How the Yandex search engine became a billion-dollar business

The average age of Yandex employees is 28 years. Most of them were not alive when the company's general director, Arkady Volozh, met technical director Ilya Segalovich. They are completely different - the reserved, reasonable Volozh and the loud, impulsive Segalovich. We are sitting in one of the meeting rooms at the Moscow headquarters of Yandex, and the creators of the search engine are patiently doing its usual job: answering questions. Maybe the machine knows more answers, but humans are still much better at selecting the results. For example, to the query “why Google can’t beat Yandex,” Yandex produces 341,000 responses. Volozh gives one: “They will not die if they do not conquer Russia, and we will die if we lose it.”

Yandex has been on the defensive for 10 years now, and recently went on the offensive. Yandex.ru is the most visited Russian site, which is visited monthly by about 28 million people, 80% of the entire audience of the Russian Internet. There are many signs that the company is preparing to go public, and this year we may find out how many billions of dollars investors will value it at. Today no one doubts that we will be talking about billions. Any parents can set Volozh and Segalovich as an example for their children: their path to a fortune of hundreds of millions of dollars began with straight A’s in school.

In the mid-1970s, Volozh and Segalovich sat at the same desk in the Alma-Ata physics and mathematics school. “Our desk gave out 50% of the school’s gold medals,” recalls Segalovich. Volozh took prizes at the Republican Mathematics Olympiad, Segalovich at the All-Union Olympiad. In 1981, they came together to enter Moscow University, but the medalists were not accepted. Volozh entered the Faculty of Applied Mathematics of the Institute of Oil and Gas, Segalovich entered the Faculty of Geophysics of the Moscow Geological Exploration Institute.

In the late 1980s, while studying in graduate school, Volozh began doing business. At first, like many entrepreneurs of that time, he traded, and in 1989, together with his English teacher, American Robert Stubblebine, he founded the CompTek company, which began supplying network and telecommunications equipment (by the end of the 1990s, this company became the largest distributor of Cisco Systems in Russia and the CIS with a turnover of tens of millions of dollars per year).

In addition to selling computers, the mathematician Volozh also had a business “in his specialty”: he developed search programs in large arrays of Russian-language text information. The country was transferring documentation from paper to computer storage, and there were enough customers: the Institute of Patent Information, industry research institutes, AvtoVAZ... “And Ilyusha [Segalovich] went to work at a state research institute, although I kept kicking him in the side: look, life goes on around you! » - Volozh recalls. In 1991, Segalovich gave up: Soviet science was falling apart, and Volozh offered him an incredible $30 instead of his institute salary of $5. In 1993, Segalovich and a team of programmers wrote the next version of the text search program, which was called “Yandex” (from yet another indexer). To demonstrate the capabilities of the program, they decided to make a model product - in 1994, a digital Bible appeared on several searchable floppy disks. The product was noticed, and the company received a substantial order from the Institute of World Literature to produce digital copies of academic publications by Griboyedov and Pushkin. The $20,000 received for the work, a considerable sum at that time, allowed CompTek to move to new premises, double the team of programmers and, most importantly, connect to fast Internet. “We went online for a couple of months, read everything that was written there, looked at the Altavista search and realized that we needed to do things for the Internet,” recalls Segalovich. Throughout 1996, in parallel with the production of digital copies of Russian classics, preparations were underway for the launch of our own search engine on the Internet.

At the same time, another current leader came to the company, programmer Elena Kolmanovskaya, who returned from America (now she is the editor-in-chief of Yandex). Her first task at Yandex was “industrial espionage”: under the guise of a customer, Kolmanovskaya went around all Moscow companies that in one form or another were involved in the development of text search programs. “It turned out that we had better technology, we had to make products for the Internet,” recalls Volozh.

The products were ready-made programs that could be installed on any Internet site to allow users to search for information on their pages, and software add-ons for the then existing search engines - these “add-ons” took into account Russian morphology (the structure of words in their various grammatical forms) and therefore, they made it possible to search several times more efficiently and more accurately. But there were no buyers for the search engine, and in 1997 Volozh decided to make large investments in the creation of a public search engine. Three servers with 1 GB hard drives were purchased for $10,000. Soon they contained the results of indexing the entire RuNet of that time - all 4 GB (nowadays several times more information fits into an iPod). Users liked the quality of the search: by mid-1999, the Yandex.ru site was already consistently among the seven most popular sites on the Runet.

