How the founder of «1С» has built a business with revenues of 1 billion dollars

Publications: How the founder of «1С» has built a business with revenues of 1 billion dollars
Having started a quarter century ago with development of «electronic teletype», the businessmen created the network for the sale of software that is envied by the largest retailers.
The cabinet interior of «1С» director Boris Nuraliev is ascetic: a table, standard cabinets, racks. On the shelves – the yellow boxes of computer programs of his company. Here in October, 2008 Nuraliev met Elena Ivashentseva, the senior partner of investment company Baring Vostok Capital Partners interested in acquiring for the founds the fraction of «1С». Before that Nuraliev rarely communicated with the members of investment community.

The life style of «1С» founder is as modest as the as the environment of his cabinet. He is rarely seen in a suit – the creator of company prefers jacket for a suit, and for a corporate events puts on, like the other employees, a bright yellow T-shirt or sweatshirt. Until the mid of 2000s he drove an old «Volga» himself. And only when he was stopped to pass on the minister parking lots, «1С» bought him Audi A8. Meanwhile, it is a case of a man who heads the company with annual revenues in tens of billions rubles.

The company and its founder are very secretive: «1С» is living more than 20 years, but does not disclose its financial rates and the structure of stockholders. It is only known that about dozen employees own it. According the Unified State Register of Legal Entities (USRLE) Nuraliev owns 32% of CJSC «1С». The owner’s identity is not a single that stirs the interest to one of the oldest IT-companies. For the last 10 years «1С» has succeed to outrun on the Russian market of management programs for medium and large business such giants as Oracle and Microsoft and concedes only the German SAP. Its products are used even in the subsidiaries and the agencies of international holding companies, such as Komatsu, Toyota, Pernod Ricard. Why the Russian «1С» are sold more gladly than the foreign programs?

Fifty-fifty

Nuraliev likes to repeat that the secret of «1С» is «in construction the business through the partners ». In 1987 he became the head of cost-accounting department of State Statistics Committee Research Institute, before that worked at the Institute of Economics and Statistics. Soon he had to solve «atypical problem» – to create «electronic teletype» to connect the personal computers instead of the networked electromechanical boxes. Such as, for example, only appeared in USSR the novelty from GDR «Robotron SM1910». Nuraliev with three friends wrote the program for teletype. Their department – and later cooperative – began to trade with it, to go to the customers. One day, after returning from the Yakut State Statistics Committee, they found the order of Yakut State Supply Committee. They did not want to fly back with the frost of 55-degrees, and they offered the local engineer working with them to do all by himself. For the half-price of «the box» with program. It turned out that the people are happy to take up this job. By the end of the year the specialists of electronic teletypes were all over the country, and the sales were 6000 boxes. «For cooperative this was a furious circulation », – recalls Nuraliev. It turned out that not instead of them the hundreds, and later the thousands of directors thought how to sell their product. «This network helped to outrun seemingly not less successful colleagues», – he says.

Then Nuraliev applied the rule that formed the basis of his relationship with the partners. He is ready to share with distributors the part of revenue offering the unprecedented discount in the market. Nuraliev gives the partners 50–55% of the «box» price or the service. In contrast of the Western vendors, SAP or Oracle, «1С» does not work itself with the end users of its programs. The partners are doing this.

Publications: How the founder of «1С» has built a business with revenues of 1 billion dollars
The idea to turning the distributors in the «partners» Nuraliev developed by starting producing his own program products. In 1992 Boris invited his brother Sergey to help him to adjust the accounting in the company. Sergey (the chief architect of all business software of the company) wrote for himself a simple accounting program in DOS operating system. Boris suggested that this product will meet the demands. «The average salary of an account were about $12, and a no one would pay a lot of to automate the work of low-paying employee», — recalls Nuraliev. The program «Mini-accounting» of «1С» company was cheap, suited for small enterprises and solved the simple tasks: it helped to conduct the financial accounting and generate the tax accounts. And it cost only $30. Of these, the dealer received a half. From the competitors’ products – «Sails», «Infina», «Infobuhgaltera» – the accounting programs of «1С» featured an important detail: Sergey Nuraliev has built-in in his development the macro programming language that enabled to adopt the software to the features of the companies and the demands of the accounts.

The program was presented on at the Comtek-92 exhibition. Actually the «1С» stand was built under the Lotus, but for the dealers who came Nuraliev offered to take also «Accounting», promising to take away the program with they could not sell it. A few have returned. That year, the sales of «Mini-accounting» constituted by three hundred boxes per month.

