The Technology of Expansion
Two Russian start-ups – CDNvideo and the Perm Chemical Company – have managed to find a recipe for success that any technological business would be smart to follow. Both of these companies created an innovative product that fills a market niche, got local partners on board, sought venture capital, fine-tuned their marketing models, and continue to improve their technology. As a result, they have made names for themselves in a highly competitive global innovations market.
YouTube Delivered to Your Home
In a matter of just a few years, the Moscowed-based tech start-up CDNvideo has managed to grow its operations and become a leading provider of distributed internet content via CDN networks in Russia, as well as to embark on expansion projects in international markets. The secret behind their impressive run is the company’s willingness to accept ‘last-minute’ orders, its ability to provide quick turnaround, and its competitive prices.
If Steve Jobs had not given an iPhone 4 to Dmitry Medvedev in 2010 during his visit to Silicon Valley, we may have never heard of CDNvideo. It was then that Apple decided to take its competition with Adobe to a new level by not allowing Flash technology to be used on its smartphones. Their objective was simple – to force internet resources to use Apple’s video standard. It was because of this decision that Russia’s then president – an avid fan of electronic gadgets – could not view a video broadcast from Russia. The situation had to be addressed immediately, so CDNvideo took it upon themselves to build the required technology, which was commissioned by VGTRK, the largest broadcasting corporation in Russia. “They announced a tender, and the task at hand was rather complex and had to be completed within very tight deadlines. Even though several other companies were bidding at the same time, we managed to beat them to the punch,” Yaroslav Gorodetsky, CEO of CDNvideo, said in an interview with BRICS Business Magazine. “By and large, it seems to me that our greatest value added lies in our ability to quickly tackle the kind of challenges that other companies are unable to respond to.”
According to Gorodetsky, the idea to build a Content Delivery Network (CDN) – a geographically distributed network infrastructure to deliver online video content from CDN users to end users – first came to him back in 2008. At that time, this technology was developing in leaps and bounds in the West, but nobody in Russia offered similar runtime solutions. The global economic crisis forced him to delay his project until March 2010, when CDNvideo was finally officially incorporated. Gorodetsky explains that in the initial stage, he and some of his school friends had to invest “several hundred thousand dollars.” This money was enough to buy the first servers, to build the network, and to cover the salaries of programmers for the first six months of operation. As a result, they managed to build a technological platform base, on which customers could create their own video portals, virtual television channels, or websites with on-line broadcasting capabilities. “To put it in layman’s terms, we enabled our companies to create their own internet TV channels and ‘YouTubes.’ Our clients are the people who produce professional video content and wish to publish it online,” explains the head of CDNvideo.
“There are many companies that are not content to just post their video clips on YouTube, while others do not want to do it out of principle,” says Gorodetsky. “Some of them do not want to do it because they wish to protect their copyright, which is de facto lost once the video is posted on Google. Others simply want to make money on their own material by selling video clips or adverts at a higher rate than YouTube can offer. There is another group of users who would not want their runtime content next to that of their competitors and finally, YouTube does not offer any online broadcasting options to its clients – or when it does, there are simply too many strings attached. Lately, against the backdrop of the sanctions introduced by the West against Russia, there were several instances when one of the Russian national channels was denied the right to broadcast its materials for political reasons. So, if companies want to fully realize their goals or avoid such specific risks, they come to us and use our services,” says Gorodetsky.
CDNvideo admits that winning the tender announced by VGTRK, now one of their major permanent accounts, propelled them to prominence on the Russian market. As early as 2011, or just nine months after Gorodetsky’s company had been incorporated, it became fully self-sustained. Today its network spans the entire territory of Russia and several CIS countries, and its list of clients includes not just all of the federal channels, but also nearly 70 regional ones as well as dozens of media customers.
In tow with RVC
Last year, CDNvideo managed to bring its business to a whole new level. Prior to that, the company had been relying exclusively on its own resources from the day it was incorporated. However, on the eve of the Winter Olympic Games in Sochi, they concluded that the only way to develop their network and provide high quality broadcasting services was to raise third-party financing. It was at that time that the company was contacted by representatives of the ‘Innovation Leader’ fund that had been set up with financial assistance from the Russian Venture Company (RVC).
Konstantin Nadenenko, Director of Venture Investments at MC Leader’s Investment Projects and Programs Directorate, told BRICS Business Magazine that their first meeting with CDNvideo had taken place in 2011 during an expo dedicated to new media technologies. At that time, Gorodetsky’s team had just completed their own CDN network and moved on to implementing their marketing strategy. “For us, it was obvious that CDNvideo was about to bring a brand new service to the Russian media technologies market and was one of the two technological leaders in the distributed internet content delivery sector. They were instantly added to our management company’s pre-investment list, which at the time boasted a number of successful IT projects,” Nadenenko noted.
For two years straight, MC Leader kept an eye on CDNvideo’s activities and their financial indicators. The well-coordinated work performed by Gorodetsky’s team as well as the company’s rapid sales and profit growth convinced MC Leader’s management that investing in CDNvideo was a smart move. The first investment tranche was transferred in early 2014. This money was used to augment the network’s capacity to accommodate live coverage of Olympic events.
