very beginning.
It is hard to catch up with decades of foreign development
Russia has a good IT school, but in the venture era, everyone focused on the Western markets and those who achieved success left the country at the first opportunity. Those who stayed were forced to compete with major foreign solutions that took up the b2b market, often in vain. The reason was that Russian developers did not have experience and resources to create a competitive alternative to foreign software at that time. The very fact of coexisting with major international companies on the same market complicated the process of creating alternate Russian-made solutions. Therefore, until now, the general level of local software development was low.
Now, after the departure of foreign players, the market requires that the vacuum is filled, and Russian-made products are created. But, as we see, it is easier said than done: many foreign algorithms and solutions are backed up by decades of development, data and user experience, and it is impossible to catch up with this knowledge in a matter of a year or two. It takes much, much longer to create a comprehensive and quality alternative.
Import-substituting b2b solutions have a limited target market
To successfully develop and scale, a startup needs a target market. For IT startups, it means an adequate number of companies that can potentially be interested in the import-substituting product and have money to purchase it. And here is the problem – there are not many of them.
According to our partner Nikita Bugrov, head of the Innovations section at hh.ru, microbusinesses are currently dominating the Russian market; even though they can be interested in b2b solutions, they are not ready to pay too much for them; several thousand rubles at most. The SMB segment is also small and there are only a few solvent companies that are interested in IT products.
What remains is large business. It is willing to spend big budgets, but one needs to understand that there are only several hundreds of such organizations, and their requirements for software for automating business processes are, first, very high, and second, can vary greatly from organization to organization.
B2b solution development for large business is expensive
Based on the aforesaid, we see that large companies are the key segment of the import-substituting 2b2 market. One should know in the beginning that to work successfully with such companies, a startup needs to prepare for serious financial expenses.
Large business has zero tolerance for risks related to security and sustainability of the solution, as well as the authenticity of software on which is it developed. To prove its compliance with corporations’ standards, the startup will need to spend money not only on the development itself, but also on certification and penetration tests, a deployment team, tech support, etc. Our experience shows that only a few startup creators understand this important issue.
Internal factors
With the departure of foreign companies, the opportunities to attract investment have reduced. Against the backdrop of market turbulence, it is not easy to talk Russian corporations into experimenting and launching a pilot project with a promising startup. Therefore, young projects need to approach building contacts with potential investors very carefully. However, we often see that startups do not understand that and their way to scaling is often blocked not by macrofactors but classic rookie mistakes – an insufficient preparation in the beginning, a nonexistent financial model and inadequate assessment of the project.
Do your homework
The key to success in any sphere is thorough preparation – and particularly so when it comes to a business, a multi-layered structure with many factors to consider. However, startups quite often neglect the basic aspects of preparation work and lose time, finances, and investors.
Market research is a key stage of project work. Prior to launching your project, you should have understanding of the product target audience and their needs; this will help you see whether there is a demand for the solution and whether it is essentially worth starting the project. However, founders often fail to do so: they create a product without carrying out customer development and even attract initial investments only to find out a year later that no one needs this product.
Also, many startups neglect to prepare a high-quality presentation of the product, and regardless of how promising the project looks it will fail to attract attention in case you lack a clear visual demonstration of your approach to be the valid one.
Undeveloped financial model
Investors are strategic thinkers who need to understand the ways their investments will earn them money. This is exactly why every startup requires a financial model – a document to describe the future potential for profit and growth, as well as its overall sustainability under different scenarios. However, startups often forget to develop such model, or do it as a last resort.
One should understand that a financial model is not simply a nice image for the investor, but also an efficient planning tool that allows you to be prepared for different project development scenarios. Also, amidst an unpredictable market and shrinking budgets for innovation projects, the financial model has ceased to be optional: today, it has become an essential document for any startup to attract investments, and one should develop and utilize it in a proper way for their project to be successful.
Overestimating your project while attracting investments
Startup valuation is a comprehensive task that involves finding a balance between the interests of the founder and the investor, as well as the market realities. But quite often, the founders get too caught up in the news about investments in western IT projects, or unreasonably strongly believe in prospects of the idea and overestimate their business.
Obviously, the founder is eager to raise more money, but it is important to stay objective and be aware that the market situation requires the ability to survive, which will be hard without using finances in a rational way. Big checks are obviously a good thing, yet they often harm the project through motivating the founders to make large, unjustified expenses. Economically feasible project evaluation, even if it is not-too-high, will allow you to promptly attract investments, start scaleup, and achieve success with mutual benefits for the investor and founder.
It is important sometimes to promptly agree to a lower evaluation. Otherwise, even a very promising startup may fail to succeed.
Summing it up
In the next few years, import-substituting solutions will serve as the core driver of b2b development in Russia’s startup industry as well as the corporate software market. However, this niche is not open for everyone: only those able to switch to a dividend model and attract investments to create new products will succeed.
Yet, one should remember that conservative sentiments are increasing among investors, with few startups to receive funding – which means the successful ones will enjoy a low level of competition and have room for development. The scope of market will be the sole restriction, and further scaleup will inevitably have to go towards new markets sooner or later.
We will face challenging times, but those who will succeed in building sustainable businesses are likely to take a big bite out of the market pie. The key to success is to stay focused, be flexible, without disregarding basic training and essential startup tools, and, if necessary, seek advice from market experts.