American Business in Russia

Starting and developing the venture: Step-by-Step Analysis.
I have identified the following steps in growing the business.
1) Write a more detailed business plan for the target group of equity investors and the producer of the product. This brief business plan will be a foundation for the detailed one. In sixth-twelve months I will have a better picture of the business from operating the business on a small scale, from research, and from talking with other people who have had the experience with the international trade. The detailed cost analysis will be required to estimate the financing needed.
2) Involve other team members in the business operations to build the team. The plan can be implemented effectively only if I will have support from my team. The team is important.
3) Start talking with the potential investors, business consultants, lawyers, distributors in Russia to obtain some advice on planning and action, and make them interested.
4) After finding an investor we will approach the producer of the product with a concrete plan by showing a serious intent and capacity to implement the plan based on experience of the management team, and strong support from the potential investors and experts.
5) Assuming that the product producer has agreed to sign with us an agreement on a exclusive distribution of its products in Russia and CIS countries, we start building a business.
6) We will need to conduct a field research in Russia, to identify product in the highest demand and that can generate high profit margins. Only these products will be registered.
7) In order to mitigate the start-up and operational risks the team will work in Russia with distributors of similar products to acquire the knowledge of the industry;
We will need to incorporate the business. One company will be incorporated in the US and another, as a subsidiary in Russia. Al legal agreement with investors and the producer to be signed.
9) Registration of the products.
10) Development of distribution strategy
11) Determining prices
12) Web-site development
13) Putting accounting and other information systems in places
14) Registration of the products.
15) Opening bank accounts and putting payment systems in place
16) Defining the job functions and job specifications,
17) Staff hiring,
18) Opening of the offices in Russia
19) Development of supply chain:
- shipping from US to Russia
-customs clearance
- warehousing products
- delivering products to whole sale buyers
- distribution to customer (retail buyers) .
20) Budgeting
21) Other issues

Growing the business. When I see this little export business growing I will be able to make better demand estimates and will have a better understanding of problems related to the supply chain. Then I intend to approach the producer of the product I am currently buying at the retail price and offer the producer of making me the exclusive wholesale distributor of its products in Russia and other CIS countries.
I see myself as an organizer who will link different people (entrepreneurs, venture capitalists, lawyers, consultants and media) to create a new large-scale import-export business facilitating trade between Russia and the US.
The product I will be selling are different health products which are not classifies as drugs and therefore do not need FDA approval. However, the product requires registration by the Russian Customer Protection Agency. My present current estimates of the demand are rather conservative. The estimate is based on simple numbers. The company from my home town in Russia is willing to have annual purchases of products worth $100,000-150,000 . My town has a population of about half a million people. The population of Russia is 140 mil. Dividing 140,000,000 by 500,000 gives us a multiplier 280. Then I multiply annual demand from the population of 500,000 (=$100,000-150,000) by 280 and we will have a total annual demand for $28,000,000-$42,000,000 worth of products at current retail prices.
The estimate is rather conservative because I use only the estimate of the population currently familiar with the product. However, there are still few people acquaintant with the product because it is not available to the public since the products or international distributors don’t sell in Russia. Very narrow group of medical professional and heath-conscious people know about the product. If we can create demand and educate the public the sales can grow substantially. Again at the conservative estimate, three times. I just make up this number but it seems to be reasonable. Having multiplied $28,000,000-$42,000,000 by the multiplier of “3” we will have a product sales of $84,000,000-124,000,000.
Moreover, if we include the population of all former republics of the Soviet Union (CIS and other countries) then we will have other 100 mil. people to serve. We shall also consider it since once we have the distribution system and other parts of the supply chain in place in Russia the entry barrier to other CIS counties will be lowered substantially.