Gorodetsky himself admits that in beginning their cooperation with the fund and the RVC his company caught a lucky break, which enabled them to accomplish a qualitative leap. They raised funds that enabled them to expand their network considerably; new servers were purchased and installed in Russia, the CIS, and the ‘far abroad.’ This enabled the company to cope with the increased load during the Sochi Olympics and later during the World Cup in Brazil. When the Russian national team was playing, the CDNvideo network even broke a record of sorts – nearly 400,000 people followed their online broadcast. “For the sake of comparison, the matches played by Germany – who went on to win the tournament – were watched online by nearly one million users. We should also bear in mind that the coverage of these matches in Germany was provided by Akami, an American corporation, and they were very proud to have managed to pull it off. And that convinced us that in terms of our technical capacity to broadcast to a large audience, our service was comparable to that offered by global leaders,” says Gorodetsky.
RVC’s assistance proved to be equally valuable in promoting CDNvideo’s services in foreign markets. The company was given an opportunity to capitalize on the venture corporation’s expertise and business connections in the United States, Singapore, and Israel, which made it easier to find new partners. RVC also helped organize trips for the company so they could take part in several events overseas. One such trip to Vietnam took place in October. “We had several brief yet productive meetings with potential buyers and potential partners. Today, we continue to maintain contact with them, and have advanced quite far in discussing the commercial aspects of our cooperation,” says Gorodetsky cheerfully.
Breaking through the ‘Firewall’
Such contacts form an important part of CDNvideo’s international expansion drive. The company took its first steps toward this goal in 2013 when they attempted to penetrate the European market, but their aspirations fell short of target. “It turned out to be very difficult. Being a Russian company, we never managed to win the confidence and trust of the European markets, so we had to change – we had to adapt to meet the needs of local manufacturers. To add insult to injury, this is a very complex market that is heavily regulated. It requires massive investments. Large European media companies have to go through a very lengthy decision-making process to select suppliers – it takes a year, sometimes even longer,” explains Gorodetsky.
CDNvideo had to come to grips with their failure on the European market, which led them to turn their attention to the East. They also hired a Russian employee who had had successful sales experience in Southeast Asia and started targeting local partners placing contextual advertising on the Asian market.
This strategy ultimately paid off. In August 2014, CDNvideo received a phone call from Fortune Game, a computer games manufacturer from China who proposed cooperation. Shortly thereafter, in September, they signed a contract pursuant to which CDNvideo became a provider of services to the Chinese company delivering their content to markets outside of China.
“It turned out that the Chinese are very meticulous people when it comes to business. They were vetting us along with our competitors from the United States, but ended up picking us. They did it because they realized that we offered the optimal solution for them. They literally ran a comparative analysis of our network, focusing on its coverage area, our service nomenclature, and prices,” explains CDNvideo’s CEO.
As opposed to the Europeans or the Americans – who rarely see Russian companies as technological innovators, but merely as buyers of ready-made solutions – the Chinese were free from any preconceived notions. Another factor that played into CDNvideo’s hand was the fact that from a legal perspective, entering into a contract with a Russian company proved much easier compared to their American or European counterparts, what with their exceedingly complex contractual structures designed to insure the provider against any vagaries of life. In addition, CDNvideo was ready to work with Fortune Games based on short-term monthly contracts, which was met with approval by the Chinese. Ultimately, the competitive pricing policy also played an important role, something that the company makes no secret of.
Gorodetsky promises that heir expansion to the East is likely to continue, especially in view of the fact that CDNvideo already sees ‘relatively steady interest’ in their product from potential partners in India, Malaysia, Indonesia, and Vietnam. Just like in China, Russian companies found a very hospitable environment in all of these countries, even though each of them has unique traits that are vital to the success of the business. “In India, for instance, we realized that our local partners could easily change their minds, even if they had already announced it publically. The Russian mindset has no room whatsoever for such practices, as that would entail serious damage to one’s reputation. In India, such reputational risks do not exist – you may well announce a decision and then change it,” muses Gorodetsky. “All in all, both India and China are different planets that function according to their own rules. It is very difficult to get there, but if you manage to, your efforts will pay off tenfold.”
“These markets are protected from outsiders by a huge ‘firewall,’ and the only way to penetrate it is to partner up with a local player who is willing and able to sell your products. You should also make it a point to find this player on your own and not rely on the services of middlemen with questionable motives,” says CDNvideo’s Director General. Even though overseas markets account for only 5% of its total sales, the company plans to step up efforts in this area. Southeast Asia is not the only area of interest – plans have been put in place to find a way into the BRICS markets, placing a particular focus on South Africa and Brazil.
The Chemistry Behind Six Patents
How does one go about transforming a bankrupt chemical plant into a profitable innovative business and a large, global gas exporter in the electronics industry? A Perm-based chemical company managed to find an answer to this very question by betting heavily on a high-tech product and joining forces with a Japanese partner who brought in technology and a manufacturing culture of the highest caliber.