The aroma of coffee and croissants , several tables in the corner of the foyer of the Concert Hall. Tchaikovsky on Triumphal Square in Moscow. In the summer of 1999, the first informal “startup fair” of the Russian Internet began at the then popular confectionery Delifrance. There was an Internet boom in the United States, the NASDAQ technology index updated records almost daily, and the young Russian Internet market attracted investors like a new Klondike. The founders of the main sites of that time gathered at Delifrance: the InfoArt portal, Mail.ru mail, the Ozon store, and the Aport search engine. “Everyone is talking to everyone, moving from table to table, “sniffing,” recalls Arkady Volozh. He refused all investment offers made to him at that time: they were ready to give him money only in exchange for control over the company.

One of the first rejected was the current chairman of the board of directors of Mail.ru Group, and then a novice investor, Yuri Milner. “Yura was the most active of all, he just pressed, pressed and pressed, saying: “We have to do everything quickly, time is running out, whoever gets there first will be the first!” - Volozh recalls. Milner appreciated Yandex's technologies and suggested creating projects together: he needed good programmers to implement his business idea - to copy the most popular models of American sites and launch them in Russia as quickly as possible. The samples were taken from the electronic auction eBay and free web hosting GeoCities, based on which Yandex programmers created Molotok.ru and Narod.ru at a frantic pace - they had six weeks for each project. According to Volozh and Segalovich, the products turned out raw and required a lot of improvement, but speed was more important to Milner. “We thought that this is not how products are made, but it was impossible to object, it was impossible to insert a word, and even then it was clear to me that we would not play the main violin [in collaboration with Milner],” says Volozh. Therefore, when in February 2000 Milner made an offer to purchase a controlling stake in Yandex, promising to raise funds through the American NCH fund, Volozh refused. The partners divided their joint projects: Molotok.ru went to Milner, and Narod.ru went to Yandex.

In addition to Milner and NCH, in the winter of 2000, Golden Telecom, the Baring Vostok Capital Partners (BVCP) fund, and a number of smaller foreign funds and Russian investors were vying for the role of investor in the search system. In April 2000, 35.27% of Yandex shares were bought for $5.28 million by the ru-Net Holdings fund, the main participant of which was BVCP. On the part of BVCP, the senior partner of the fund, Elena Ivashentseva, whom Arkady Volozh met at the same Delifrance, was responsible for the deal.

Buying a stake in Yandex for that kind of money in the spring of 2000 seemed crazy. A month before the announcement of the deal, the NASDAQ index, having reached a maximum of 5132 points, collapsed by 40%. The “dot-com bubble” burst, investors went bankrupt, companies declared themselves bankrupt. “We walked towards the deal for seven months, proudly announced it, and all the questions from journalists were “what are you doing, where are you going, there is no business,” says Elena Ivashentseva, a petite woman who carefully considers every word in response to any question. It was even more difficult to explain to investors. “We received a lot of demands to immediately sell the packages both in Yandex and in the previously purchased Ozone, and generally close this topic,” recalls Ivashentseva. It helped that it was impossible to sell shares of Internet companies in the midst of the industry collapse. “We had to wait and be patient. Since then, we’ve been waiting for 11 years, buying new shares, and BVCP is still the largest investor in Yandex,” says Ivashentseva.

Yandex itself was not affected by the crisis, since it was not essentially a business. The revenue of Yandex, which before the sale of shares to investors was simply a department of the CompTek company headed by Arkady Volozh, amounted to $72,000 in 1999. The search engine survived at the expense of other divisions of the company. But even this small and unprofitable Yandex defended independence. “We needed an investor who would be an investor, not an owner, who would not steer for us,” explains Volozh.

Lev Tolstoy Street, 16 , a huge seven-story office building with a signature yellow arrow on the facade, is the new headquarters of Yandex, into which the company moved from several old offices in the winter of the crisis of 2009. Ivashentseva recalls dozens of calls from other investors who considered moving to a much more expensive office in the midst of a crisis “crazy” and demanded that everything be stopped. But the Yandex board of directors approved the move, considering it important for the business. Yandex is confident that it needs to be as attractive as possible to employees: after all, it has to compete for brains not only with Russian IT companies, but with the whole world. “People are leaving: we really compete with Seattle, Vancouver and Silicon Valley,” says Volozh. Microsoft and Google set very high standards of comfort for workers, and Yandex has to “keep the bar up.”

