From startup to IPO: How Yandex became Russia’s search giant
Had not Sergey Brin emigrated with his family to the United States at the age of 6, his destiny might have perhaps resembled those of Arkady Volozh and Ilya Segalovich, the Russian mathematicians who founded Yandex.
Until the collapse of the Soviet Union in the early 1990s, Volozh and Segalovich were rather typical representatives of their generation of gifted mathematicians formed by the Soviet system of scientific excellence. Both were born in 1964 in Kazakhstan, then part of the Soviet Union along with Russia. In the 1970′s they both attended the Alma Ata Physics and Mathematics Academy.
Although both received numerous awards in Kazakh republic and even federal academic competitions, neither Volozh nor Segalovich was accepted at the prestigious Moscow State University when they tried to enter in 1981. Volozh subsequently studied in the faculty of applied mathematics at the Gubkin State Institute of Oil and Gas, and Segalovich earned a degree in geophysics at the Moscow State Geological Exploration Institute.
Among the first entrepreneurs of perestroika
Volozh launched his first business in the late 1980s while still a grad student. In these years of the final crisis of the planned Soviet economy, which were also the first years of economic freedom, almost everyone in the country tried their hand at trading something. Volozh and his American English teacher Robert Stubblebine launched CompTek, a company distributing network and telecommunications equipment.
“CompTek became a wireless network industry pioneer in Russia and the main distributor of Cisco products in the former Soviet Union. The company was respected by all major telecoms and government agencies through BESEDA, a public body created for the promotion of wireless networks that is still alive and running nowadays,” comments prominent Internet industry figure and EWDN co-founder Andrey Zotov.
Volozh never forgot his academic specialty, however. He developed search software for large organizations transferring data from paper to digital formats. This is how he developed the International Inventions Classifier and the Goods and Services Classifier, two information search systems created in DOS which later provided the foundation for Yandex search technology.
In 1991, Volozh recruited his former classmate Segalovich for $30 a month – a significant amount in those times. With a team of developers, Volozh and Segalovich continued improving their text search software, which they named Yandex, standing for “yet another index”. They collaborated with the Russian Academy of Sciences to enhance the system’s linguistic capabilities, taking into account the specificities of the Russian language.
A few years later, the team received $20,000 from Moscow’s Institute of World Literature for digitalizing the academic works of Griboyedov and Pushkin. This sum was a critical to enabling the team to continue developing their search technology.
When Volozh and Segalovich discovered the Internet and specifically the AltaVista search engine, they immediately understood the huge opportunity and began to develop their own Internet search engine.
From initial technological advantages to business success
Why did this technology work so well? A range of initial distinctive features stand out, starting from its ability to search automatically for all possible variations of a given word, making search more accurate. This is due to the fact that Yandex was originally developed to treat Russian, an inflective language using numerous word variations to reflect grammatical purpose and meaning.
Another important feature of Yandex search technology is morphological hypothesis building, which takes into account the distance between the searched words within sentences and paragraphs.
“From the very beginning, Yandex’s know-how was based in the application of computer linguistics methodology,” commented to East West Digital News Sergey Kuznetsov of the Yandex Department at HSE‘s School of Applied Mathematics and Information Science. ”In the 1990s, the advantage of using these methods was not obvious, however now they are broadly accepted. This allowed Yandex to beat Rambler, which dominated in the search market in Russia in 1990s.”
When Yandex was officially launched as a search website in late 1997, its technology also included features quite advanced for the time such as algorithms checking for document uniqueness (excluding copies in different coding), relevance evaluation taking into account word occurrence frequency in a given document and the first ability to conduct search queries in natural language.
Despite these promising advantages, it took years before the founders achieved commercial success.
Yandex technology offered for $15,000
“In the beginning, we thought we would become a technology provider to other companies,” recalled Volozh in a 2007 interview. “We proposed our technology to Rambler, whose technology did not treat Russian language, and to Infoart, for example. No one was interested, not for $50,000, nor for $15,000.”
This lack of response pushed Volozh to create his own web-based search service. $10,000 was enough to buy three servers that indexed the entire Russian-language Internet which was no more than 4Gb at that time. Yandex.ru was launched in late 1997.
Despite the accuracy of its results, Yandex lagged behind search market leaders such as Rambler, RBC and Mail.ru. Two years later, still with less than 50,000 daily visitors, Yandex.ru was still struggling to hold the fourth position. The company generated a mere $72,000 in revenues in 1999. Volozh himself was not able to devote himself completely to his startup before March 2000, just before closing the first round of financing. It was only then that he made the decision to leave CompTek’s thriving hardware distribution business.
“Our investогs were audacious,” admitted Volozh years later. An investment deal was finalized in April 2000, in the middle of the high tech crash on international stock exchanges. Yandex, still a puny, loss making company far from leadership was nevertheless valued at $15 million.