Rebirth of dealers

In 1994 the small and medium companies were already able to afford more expensive products, and their owners understood the need of a modern accounting. Noticing the changes of demand, «1С» released the program «Accounting 6.0» for Windows. Qualification of accounts was not enough, and the seller had to think about the technical support. «1С» could go the traditional way by extending the staff of technical support, but even the most brilliant support service could not provide the qualitative maintenance of the product across the country.

Then Nuraliev decided to give the function of technical support to the partners. However, many dealers did not want to assume the risks of the end users service. To work with new product it was necessary to hire and teach the specialists, create implementation departments, call-centers … With the sale of a beautiful plastic case with three five-inch disks of «Accounting» costing стоившего $480 the dealers received $240. And the average salary of the employee of partner company was about $100.

Faced with resistance Nuraliev decided to change the format of relationship – to turn the dealer part into the franchise part. «Franchise in IT is rare in general, there was no experience, – recalls Nuraliev. – Something invented ourselves, something subtracted from the Western experience, something noticed in other industries». In addition to the prefix «1С» in the name and to the right of working with brand of company that received the best, the partners were provided by the technical support and advertising. They had to learn the new programs and to pass a paid certification for each of them. And pay $100 of royalty in a quarter, if they will not execute the sales plan.

For dealers the pay for franchise status was very significant, recalls Marina Slesarenko, assistant director of«1С», and in that time – director of «Integrator» company from the town Volzhsky. «Nuraliev convinced the dealers that they will be lucky if he will take money from them, rather than from the clients. While he is taking money from them, he is interested that they live well », – she says.

But the dealers were convinced not only by that. The franchisee was offered not 50% discount of the price for sale the product to the end user, as a regular dealer, but 55%. In the mid of 1996 from 1500 partner companies 85 signed up in the franchisee of «1С», and by the end of the year the number had risen to 590. The affiliate network worked to sale not only «1С» software, but also someone else’s – the program of Microsoft, etc. Now «1С» earns on its business software more than 35%, more 40% – on the games. The rest – the programs of third-party vendors.

The success of own «1С» products was explained also by the fact that the company adjusted the close relations with the tax authorities. «The changes in the law are always published in advance, — explains Nuraliev. – Another thing is that the document is being prepared, it may have several versions, and the developers have to do two-three program versions, and sometimes even leave in it «a switch».

«1С» popularity was confirmed by the frequency of occurrence the pirate versions. As the head of one software company thinks, about a half of circulation walking around the market could be the share of pirate copies. It was possible to begin to fight with this problem only in 1997, after releasing draconian anti-pirate article in Criminal Code (CC) according which the prison sentence is supposed to receive for copyright infringement.

Nuraliev was care of a dealer network well-spent. In 2010, according to the company EMTG, the number of «1С» franchisee has reached 6000. There was no such network even in the industries with highly-developed franchise – for example, X5 Retail Group had 610 franchisee, «Sportmaster» – 157, «Rosinter» – 109. «Nothing of that scale is present in any software company in the world », – says Ivashentseva from Baring Vostok. Now in «1С» network there are about 10 000 enterprises, more than 150 000 developers work for them. And a staff of «1С» itself is no more than 1000 employees.

The crisis of 1998 showed that the business software market is much more stable than the other segments. The owners of medium companies economize on is smaller than on other. The sales of accounting programs reduced, according to «1С» estimates, only twice, while the operating systems – five or six times, games and other multimedia programs – 10 times. The business part of the market recovered faster. Already in November, 1999 the monthly sales of «1С» were higher than before crisis: $2,7 million versus $2,3 million. It seemed to be the time to develop a profile direction. However, «1С» went to another market.

At the height of the crisis a head of game programs direction Yury Miroshnikov cam to Nuraliev and offered to make flight simulator which would compete with the game from Microsoft. «It was scary», – recalls Nuraliev. «1С» in the past engaged in games that were developed rapidly in Russia before crisis, and in 1996 even released the game «Pilot Brothers » based on the cartoon «Investigation is carried out by the Roly-Polies». Nuraliev tried. In 2001 the game «IL-2. Sturmovik» released in Russia and on the Western markets at the same time (there was a French publisher Ubisoft). Special website Imagine Games Network (IGN) has included it in Top-25 of the games of all time. In the Walmart shops «IL-2» outrun by sales Microsoft Flight Simulator, as it was reported by research company NPD.

But soon «1С» had to focus on the profile business. The company felt the pressure of serious competitors in the market of medium enterprises that began to introduce the resource management systems (Enterprise Resource Planning, ERP).

