Yevgeny Gavrilin's Boomstarter - How the Microfinance Market Points to a Russian Takeoff

The 'Russia re-rating effect' long preceded the 'Trump effect' on stock markets

Tue, Nov 22, 2016 | 580 Comments

The Hillary Clinton effect – war with Russia on all fronts – destroyed billions of dollars in the equity value and market capitalization of Russian corporations. The collapse in the international price of crude oil, to which the Russian stock market index is usually tied, accelerated the decline.

But starting a year ago, a novel Russian effect appeared in the market. The trend lines – yellow for the Moscow MICEX index, blue for oil — began to diverge. Russian stock prices started climbing, crossing the downward movement of the oil price (lead image, top right, 1-year chart) and continuing upwards even when oil’s gains were reversed.

That is what professional investors and brokers call the Russia re-rating effect. And it commenced long before Donald Trump was elected US President on November 8 (lead image, lower right, 1-month chart).  Trump’s victory  turns out to have been a one-day wonder, a blip on the chart of the Russian stock market revival. So, if Trump is ready to put a stop to the US war on Russia  – or even if he isn’t —  is there a Russian boom coming?  Yevgeny Gavrilin (lead image) says there is; on the internet he’s calling it Boomstarter.ru.

Gavrilin, 34, along with his partner Ruslan Tugushev,  33, are pioneers of the newest form of Russian micro-finance called crowd funding.

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Gavrilin and Tugushev (below, left) had been internet advertising agents and social media impresarios before they started Boomstarter early in 2012. In June of the same year Max Lakmus (right), 38, a guitarist in the rock band Bi-2, started Planeta.ru. It is Boomstarter’s rival in the same corner of the market which has traditionally been dominated, in Russia as elsewhere,  by mainstream banks, specialized banks (loan sharks),  and credit unions.

Micro-finance usually means small amounts of money loaned to individuals or organizations without the collateral in assets or income to secure their borrowings from conventional banks.  In short, in most places the poor.  Crowd funding means borrowing from large numbers of individuals, who aren’t necessarily poor at all. They contribute their cash in return for a variety of promises and payoffs, including name recognition, barter, rewards, payback in  money, or shares in the capital of the proposed venture.  Crowd funding has a long history, but as a business today with turnover potential in the billions of roubles and dollars, it has required the internet as the platform of communication – for marketing and advertisement, as well as for payment transmission and banking.

In the past four years, Boomstarter says it has funded more than a thousand projects with a turnover of more than Rb250 million.   Planeta claims to have funded more than 6,300 projects and raised about Rb500 million.  Both Russian businesses have been copied from American  models — Indiegogo which started in California in January 2008, and Kickstarter which followed in New York in April 2009. They are now multi-billion dollar institutions in the global crowdfunding market which looks like this.

Indiegogo claims its monthly audience worldwide is 15 million, and has raised more than $800 million between 2008 and 2015.  Last year Indiegogo claims it conducted 175,479 campaigns. Kickstarter says its monthly audience is 33 million; it claims it has raised almost $2.8 billion for almost 116,000 projects.

Maybe the claims are true,  but there are no audited annual financial reports; Indiegogo campaigns aren’t the same as Kickstarter projects; turnover, revenues and costs are not identified in the presentations of either company.  For the differences between their audiences, read this.  For a comparison of the two for those looking to raise project finance, click here.

A recent US report claims the crowdfunding market outside Russia will grow in money terms by 27% per annum between now and 2020. But it’s a crowdfunded product itself, so you must buy the report to know what the evidence is. This report from Forbes claims crowdfunding is doubling in value each year, and is already bigger, at least in the US, than the off-internet venture capital market.

Fundraising For Startups Has Never Been Better”, claims the Forbes headline. If that sounds like advertising hype, it is. The independent Quantcast measurement site reports the audience numbers at both Indiegogo and Kickstarter have been on a downward trajectory this year. Between December 1, 2015, and October 31, this year, Indiegogo’s monthly audience fell sharply from 40,000 to 19,000. Kickstarter’s monthly audience, according to Quantcast,  began the same period at 800,000; rose to 1.2 million in March; and fell to 600,000 last month.