The only thing that Iodobrom – a former flagship of the Soviet chemical industry – could boast in the not-so-distant past was a handful of buildings spread around its semi-deserted property. The remains of the edifices sported cracked walls made of moss-covered red bricks that were full of gaping holes, broken windows, and rusty beams supporting dilapidated roofs and lifeless chimneys.
This picture began to change in 2002 when a Moscow-based company called Bioprocess Holding – which later became Bioprocess Capital Ventures, an investment fund set up with the assistance of the Russian Venture Company (RVC) – incorporated the Perm Chemical Company (PCC). The old workshops were converted to launch the production of cutting edge gases used in the electronics industry. “In early 2000, we [Bioprocess] decided to diversify our business and create a company that could operate in the chemical industry. Moreover, we wanted this business to be innovative. We wanted it to be based on unique competencies that only we could offer. What we had in mind was a company that would require some considerable scientific investments as well as human resources – in other words, something that would be difficult to replicate,” says Alexei Nesterov, CEO at PCC, who ran the Perm-based company until 2009.
After a sharp decline in orders caused by the crisis, the company adopted a new development strategy that placed a greater emphasis on manufacturing halogen-based high purity electronic gases, including hexafluorobutadiene – one of the most advanced gases required for the plasma etching of silicon wafers used in 25-65 nanometer micro circuits.
The decision to convert PCC capacities to accommodate hexafluorobutadiene production was taken following a lengthy consultation process with Showa Denko, a Japanese manufacturer of semi-conductors and a strategic partner of the Perm-based company. The negotiations were facilitated and mediated by another Japanese company, Iskra Industries, that had an established track record in Russia specializing in exports of medical equipment and medical drugs.
According to PCC representatives, Showa Denko’s key requirement was that its partner should be able to quickly organize the production of hexafluorobutadiene. At that time, the only hexafluorobutadiene manufacturer in the world was located in Italy. Another prerequisite was to ensure the highest quality and volume of the product’s synthesis, which required complex technological processes and access to high chemical technologies. The rest was history – PCC managed to convince Showa Denka and prove that it was capable of successfully rising to all of these challenges.
The Japanese company acted as Bioprocess’ co-investor during the initial project stage, providing funds to rebuild the manufacturing shop and making available a lab-based hexafluorobutadiene manufacturing technology. The Perm-based company in turn had to develop an industrial technology on its own, as well as to invent and build technological reactors to produce this chemical. It should be noted that specialists from Showa Denko were proactively involved in putting the production line in Perm into operation and bringing it to a world-class level. “The determination to achieve tangible results that the Japanese colleagues demonstrated and the presence of one Japanese employee on the production floor – all of it helped us tremendously to create the right atmosphere, energize everyone, and build a truly close-knit team. And when he brought a rice cooker and started cooking Japanese food for our night shift staff, we knew that the PCC team was firmly behind this project,” said Andrei Kolosar, Executive Director at Iskra Industry.
It was during the commissioning of the
PCC that the technology to produce hexafluorobutadiene on an industrial scale was developed. It was patented and is now protected by six patents. Among other things, it required a complete overhaul of all processes and equipment
at the plant – an endeavor that required the partners to spend several million dollars.
Today, several years after the launch of the project, PCC has become one of the leading hexafluorobutadiene manufacturers worldwide. The total global output of this product is estimated at 20,000 tons per month, and one-tenth of it is synthesized at the Perm-based plant. There is no demand for hexafluorobutadiene in Russia, which is why the entire hexafluorobutadiene output is exported. Apart from Showa Denko, the list of PCC clients includes virtually all global electronics manufacturers in the United States, Europe, and Southeast Asia.
The global nature of this export operation is to a large extent predicated on the falling hexafluorobutadiene demand among electronics manufacturers. Still, at PCC they do not view this trend as a threat to their business.
“Needless to say, the market is cyclical in nature and there is no escaping the influence it has on our business. However, our investments are long-term in nature. We invested at the very beginning of this product’s life cycle. And of course, at the stage when we were embarking on this journey, we had to assume a great deal of risk. When we saw the demand grow and the product proved to be sought-after, our risks went down. But we built our business based on the premise that we would constantly upgrade these gases,” Nesterov noted.
According to PCC’s CEO, as it stands today the share of hexafluorobutadiene in the company’s total sales does not exceed 50%. This entire time, the company has been taking proactive steps to diversify production and launched a line of new industrial and electronic gases, including trimethylsilane and monomethylsilane. In addition, today PCC also manufacturers antipyrenes and pharm intermediates required to produce the latest generation of ready-made medicinal substances. It should also be noted that the company is planning to launch another production line to focus on the latest generation of drugs, and is also looking into the possibility of manufacturing high-tech chemical products for the aerospace and airline industry.
Mr. Nesterov hopes that the Russian industry will continue to evolve and the company will find new clients – not only abroad but also on the domestic market, and primarily in the microelectronics sector. The company remains convinced that the expertise it has generated over the years, along with its human resources and technological advances, will enable it to synthesize new chemical products of the highest grade that will be sought after on the market.