Opposite battle

The main difference of ERP from other programs is that is combines the accounting systems of all departments of company and maintain a single base for all the tasks. Earlier there were the separate programs for accounting, warehouse, store, logistics, work with staff and customers. ERP-system brings this information together. With its help manager can see the history or relationship with a client, his credit rating, presence of components for this order on the warehouse, and the head of department – consider the loading by the orders and vacation schedule of the employees. When the accounting is conducted by the departments, a senior manager receives conflicting information, but if all of it is brought together, it becomes more difficult for his subordinates to handle data. ERP is not a cheap pleasure. The cost of systems for large business starts with $1 million, for medium – with $100 000. But in 2000s the Russian medium enterprises were already able to afford it.

Foreseeing the growth of demand in the Eastern Europe market, in 2002 Microsoft bought the manufacturer of software for «mediums» Navision. A year later SAP – a leader in development of management programs for the large companies – also went to the Russian market of medium enterprises. The world grants went «form above» – from large to medium clients.

Nuraliev went in new niche «from below». He joked to the journalists’ questions about competition with a global corporations naming everything what is going on «the opposite battle». In 2003 «1С» released the eight version of «1С: Enterprise» system. It was designed for the companies with a hundreds of workplaces and larger. Two years later, according to the estimates of market researcher IDC, «1С» had 9,7% of Russian ERP market, and in 2011 – 31,6%, leaving behind, for example, Oracle.

Thanks to what was Nuraliev successfully conducting the «opposite battle»? The market development helped «1С». In the wake of economic growth the small enterprises already worked with «1С» products grew rapidly turning into «mediums». And went to more complex programs of supplier. But there was another factor – the very same «partner network». Oleg Novikov, a general director of publishing house EKSMO, recalls that in 2011 they decided to go from SAP to «1С» retooling 500 workplaces. «If there were the problems before SAP it was hard to go through, – he says, and the specialists from partner company «1С:Rarus» were nearby ». «1С:Accounting» is on the market since the beginning of the time and became the same accounting standard almost in any company as MS Windows – operating system for almost any computer. To eat off the market share is always more difficult than to capture the empty market », – says Viktor Tsygankov, an analyst of IDC.
Publications: How the founder of «1С» has built a business with revenues of 1 billion dollars

Anatoly Karachinskiy, the head of the company IBS Group, is more careful in the estimates. He believes that, although «1С» did a terrific work showed how the local developer can create the standard of accounting program, the merits of Nuraliev company on the ERP market should not be exaggerated. «1С» won the accounting market using a good distribution system and a large number of partners who are given the opportunity to earn on consulting and program introduction, – he says. – But on the market of complex ERP-systems SAP and Oracle are still struggling, and «1С» should answer a call – to rise from the accounting system which has become the standard for small businesses to the segment of large ERP».

«Marking the time»

The time of the schemes worked since the nineties is rapidly running out. Such IT-companies as «Sytronics» and «Armada» have already entered IPO by this time. Kaspersky Labs and Verysell were going to become public. «At the beginning of 2008 all IT-companies had such a target – to enter IPO, build the giants, – recalls Nuraliev. – So what, everyone will be the giant, and we will be a rabbit?» His story «1С» director continues with phrase of movie «Seven Old Man and a Girl»: «Women are already playing volleyball!».

Company needed to expand, to buy up other market participants. Nuraliev says that the mergers and takeovers «1С» carried out «with its own money and never asked for this the credits». «Our business was always a fairly cost-effective», – he says, but do not name neither revenue nor profit. According to the Forbes calculations, in 2011 his company earned 23,7 billion rubles (versus 18,5 billion rubles in 2010), that confirms for Forbes the source close to the company.

The first major purchase Nuraliev made in 1996. He decided at that time to turn one of the partner company, as he jokingly says, in the «demonstration collective farm», offering Dmitry Kazachkov, the founder of partner company «Rarus», to become JV with the distribution of the shares «50 to 50» – to whom it was possible to bring the partners, to show the history of success. Kazachkov agreed out of pure pragmatism: «1С» share in the company is a guarantee for business.

The same scheme Nuraliev applied 10 years later in a completely different market segment. In the mid of 2000s a boom of e-commerce began in Russia, many retailers began to build online shops. In the spring of 2007 «1С» agreed to create a joint venture with the equal shares with the developer of the systems for web-commerce – «Bitrix» company. It has, according to the estimation of W3Techs analysts, 1% of global market in 2013. In Russia the network «Eldorado» was its client through the site of which in 2007 $60 million in revenue has passed.

Sergey Ryzhikov, a general director of «1С-Bitrix», recalls that their company was always «reaching to the same companies with which «1С» is working, and e-commerce needs not only the site but a program integration with warehouse and accounting ». Besides, «Bitrix» had the similar partner network of about 1500 of introduction companies. Soon they have met with Nuraliev and agreed about the joint business «50% to 50%». Shareholders of «Bitrix» agreed «because believed Boris». «He does not wriggle, says candidly about his goals and causes the counter candour», – says Ryzhikov.