“Our talks with Yandex lasted 7 months,” said Elena Ivashentseva, Partner at Baring Vostok Capital Partners in an exchange with Forbes.ru. “It was really difficult to explain this to our investors, who en masse demanded that we get rid of the stakes we had acquired in Ozon.ru [now a leading Russian e-commerce site] and then in Yandex.”
Baring Vostok Capital Partners was patient enough, however, to wait until Yandex emerged as the market leader 11 years later, offering an up to 600-fold return on investment.
Overcoming domestic competitors and resisting Google
In 2002, Yandex established itself as the leader of the online search market in Russia and became a profitable company. The climb to the top was arguably one of Russia’s greatest startup dramas to date, with Yandex becoming one of Russian’s most successful companies of the decade. Having no serious obstacles on the horizon, Yandex is set to continue in its success.
After leaving its Russian competitors in the dust – nowadays Mail.ru commands less than 8% of the search market and Rambler less than 2% – Yandex has successfully resisted Google on the domestic market. In spite of noticeable adaptation and marketing efforts over the last five years, the US giant does not even represent a quarter of the market, and its share is not growing.
The Yandex search engine offers 427,000 answers to the question “Why can’t Google beat Yandex.” The best answer is perhaps this one: “[Google] will not die of they do not conquer Russia. But we will die if we loose her,” commented Arkady Volozh recently.
Yandex has always maintained a strong focus on R&D. It has never stopped improving its technology and offering new services. The Yandex portal now provides its users with virtually everything, from a wide array of search functions to a webmail service, a news aggregator, maps and location based services, an e-commerce market place as well as a number of classifieds sites, blogging platforms, a range of desktop applications and tools for webmasters, to name just a fraction of the services Yandex offers.
“Although the capitalizations of Yandex and Google are of different orders of magnitude, the engineering and innovation potential of their respective R&D departments are comparable,” notes Kuznetsov. “In some directions, Yandex is even ahead of Google, for example, the Yandex real-time traffic monitoring service launched 4 years before Google could offer a similar service to its Russian users.”
Competing with US behemoths to retain talent
Good R&D is inseparable from talented, motivated teams. Yandex understands the need to be attractive for talent. “People leave Russia. We really compete with Seattle, Vancouver and the Silicon Valley,” Forbes.ru quoted Volozh as saying.
Yandex employees, on average 28 years old, usually enjoy salaries above market levels, according to a Forbes.ru inquiry. Many benefit from rapid career advancement as well as from a number of training programs, including participation to international conferences. Casual working conditions, flexible schedules and free lunches – the company of 2,500 employees has kept the cool atmosphere as well as the ultra fast pace of a young startup.
Another reason for Yandex’s success is that the founders have managed to remain independent and impose their vision on the company. Yandex founders declined acquisition offers from Yuri Milner in 1999, from Google in 2004 and from Usmanov in 2008. Each time, Yandex founders saw in these overtures a threat to company independence or a risk that their roles would be reduced to managing a small regional division of an international company.
Russia’s online advertising giant
Since the very beginning, Yandex has based its business model on advertising revenues. The company placed its first advertisement in 1998 and launched Yandex.Direct, its auction-based context advertising placement service, in 2001. Today, advertising accounts for more of 97% of the company’s revenues, including almost 90% for text based advertising.
In this field too, Google had a slow start. “Until 2008, Russian sites participating in AdWords, Google’s advertising network, were paid by checks sent via snail mail,” recalled Mikhail Raitsin, Technology director at RBS Group, a major Russian web marketing company, in an interview with Forbes.ru. “By contrast, participants in the Yandex ad network could get their money in one click using Yandex.Money, the company’s own e-currency.”
“Yandex has always been looking for new formats,” said Natalya Dmitrieva in an interview with EWDN. Ms Dmitrieva has led marketing activities for prominent Russian websites over the last five years and has observed Yandex behavior. “They just became trendsetters for the market. They have successfully combined a discount system for advertisers and agencies. They were the first to define a clear discounting policy based on budget size.”
With Yandex.Direct, the company has become the absolute leader on the Russian contextual advertising market, with a market share of approximately two thirds on average over the last two years, but reaching up to 80% in certain periods.
A modest start on the international market
Yandex’s activities outside Russian-speaking countries began in 2008 when the firm opened a lab in Palo Alto, California, “with the objective of fostering innovation in search and advertising technology.” Among the lab’s 14 employees are “senior research scientists and engineers with a wealth of research and development experience from top US search engine companies, such as Yahoo! and Google,” says the company.
To date, however, the company’s business record on the international scene has been modest. Yandex dominates the search market only in Russia. It maintains a strong presence, but it is far from leadership on neighboring Russian-language markets – its market shares range from 25% to 40% on the Kazakh, Ukrainian and Belorussian markets.