Among other pleasant things noted by Yandex employees surveyed by Forbes: a salary above the market average, fast career growth, company-paid training and trips to international conferences, a relaxed work schedule, free lunches, a minimum of bureaucracy and formalism. “There is some healthy relaxation here, following common sense rather than rigid rules and strict hierarchy,” says a programmer named Artem. It is very difficult to get a job at Yandex - the percentage of those who do not pass the probationary period is higher than in other IT companies, but the person hired will be forgiven for their first mistakes and given the opportunity to correct them. “To deserve dismissal, you have to prove yourself to be a completely inadequate person,” says Alexander, an employee in the development department.

What in return? The crazy speed with which you have to think and implement projects in order to stay at the forefront of the search. “We are working in the “should have done it yesterday” mode, otherwise Google, Mail.ru, Bing will launch the same thing tomorrow. Hence the increased level of chaos and waste during launches and periodic “fuck-ups,” says Alexander. “In general, the atmosphere of a startup, adjusted for 2,500 employees.”

Speed helps you beat your competitors. At the beginning of 2000, Yandex, then the third largest search engine on the Runet, was rapidly catching up with the leaders - Rambler and Aport, which not only lagged behind in search technologies, but also experienced management problems. Their founders did not want or were unable to retain control in their hands: Aport went to Golden Telecom, Rambler to the alliance of Russian Funds and the international fund Orion Capital Advisors. After the dot-com bubble burst, investors frantically tried to find a way to recover their investments, changing management and adopting new strategies. Yandex, whose investors did not have full control over the company and, in addition, faced a buffer in the form of Baring Vostok, could focus on development.

In 2001, the company launched the first contextual advertising system on the Russian Internet, Yandex Direct, thanks to which its monthly revenue doubled by 2002, to $400,000. And then Yandex pushed Rambler away from the position of the most popular search engine. “Arkady [Volozh’s] strategy - to focus on technology and search quality and not to waste time trying to keep up with all the new business models of the Internet - turned out to be correct,” says Leonid, head of the board of directors of the investment company Internet Search Investments and Yandex shareholder since 2000 Boguslavsky. Igor Ashmanov, who held senior positions at Rambler in 1999–2001, considers the decline of competitors to be a more important factor in Yandex’s success. “Segalovich will say that the reasons for success were technological, Volozh - that they were managerial, Kolmanovskaya - that they were marketing, but I believe that there is exactly one true reason: the sale of control in Rambler and Aport to laymen on the Internet, everything else is consequences,” he insists.

In 2002, Yandex was the first of all Russian Internet companies to achieve self-sufficiency and pay dividends - $100,000. The future could be considered cloudless if the Russian version had not been launched by the world's most popular search engine, Google, a year earlier.

“Before Google’s IPO , at the end of 2003, [the creators of the American search engine] Sergey Brin and Larry Page came to us, and we almost fell in love,” says Segalovich. Brin and Page offered several options for purchasing Yandex - for money and for a share in the authorized capital of Google; negotiations continued for more than a year. But they ended in nothing: the founders of Yandex, as they now claim, realized that the alliance with Google could have only one ending - the cessation of the existence of the Russian company. Negotiations were conducted with Microsoft and Yahoo. “I will not confirm the fact of negotiations, but I can say my opinion: at some point the team had the feeling that they could not cope on their own, that they could do more if they had some international resources,” says Elena Ivashentseva. But as soon as Yandex management realized that the most they could count on was the role of a small department of a large company, all negotiations with strategic investors stopped, she adds.

Having received a refusal, Google improved the quality of Russian search, opened an office in Russia and began selling its AdWords contextual advertising here, competing with Yandex Direct. “We were afraid that Google might simply overwhelm Russia with advertising,” says Kolmanovskaya. The American corporation was advancing: in December 2007, Google overtook Rambler, becoming the second largest search engine in Russia. After that, it began to eat away Yandex’s share, which continued to fall and reached a minimum in March 2008 - 53.5% of all search traffic. Yandex responded by restructuring its management structure and began launching new search algorithms and new projects every few months. As a result, its share began to grow again and is now about 64%. How did the Russian search engine manage to defend its position?