Expanding the presence on the market Nuraliev was forced to abandon the usual scheme of purchasing only by his own means. «1С» management began to listen the proposals of investors made the appearance again and again. A person familiar with everything that was happening in the company at that time says that the need to search the money was not a good life. During the crisis many partners of «1С» stopped to pay. Boris Nuraliev says that, for example, in 2008 the revenue of company grew by 8%, while the year before it has almost doubled. He thinks that «1С» passed the pick of crisis in 2009 not bad in – the revenue fell by 13%, despite the fact that, according to the estimation of IDC, the market in whole fell more than by 40%. Nuraliev explains this by preservation the demand for business programs.

In October 2008 when the crisis was raging in full, Elena Ivashentseva, a senior partner of company Baring Vostok Capital Partners (one of the first investors of «Yandex», share owner in Ozon.ru) phoned Nuraliev with a proposal to meet. She knew that «1С» was interested in attracting the investments. By that time the fund Private Equity Fund IV has collected the capital of $1,05 billion. Ivashentseva says that Private Equity Fund IV has been interested first of all the very partner network of «1С». However, Nuraliev did not hurry («do not accept the first proposal!»): «1С» then hired «Renaissance Capital» which, as the investment bankers told, was negotiating also both with UFG Asset Management and Delta Private Equity Partners. However, after the consultation including with the owner of «Yandex» Arkady Volozh, Nuraliev decided to deal with Baring Vostok.

In October 2011 Private Equity Fund IV received 9% of specially Cyprus offshore «1C Ltd». The other shares in it had CJSC «1С», in which the assets of the company were consolidated.

Publications: How the founder of «1С» has built a business with revenues of 1 billion dollars
The parties do not disclose the sum of a deal, but it can be calculated. In 2011 «1С» revenue was, according to the calculations of Forbes, $0,8 billion. The public company SAP with respect to the ratio of revenue to capitalization (p/s) then tradd with multiplier of 3,4. Kseniya Arutiunova from RMG Securities thinks that the discount of 25% is applicable for Russian IT-market in comparison with the developed markets. With discounts «1С» could cost then from $2 billion to $2,5 billion, and the package Baring – $180–220 million. However, one of the IT-market experts considers these estimates too optimistic. He admits that due to the slump of financial activities of «1С» in 2008–2009 the cost of company could come down and actually Baring paid for package «about $40 million» evaluating the entire «1С» not more than $400 million. Elena Ivashentseva says that this is «not true», but does not name the sum. Nuraliev does not comment this data too.

What is «1С» spending the funds for received from the deal with Baring Vostok? It accelerated the creation of joint ventures with partner companies. If in 2001 «1С» had about dozen joint and «affiliated» businesses, in 2011 the number exceeded one hundred. But that is not all.

«Nuraliev buys the assets that allow the investors to apprehend «1С» as a diversified business in high-tech area, not just the developer of accounting programs and the dealer network», — says the top-manager of one of the international software companies. Usually the market estimates such companies more expensively, he recalls. And Nuraliev does not exclude to enter IPO and confesses that one of the auditors of the «big four », whom he does not name, is carrying out the «1С» audit.

What is Nuraliev buying? The company is aggressively expanding rapidly growing area of computer games. By the end of 2010s «1С» has held a series of mergers and acquisitions buying the developer «Buka», a share of Avalon Style Entertainment, has invested the creation of Nival Network company and has purchased the publisher of the games and consoles «SoftClub». Another direction of investments – buying up the «cloud» companies and development of this technology. This model is called SaaS (Software as a Service –): the technology gives the opportunity for the companies to store the programs and databases not on their own servers, but on the services supplier and use it in internet. In the summer of 2011 «1С» has embedded the «cloud» features in its program «1С:Enterprise 8.2», and already in May of 2012 on website 1СFresh the «cloud» programs «1С: Small company management», «1С: Accounting 8» and others became available. The pioneers of implementation of the «cloud» technologies among the Russian companies became in 2008 the small companies «MoySklad» and «Megaplan». Exactly they were bought in 2012 by «1С».

The experts call SaaS «the killer of intermediaries», but contrary to all the rules Nuraliev is still give the partners setup of cloud software and leaves them 50% of revenue. But now not for the «box», but for the service. What is the logic? Those who know Nuraliev well just do not advise to look for it. «There is a human logic: here is the problem – here is the solution, but the logic of Nuraliev solutions that led to effective results I could never understand », – says Sergey Belousov, the founder of worldwide working software company Parallels. «Boris is a representative of a very advanced, but not humanoid race », – he smiles.

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