Opportunity. Recently I received email from a friend of mine with a suggestion of exporting certain products from the US to Russia. The US products for which demand exists in Russia cannot be shipped directly from the US producer and distributors directly to Russia. It has to be shipped first inside of the US and, then somebody has to ship it overseas. It creates a barrier for potential buyers in Russia and the opportunity for me because I am right here.
The business model is rather simple. I buy products in assortment and numbers asked by my customer. Once the specification order (demand) coming from the customer is known the total price, including all expenses is prepaid by the customer. Then I order the product on line or by the phone and it is shipped to me to the local address in the US. After I receive the product I ship it by FedEx to my customer in Russia. For this service I charge twenty percent commission based on the total purchasing price of the product. I receive half on my commission (10%) as a prepayment and ten after the product has been received by the buyer.
The product. The product for which a high demand had been identified in Russia is produced by Thorne Inc. headquartered in Idaho (http://thorne.com). Thorne inc. produces a broad line of dietary supplements for cognitive, immune, circulatory, gastrointestinal, muscular-skeletal, neurological support, anti-aging products, minerals and vitamins. All Thorne products are considered of the highest quality. “For more than 25 years, Thorne has relentlessly pursued the highest possible quality and bioavailability in dietary supplements. Thorne actually manufactures products that it sells. It allows it to control every aspect of the manufacturing process and ensure that every Thorne product is in pure, completely hypoallergenic form, and without the common additives, flowing agents, and binders used throughout the industry. A few other companies have tried to do what Thorne does, and many others claim to have the same philosophy and quality, but nobody has been able to duplicate what its clients call “Thorne Quality.” We have changed the industry in many ways over the past two decades, and we continue to raise the bar and set new standards in product formulation, raw material purity, manufacturing, and quality control.
Analysis of the Dietary Supplements Industry in Russia. Russian dietary supplement industry is in its emerging stage far away from maturity. Better quality products, user-friendly regulations and more realistic consumer expectations are feeding a market that is showing little sign of being hit by the recession.
A present size according to the Survey by Nutrition Business Journal (2007) is around 1 billion dollars growing a rate of 15-20 percent a year with. Dietary supplements industry is very fragmented with no dominant players. A third of products sold are produced by foreign manufacturers from Europe and China. Western suppliers such as Chr Hansen, Orafti, Roquette, Solae, Ocean Spray have established businesses in Russia supplying foods and supplements markets. “Dr Alexey S. Petrenko, technical regulatory manager with the Russian arm of Californian-based direct selling company, Amway, told NutraIngredients.com food supplements in Russia had become an important market for the diverse consumer goods company, accounting for 10 per cent of its Russian turnover. A lot of effort has been put in by food supplements organisations and companies to educate consumers about what food supplements are and what they do. That work is paying dividends now as increasingly wealthy Russians seek out food supplements for a range of health conditions. There are 5000 registered products on the Russian market and many of them are from all over the world including. The trend is toward better quality products.” 800 hundreds of registered products are of foreign origin and 500 of them are coming from China. The Russian are willing to pay premiums for better quality products.
However, according to certain sources ninety percent of all products sold are not registered are traded in the black market because they do not have an official and required registration with Russian Consumers Protection Agency (Rospotrebnadzor).
Russian producer are still missing technologies and expertise to produce products of the quality similar to those of the best American and Western companies and can effectively compete only in certain product lines.

Operations.
Summary of Spartak Investments business model:
- We build and develop businesses that will provide outstanding return on investments.
- We create a portfolio of ownership of different businesses.
- We participate directly in the creation and development of businesses by developing their business models and strategies, building team of managers and cultures, assisting with marketing research, finding partners and suppliers
- We attract investors and partners who will help in the business creation process with their knowledge and other non-financial resources.

Our portfolio: Our portfolio will be comprised out of the businesses with the high potential and above average returns on capital employed. We want to start with companies in import-export sector to generate original funds for further expansion. We intend to build a well-diversifies portfolio of private equity companies. Our primary focus will be on export-import opportunities between Russia and the US., high-tech companies developing companies, companies in consumer products and services, and global market commodities (f.i. gold).
Portfolio selection criteria:
Probably, the most important factor in any investment decision is the quality of management. The second most important criteria for investment is the commercial viability of the proposal. We review the current (if the business already exists) and potential revenue growth and market share and the viability, regulatory risks, civil liabilities, and potential return.
Criteria Description:
Management. We seeks managers who have experience in the sector; have overseas experience, especially in Russia; and exhibit competence, integrity, and a willingness to cooperate with investors.
Commercial viability The Fund reviews the proposing organization’s current and potential revenue growth and market share and the proposal’s viability, regulatory risks, civil liabilities, and potential return.
Sector focus. We seeks a diverse portfolio consisting of businesses from many sectors with relatively low fixed costs and low exit barriers.
Location: The proposed investment must be in Russia.
Proposal terms Spartak Investments and the proposing business/individual must agree on the proposal’s terms, including an exit strategy.
Portfolio selection process include a formal screening investment opportunities by
1) Listening to the market, observing businesses and listening and then generating ideas in-house.
2) We invite all people to introduce their business plans.
The following steps are included in selecting opportunities and existing companies for our portfolio. (Source: Aginsky Consulting Group).