Search engine optimization experts interviewed by Forbes disagreed on which of the two rivals - Google or Yandex - currently provides better Russian search. “For 99.9% of the audience, the search quality of Yandex and Google is not verified; the average person cannot say why one is better than the other,” says German Klimenko, owner of the Liveinternet portal and the MediaTarget contextual media advertising system. The battle moved to another field.

“Yandex makes a huge number of local services that are useful to local consumers, but Google, in general, does not bother with this, introducing new services slowly and carelessly,” says Igor Ashmanov. Yandex.News was launched almost six months earlier than Google News, and Yandex.Traffic was launched four years earlier than a similar Google service in Russia.

Internet sites are much more willing to work with Yandex as a wholesale advertiser, hosting the code of the Yandex Direct advertising system more often than the Google-owned AdWords system. This also leads to the fact that the user, even on third-party sites, encounters Yandex more than its overseas competitor. It is more profitable to work with Yandex, says Mikhail Raitsin, director of technology at RBS Corporation, one of the leaders in the field of Internet marketing. If a participant in the Yandex advertising network can receive earnings very quickly - through Yandex.Money and then in one click on a bank card, then earnings in the Google AdWords system until 2008 could only be received by mailed personal check, which was cashed not every bank. And even the introduction of payment through the Rapid transfer system did not solve the problem, the director of RBS believes. In addition, Yandex shares revenue with advertising agencies, which Google does not do in Russia. “The average commission size is 14–16%, that is, Yandex has actually created a network of motivated professional dealers of its own contextual advertising, while Google has not,” says Raitsin.

Yandex takes every opportunity to get to the user through the browser, notes Vladimir Isaev, a representative of Opera Software, the creator of the Opera browser. “As soon as the technical opportunity arose, Yandex made Opera icons for the express panel, with which you can display the weather and traffic jams in real time, but for some reason the others do not implement this,” he explains.

The rapid growth of the Russian Internet allowed Yandex to double its revenue every year until 2008: $35.6 million in 2005, $72 million in 2006, $167 million in 2007 and $300 million in 2008. Up to 85% of Yandex's revenue comes from contextual advertising - a business model whose position was not shaken even by the global financial crisis. In the winter of 2008, newspapers, citing investment banks, began to write about Yandex’s intention to conduct an IPO, during which the company expected to receive a capitalization of $3–5 billion. But then the state intervened in the company’s plans.

None of the Russian officials have ever stated publicly that the Russian authorities set out to prevent large Russian Internet companies from coming under foreign control. Reports about this appeared with reference to anonymous sources in the presidential administration. The authorities' interest in the Internet especially intensified, according to Forbes interlocutors familiar with the situation in large Russian Internet companies, after the Russian-Georgian war of 2008: the Kremlin considered that the Internet did not “play” enough on the Russian side in this conflict. “They conveyed to us the idea that all major Russian Internet companies need to be gathered into a collective farm to confront foreign ones,” Volozh cautiously said at the beginning of 2009 in an interview with Kommersant. Information has appeared (also anonymous) that a company with state participation will be appointed to “look after” Yandex, to which a small stake will be sold for this purpose. It was then that First Deputy Prime Minister Igor Shuvalov stated that the state should have small stakes in all strategically important assets, and Yandex was believed to be included in such assets. “We found ourselves in such a limbo, between a rock and a hard place,” says Volozh. On the one hand, there is the state, which is increasingly looking at the Internet as an alternative to traditional mass media; on the other, there are the company’s private shareholders, who are not enthusiastic about a possible alliance with the authorities. The ban imposed by the FAS on the sale to Google of the large Russian contextual advertising system “Begun” created a lot of noise among investors, confirming that foreign money is allowed into the RuNet with restrictions.

“I had never dealt with such things, so I started running around to everyone, asking what they do in such cases,” says Volozh. Friends advised me to find a person who knows how to enter high offices. The head of Yandex recalled his fleeting acquaintance with the former head of the presidential administration, Alexander Voloshin. After negotiations, he agreed to become a consultant to the company’s board of directors, and at the same time, Yandex adopted a provision on a “golden share”, the only function of which is the veto right to consolidate more than 25% of its shares in one hand. The share was transferred to Sberbank. “They hung it in a place where it’s difficult to get it,” comments Volozh.