There is no comparable independent measurement for Boomstarter and Planeta. Estimating the size of the Russian audience and the value of the market in funds raised is difficult. Most available reports stopped after 2014, such as this one. That claimed the turnover was Rb700 million in 2014; at the pre-devaluation rate, it was equivalent to $21 million.

In mid-2015 Tugushev said Boomstarter had an audience of 500,000; Planeta, 300,000. Notwithstanding, this report claimed Planeta’s audience  was stumping up significantly more money than Boomstarter, while the number of Planeta projects was fewer.

COMPARING TURNOVER FOR BOOMSTARTER AND PLANETA, 2012-2014
(in million roubles)

Source: https://roem.ru/10-07-2015/200002/boomstarter-vs-planeta/

COMPARING PROJECTS FOR BOOMSTARTER AND PLANETA, 2012-2015

Source: https://roem.ru/10-07-2015/200002/boomstarter-vs-planeta/

More than half the money raised by the Russian crowdfunders, according to the J’son & Partners consultancy in Moscow, went into production and sale of films, video games and films, and pop music performance.

Source: http://json.tv/en/ict_telecom_analytics_view/crowdfinance-market-in-russia-crowdfunding-crowdinvesting-crowdlending

When Gavrilin and Tugushev cite their most successful projects, these also include manufacture and sale of bicycles, personal backpacks, satellite-powered beacons, shoes, books, a patriotic video game on the history of Russia, and a food catering shop in the Urals.

The product range in the project inventories declared by the two Russian sites is typical of consumer demand in the relatively narrow age range which Planeta has reported for its audience: 6% under the age of 18; 31% between 18 and 24; 42% between 25 and 34. According to Planeta.ru, 60% of its audience is male; 40% female.

Enthusiastic though these age groups are in the internet marketplace, they can hardly be immune from the pressures on the Russia economy at large. Between 2014 and now, it would be surprising if the crowdfunding sites aren’t suffering from audience contraction and shortage of spending money,  as is the rest of the Russian economy.  These two charts from Uralsib Bank show the collapse of Russian income since 2013, before the war and oil price effects accelerated the decline:

Source: Uralsib Bank, Macro Monthly Report, September 9, 2016

Nor ought the crowdfunding businesses expect demand for project financing and turnover to grow if the rest of the economy is stuck.  This is the World Bank’s forecast, released this month, of how halting the Russian economic recovery will be: “We expect the economy to inch towards growth. For 2016, we project growth of the Russian economy at -0.6 percent, an improvement from our earlier June forecast of -1.2 percent. And as oil and gas prices are projected to continue recovering to US$55.2/bbl in 2017 and US$59.9/bbl in 2018 and positively affect domestic demand, we forecast the economy to start inching towards growth of 1.5 percent in 2017 and 1.7 percent in 2018. This growth upsurge, however, is unlikely to turn the tide in terms of building a more diversified economy.

However, this is not how Boomstarter views the present or the future. Earlier this month, Gavrilin claimed Boomstarter’s turnover is growing at a rate of 8% month on month, “and we continue to grow.”  

The Russian audience for Gavrilin’s market message, expressed in Youtube presentations like these, is exceptionally large, and growing.

Source: https://www.youtube.com/watch?v=L2vxY0ddHTI – 542,421 views

Source: https://www.youtube.com/watch?v=-ToIn7FMhs8  — 1.4 million views

This is still a form of microfinance – lending, borrowing, and investing money. So it’s like online banking, except that it raises money from individual lenders, investors or contributors. How then can crowdfunding be expanding at the same time that individual incomes are dwindling, and Russian  bank lending is contracting?

Boomstarter and Planeta agree the Russian audience for crowdfunding projects continues to grow, despite the economic crisis. They are evasive in reporting their financial results in 2015 and so far this year.  Gavrilin declined to be interviewed. A spokesman who identified himself as Rustam, without a family name, was asked for Boomstarter’s audience and financial results in 2015 and 2016, to clarify whether the rates of fund-raising and profitability have been growing or falling. He was also asked to say how the war against Russia, sanctions, and economic contraction have impacted the crowdfunding market. Boomstarter is not responding.