Phase 1
Due diligence;
Primary and secondary research;
Competitive landscape analysis;
Feasibility study;
Strategy development;
Document preparation.
Phase 2
Identification and solicitation of missing resources. Most commonly this includes:
Human capital
Managerial expertise in the region
Physical capital
PP&E (Property, Plant, and Equipment)
Working capital
Phase 3
Business Plan Execution/Implementation
Portfolio Management Process. (Source: Tuck School of Business at Darthmouth Center for Private Equity and Entrepreneurship.)
Portfolio management has four components: (i) portfolio monitoring, (ii) company
analysis, (iii) venture capital decision making, and (iv) portfolio company
assistance. These processes begin with the closing of the initial investment and are
repeated continuously until the closing of the exit transaction. Spartak Investments’ ability to
assist its portfolio companies, also known as adding-value, is what differentiates leading firms from the rest of the industry.
Operational Functions and capabilities.
- Market and industry research/analysis;
- Business strategy development;
- Financial and marketing planning;
- Business process development;
- Procurement, enterprise resource planning and supply chain management;
- Operational improvements;
- Optimization of human resources, organizational structure and management systems;
- Global outsourcing;
- Strategic alliances, distribution and channel partnerships;
- Cross-cultural communication and integration;
- Investor and client relationship management;
- Business valuations;
- Interim venture management;
- Capital fundraising
- Equity sales and M&A activity.

Private equity investments grew steadily in terms of both volume and deal size until the impact of the recent financial and economic crises. Growth capital was the primary focus, and many PE funds have secured high returns from investments in rapidly growing businesses during the last decade (KMPG’ Russian Private Equity Survey.)
The impact of the crisis: Crisis made exist extremely difficult and many PE houses currently find themselves having to work much more actively with their portfolio companies to protect their investments. PE are focusing on the consolidation of fragmented industries, operational restructuring and working with underperforming or distressed assets which all leads us to the conclusion of applying better and more knowledge to businesses resulting in demand for high quality consulting services. Many large international PE houses are rethinking their approach to Russia, not least due to the continuing constraints on investment opportunities in more developed countries.
The research confirms the interest in Russia due to its potential to move back into sustained and high growth as soon as the economy stabilizes. With a wealth of oil and other natural resources, underdeveloped infrastructure base and a very large population of potential consumer, underdeveloped consumer’s market Russia, the biggest single consumer market in Europe with the 78% of the Russian population living in the European Russia, and high level of unsatisfied demands, and low levels of personal borrowings offers attractive opportunities in the medium term, particularly for those funds willing to invest in the understanding of the challenges of the local business environment. Although the current environment is particularly challenging, it can be expected to offer increasing opportunities to enter the market at the comparatively low valuations.

TEN REASONS TO INVEST IN RUSSIA
Vast Natural Resources. Russia is one of the richest countries in the world in terms of its wealth of metals, minerals, oil and gas and timber. It has tremendous potential for agricultural development.
Vast Consumer Market. Russia’s size of population creates enormous demand potential for all kinds of goods and services. Insufficient domestic supplies means the gap is largely met by imports.
Strong Support to Investors from Federal and Regional Authorities. Russia’s authorities encourage foreign investment. In addition, the Foreign Investment Advisory Council, chaired by the Prime Minister, and with members from the largest and most prestigious foreign investors in Russia, helps create the right sort of investment environment.
Huge Investment Potential in Priority Sectors. Oil, gas and petrochemicals, scientific and technical areas, defense and conversion industries, machinery, transport, pharmaceuticals, telecommunications, agriculture, food processing and distribution all offer tremendous potential for investment. Other priority sectors are consumer goods manufacturing, general infrastructure, medical services and health.
Fast Growth of Competitive Export-Orientated Industries. Foreign investors can use modernized Russian factories to produce competitively priced goods for world markets.
High Technology Niches. Russia leads the world in many areas of fundamental research and development, from eye microsurgery to space technology. This resource is now available to foreign partners. In addition, the conversion of former military enterprises to civilian production offers the opportunity to invest in concerns with a nucleus of highly qualified, disciplined personnel and access to modern technology and equipment.
Highly Educated Population. Russia has well-educated workforce which is keen to learn new skills, where appropriate.
Low Labor Costs. Labor is relatively inexpensive. The average wage is a fraction of that in OECD countries.
Ideal Bridge Between West and East. Russia is strategically located between most developed countries and emerging markets. It has major transportation links connecting Scandinavia and Western and Eastern Europe with Central Asia and the Far East.
Unprecedented Business Opportunities