During this period, there were other contenders for Yandex shares. In the summer of 2008, representatives of the metallurgical magnate, Forbes Golden Hundred member Alisher Usmanov approached the company’s shareholders with an offer to sell 10% of the shares. “There was an offer to sell at a market price, which ultimately led to the loss of control over the company,” says Volozh. The negotiations did not end in anything. Having failed to buy Yandex, Alisher Usmanov acquired a controlling stake in the current Mail.ru Group, which then used his money to buy shares in the social network Facebook and other American Internet companies, making Usmanov the largest Russian Internet investor.

Yandex, in turn, is again going to hold an IPO. Judging by how carefully management and shareholders avoid any questions related to the company's strategic plans and financial reporting details, a stock offering could take place soon. Igor Ashmanov considers the most likely date to be the second half of 2011, and estimates the company’s market capitalization at the time of placement at $5–6 billion. Mail.ru Group, with more modest financial indicators than Yandex, when placing shares in London in November 2010 received a capitalization of $5.7 billion, and by February 2011 it grew by 25%. Mail.ru Group shares were extremely popular among investors - demand exceeded supply 20 times. If the shares of another leader of the Russian Internet market enjoy the same demand, the capitalization of Yandex may reach larger figures. Yandex is still a private company, so its shareholder structure is not fully disclosed. It is known that managers and current employees of the company own 24% of the shares. It is assumed that the largest part of this stake belongs to Arkady Volozh, the second largest to Ilya Segalovich, but there are many smaller shareholders in the company. Will Yandex be able to boast of official billionaires if it goes public? Arkady Volozh says that “several dozen millionaires will appear in the company.” And, let’s add, two owners of fortunes worth hundreds of millions of dollars are Volozh and Segalovich themselves.

The company's founders do not intend to lose control over it during an IPO. Yandex shares are divided into two types: type A (1 vote per share) and type B (10 votes per share). Type B shares are owned only by the founders and first investors of the company; in the event of any resale, including on the stock exchange, they automatically become type A shares.

Mail.ru Group's popularity among investors and high market price are largely based on the fact that it owns shares in trendy Internet services, including stakes in major social networks, including Facebook, as well as in entertainment services. Yandex has no major social networks or entertainment services, and the company’s attempts to create projects in this direction have not had much success. “They come up with different theories why we can’t do anything on social networks. But we just don’t know how, that’s all! And we tried to buy - it doesn’t help, you can’t be everywhere,” Volozh says self-critically. Yandex still holds the leading position in the Russian search market - in January 2011 its share was 64.4%, Google's was 21.9%; the main source of its income is still contextual advertising (88% of 2010 revenue, amounting to $410 million)

The main field for the further development of Yandex remains the information and reference sector of the Internet. “We are about information, about an explicitly or implicitly asked question and the answer to it,” says Segalovich. In his opinion, the company has enormous growth opportunities both in the search services market and in terms of geographic expansion. The war with Google, which is far from over in Russia, may spread to other territories.

Last year, Yandex managed the unthinkable - to take away the search share in Ukraine from Google, something that no one had previously succeeded in in any country in the world where Google occupies a dominant position. Representatives of Google responded to a direct question from Forbes on this matter with a not very clear comment about the imperfection of methods for assessing search traffic, but immediately stated that they were recruiting additional employees for the Ukrainian office and would be engaged in “further localization of products.”

“Theoretically speaking, we dream of playing the Ukrainian scenario somewhere else where Google feels relaxed,” Segalovich says. The nearest “somewhere” is Belarus and Kazakhstan, and further away are European countries where the native language is not English and where Google uses native search algorithms that are not optimized for local languages.

What if all Internet users go to social networks, within which search engines, neither Russian nor Western, do not work? Yandex is not afraid of this. “The world is very big, the Internet is very diverse, and I can’t imagine people who want to live in a bunker - they will still want space,” says Kolmanovskaya. Yandex does not want to gather all Internet users in one place and try to make money from it, and this is the key difference between the company’s model and the model, for example, of the Mail.ru holding, she says. “If tomorrow the entire Internet shuts down and only Mail.ru remains, it will probably be absolutely happy - it has defeated everyone. And if only Yandex remains, we will have nothing to do - where will we look? “- she concludes.

Billions of Yandex. In the process of searching