Planeta.ru replied their audience numbers in 2015 grew over the 2014 aggregate, and that in the nine months to September 30 of this year, the audience numbers have continued rising.  “We see that the industry of crowdfunding is developing dynamically, especially in the last two years. The number of projects and the amounts collected through crowdfunding have significantly increased over the last two years.

There is less clarity on the financial performance.  Planeta’s turnover grew in 2015 over 2014, but this year turnover “is almost on a par with last year. Despite the economic crisis, the average check for contributors to Planeta.ru did not fall – it is still in the region of  Rb1,500. We continue to grow, and that means our stability allows us to withstand the adverse economic conditions.” Looking ahead to 2017, Planeta’s spokesman said:  “I can’t predict the entire economy, but our playground is definitely planning to develop in business and technology.

Although Boomstarter and Planeta are already four years old, this study of Russian crowdfunding by the Moscow Consulting Group, released in February 2015, failed to recognize the audience, turnover or project value of the internet platforms, and didn’t compare their performance with other microfinance sources in the market.

Source: http://moscow-consulting.com/publications/russian-microfinance-market-its-time-to-grow-up (released February 2015)

Boomstarter has acknowledged that its own start-up costs required at least $1 million raised by the co-founders, Gavrilin and Tugushev. They also say they have sold shares in their company  to Nadia Cherkasova, head of microfinance at the state bank, VTB 24;  and also to Boris Zhilin. He’s a New York-based Russian-American with a group of US investment funds under his direction through a holding called Armor Capital Management.  Gavrilin has told reporters  they are “passive investors who do not like publicity.” At VTB in Moscow Cherkasova was asked to clarify whether she is acting for the bank in acquiring Boomstarter shares, and how big is the stake. She refused to reply.

Zhilin also did not respond to telephone and email enquiries about his shareholding, Boomstarter’s financial performance, and the valuation Armor Capital has booked for its stake in Boomstarter.

Another Moscow bank, which has been reported to be associated with Boomstarter, is Svyaz Bank.  This institution has emerged from a Central Bank-supervised administration after alleged corruption and mismanagement led to bankruptcy; for details, click. Reputationally, the recovery of Svyaz Bank appears incomplete.

Boomstarter has also identified Microsoft as an in-kind investor, providing website and data storage and transmission technologies,  such as Microsoft Azure.

Without financial reports or shareholding disclosures it is far from clear what Boomstarter earns, what its costs and liabilities may be, and what the shares are worth.  Gavrilin, Tugushev and the Boomstarter website explain the company earns a 5% commission on funds raised, while another 5% is charged by the payment and banking system used. There are social media claims that the cost of the fund-raising charged by Boomstarter works out greater than advertised.

The company says it employs  a staff of at least 25, in addition to Gavrilin and Tugushev.  Site advertising, event promotions, and sponsorship deals with commercial retailers, and with state organizations have also been reported.  Altogether, the business hints at profitability.  But there is no telling.

Last year Gavrilin and Tugushev proposed to sell a block of Boomstarter shares as a crowdfunded project on its own. Their scheme offered subscribers promissory notes or options costing Rb1,000 to be convertible to shares in three years’ time.  In the offering, one hundred thousand options at Rb1,000 a piece were to represent 5% of the company’s capital, implying a  valuation of Boomstarter at Rb2 billion ($31 million).  If the company turned out to be worth more, then the options subscribers would be making a profit; if less, a loss. But the scheme failed to get off the ground.  Russian lawyers and regulators have criticized the scheme as potentially unlawful or fraudulent.  For more details, read this.   For a critical analysis of the “cunning scheme”, circulating this month on the social media, click to open.