Important facts about Russia:- Russia is the Biggest country in the World
- Population 141 mln. The next biggest country in Europe is Germany (80 mil.)
- Most of the pollution (over 100 mil) live in the European part of Russia
- 8th Largest Economy in terms of GDP (1.6 Trillion)
- (1) UnitedStates Japan China Germany France United Kingdom Italy (8) Russia Spain
- 7.3 % annual GDP growth from 1998 to 2008
- Per capita GDP $11,800 (Nominal), $16,000 (PPP)
- Highly educated and motivated people
- Russia has vast mineral resources
- Underdeveloped consumers’ market
- Very low level of personal borrowing
- Economic potential represented by automobile industry: 5.9 mln. passenger cars to be sold in 2012 in Russia. In US in 2007 7.7 mln. were sold.

Business opportunity.
We determine for ourselves a business opportunity as a business idea with a high probability to be realized in form of sustainable and significant positive cash flows. As an investment company Spartak Investments looks for niches where a business can be created or improved to excel in satisfying customers’ needs and outcompeting rivals. The root of the opportunities for us is in low productivity and weak competitiveness of Russian companies. Our ability to build highly productive businesses will allow us to outcompete rivals.
Business description.
Spartak Investments (SI) is the investment company involved in direct investments in Russian small and medium size businesses. We develop our businesses and either have a control ownership in all our businesses or joint-venture agreements which will allow us to participate in strategic decision making of our all portfolio businesses.
We plan to have a diverse and diversified portfolio of businesses. We participate in development of only those businesses which we understand and have or can gain expertise in. We attract investors and partners by our talent, knowledge and skills in a business milieu.
We either build businesses from scratch or buy ownership in private companies which we consider to have high potential. All companies in our portfolio are planned to become public, be sold or used as cash and profit generating units.
At this stage Spartak Investments (SI) is a startup company. We are planning to focus on several businesses in consumer goods and services industries: food, hotels, construction materials. At this stage we want to focus on Franchise businesses using US franchisers and Import-Export operations between the US and Russian, and other countries from the Commonwealth of Independent States (CIS) countries. Some of them involve businesses in hotel, food industry and other consumer oriented industries.
We look for investors and partners who will contribute not only financial capital but their knowledge and talent and other resources to businesses we create together. Investment funds can be provided by investors for a particular business project in exchange for equity and/or future cash flows based on profit sharing agreement.

Executive summary.
Spartak Investments is a Russian equity investment company. We provide extraordinary return to our investors by buying and developing businesses in Russia with the highest potential. The main driver for the value creation of the business in our portfolio is our knowledge and organizational/management skills. We know it is possible to create value with minor financial capital investments, especially in Russia where the management skills can be the main driver productivity. We focus on Russia market because there are extraordinary opportunities available as long as Russian companies’ remain largely inefficient in comparison to the companies in developed economies. SIF attracts private investors from all over the globe and build businesses using the best practices available in the industry. Our main source of value creation is our outstanding team of entrepreneurs. We all have advanced degrees from international universities and work experiences in the top consulting, investment and Fortune 500 companies.
Our mission statement: to improve a quality of life of people in Russian through the services and products companies in Spartacus Investment portfolio will provide, help people develop their entrepreneurial talent through building businesses with us, and to provide an outstanding return on capital, effort and talent.
We participate in industries, regions in Russia with the highest growth potential.
Portfolio companies target domestic and international markets. We screen the business opportunities intensively. Our criteria for selecting businesses are very rigorous and demanding: business has to start generating positive cash flows within a year; we invest only in the least capital intensive business; more than 50 percent of the value has to be created with knowledge skills, and organizational talent, payback period shall be no more than 3 years, we control our businesses mainly through majority ownership or participate in strategic decision making otherwise.
We use simple principles: we need to understand business we develop a hundred percent, the business model has to be simple and understandable, every team is assigned only one business project which allows us to keep focus but still grow fast.
Every business we create is intended to be a public company, sold or be kept as a profit generation unit. As Spartak Investments grows and achieves an estimated capitalization of several million dollars we plan to make it public.
As a side product of our investment activities our company also offers management consulting services to small and medium size businesses. The reason we want to provide these services is because it aligns with our mission statement of developing entrepreneurial talent, helps us to sharpen our skills and serves as sources of information about opportunities.

http://www.russiablog.org/2009/03/real_russia_project_contributo_1.php#more