The regulators at the Central Bank of Russia are paying attention. Insuring deposits banked for projects through the websites is one issue. Establishing legally accountable identities for Boomstarter, Planeta and their affiliated companies is another. Preventing pyramid fraud schemes is a third. In charge of the new regulation effort is Mikhail Mamut (right)

 , Head of the Central Bank’s Service for Protection of Financial Services Consumers and Minority Shareholders. Earlier this year he convened a working group of the major crowdfunding platforms to consider a framework for their business to protect users and operators.  On November 9, the Central Bank issued a release announcing  that “crowdfunding is supposed to be regulated in three main directions – regulating activities of crowdfunding platforms and determining requirements for their owners and management; determining requirements for issuers of securities (offered through the platforms) and borrowers; and determining requirements for creditors and investors using crowdfunding platforms.

The Service for Protection of Financial Services Consumers and Minority Shareholders…believes that crowdfunding regulation should be introduced piecemeal – through oversight and voluntary polls of crowdfunding platforms, working out criteria for their classification and registration, reporting and subsequently establishing requirements for financial indicators and risk management. Consumer right protection is an absolute priority in developing the regulation framework.

Supervision over crowdfunding platforms should be guided by the market risks without hindering the development of efficient crowdfunding business models. That was the fundamental of the Bank of Russia’s approach to regulation communicated during the first meeting of the working group on monitoring, consumer risk assessment and development of proposals for crowdfunding regulation… Investors and borrowers face risks from inaccurate identification, low quality of business project verification or other borrowers, to non-transparent activity of a platform and possibility of fraud, including Ponzi schemes. Besides, there is a risk of a fund loss if a project fails to raise enough money to be launched.”

We have enough time,” Mamut told an industry interviewer, “because the [Russian] crowdfunding market is only emerging and has yet to gain in volume.” According to the Central Bank’s calculation, the Russian crowdfunding sector “currently accounts for less than 500 million rubles (USD 7,748,755) in total liabilities.”

Sergei Shvetsov (right), the First Deputy Governor of the Central Bank

 , also commented this month on the need to regulate the crowdfunders. “The Bank of Russia fears that a successful business model of these services can also camouflage crooks who in reality will be engaged in attracting people’s money in a financial pyramid. The goal of the Central Bank is to prevent this.”

Boomstarter and Planeta are at the small-money end of the market for youngsters. But if founders like Gavrilin and Tugushev, and regulators like Mamut and Shvetsov are right, the crowdfunding finance market is growing fast.  Fast enough, Shvetsov pointed out, that on international stock exchanges like London, the crowdfunding platforms can now raise capital as shareholding companies through which individuals can invest in initial public offerings (IPO’s) with much smaller sums than have been possible before.

 

NOTE ON RUSSIAN VALUE GROWTH CHARTS: At the big-money end of the market, where the players are at least ten years older than the crowdfunders, and the supply of capital to invest vastly greater,  the growth potential for Russia is also visible, though investment bankers say the reasons for the growth in Russian value aren’t the same.

THE MOSCOW STOCK INDEX VERSUS CRUDE OIL – ONE-YEAR RUSSIAN RE-RATING EFFECT 


Key: yellow=Moscow stock market (MICEX) index; blue=Bloomberg crude oil index
Source:  https://www.bloomberg.com/quote/INDEXCF:IND

THE MOSCOW STOCK INDEX VERSUS CRUDE OIL – ONE MONTH TRUMP BLIP


KEY: yellow=Moscow stock market (MICEX) index; blue=Bloomberg crude oil index
Source:  https://www.bloomberg.com/quote/INDEXCF:IND

Fund managers acknowledge there aren’t many choices currently available to investors for placing their money. As the chart shows Brazil and Russia lead, while China and South Africa lag.


ONE-YEAR TRAJECTORY OF EMERGING MARKET STOCK INDEXES – BRAZIL, RUSSIA, SHANGHAI, JOHANNESBURG 



KEY: (top down): green=Bovespa (Brazil), +28%; pink=MICEX (Moscow), +14%; yellow=Johannesburg Stock Exchange (South Africa), +1%; grey=Borsa Istanbul (Turkey), -7%; blue=Shanghai Composite Index, -11%.
Source: https://www.bloomberg.com/quote/INDEXCF:IND
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