Interview with Kamil Kurmakaev: Corporate Governance in Startup Companies

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Problems related to corporate governance are relevant not only for public companies and large private businesses, but also for fast-growing entrepreneurial companies that frequently have neither time nor the necessary knowledge for solving such problems. We spoke with Kamil Kurmakaev, co-founder of Wikimart, which was founded in 2009 and became one of the top 30 Russian internet companies by 2012 (according to Forbes magazine).

Talent Equity Institute: Kamil, tell us, how did the system of corporate governance evolve at Wikimart?

Kamil Kurmakaev: The development of our system of corporate governance is still ongoing. It can conditionally be divided into a few stages. During the first two years at the company, there were two boards – an Advisory Board, something fairly common in fast-growing technology businesses, and a traditional Board of Directors. The Board of Directors includes the two founders of the company (myself and Maksim Faldin) and two representatives from the business angels that invested in Wikimart. We got together about once every four months to discuss what was happening in the company, what kind of progress we made. These discussions were informal, but key decisions were made there.

During the first stage, the Advisory Board was extremely beneficial for us. In particular, we managed to get together a reasonably large group (about 20 people) of highly-qualified professionals, primarily from the business angels. Almost all of them had experience in starting a business from scratch, so their expertise was critical for us, especially in the areas of technology, logistics, and sales. Early on we received such high-level expertise that we had the opportunity to establish many processes geared towards the long term.

Talent Equity Institute: How did you establish this process? How did you motivate members of the Advisory Board?

Kamil Kurmakaev: Many think of an Advisory Board as some room in which advisors sit and provide recommendations to management. It actually looks quite different. You call a specific person with a specific problem, and then develop a particular model of communication. For example, with one of our leading professionals, Michael van Swaaij (a former Ebay executive), we decided to talk over the phone monthly and discuss about the events of the previous month, as well as our thoughts on different matters and any concerns. Intercommunication didn’t pan out with some angels – we talked once and understood that we don’t have any mutual interests, which is totally normal. We gradually formed a group of people that we communicated well with, and set topics and timeframes for communication (once a month, once every three months).

Regarding remuneration for Advisory Board members: we didn’t have a well-developed system of compensation. Several of them could hold shares, but many helped us for free.

Talent Equity Institute: How and when did the second stage of the corporate governance system’s development begin?

Kamil Kurmakaev: The second stage began in the second half of 2010, and continued until the beginning of 2012. The first venture capital investor, Tiger Global, joined the company, investing 5 million dollars and receiving 50% of shares. Together with the fund, we began to expand our corporate governance: the Board of Directors grew to 5 people, including Lee Fixel, a partner at Tiger Global. We also recruited two independent directors – Michael van Swaaij and D.J. Patil, a former LinkedIn executive. Beyond that, the Board of Directors operated at two levels: the first involved gathering the whole board every 3-4 months to talk about strategic issues, with presentations and metrics. The second level included only three people (myself, Maksim, and Lee Fixel from Tiger Global), and we made decisions about operational issues regarding debts, partnerships, etc. – all of the things that couldn’t be put off for several months. At this time, the Advisory Board started to play a smaller role. Moreover, at this point we decided to limit the information that we presented to the Advisory Board to only the most general metrics so that we didn’t put pressure on management. To explain to every advisor changes in this or that variable would have taken too much time.

The new stage began in the beginning of 2012, and was also related to the addition of a new shareholder – Finprombank, which held 10% of shares. But the corporate governance system’s reform involved not only to the addition of a new shareholder, but a change in the nature of the shareholders. Two less formalized outlines emerged: as before, all key financial decisions and issues related to approval of potential deals and partnerships were made with Lee. But we added to this a committee that included Russian investors, with whom we could meet and discuss problems and opportunities that were specifically Russian – for example, which distributors we needed to build relationships with. Such local questions might have been interesting to our international investors, but they wouldn’t have been able to provide any meaningful, practical advice. At this point, the role of the Advisory Board diminished to nothing, but we still kept in touch with several advisors.

Talent Equity Institute: Why did the role of the Advisory Board diminish to nothing?

Kamil Kurmakaev: The company grew and certain issues that the experts from the Advisory Board helped us solve were delegated to a lower level, and were no longer on mine and Maksim’s plate. For example, a former manager who consulted with us on logistics now spoke to our business process executives, not with us. Maksim and I could no longer spend so much time on individual conversations and deep analysis of each issue.

The fourth stage began at the end of 2012, at a time when Tiger Global had many portfolio companies. This meant that they couldn’t be deeply involved in the numbers for each company, and by this point Wikimart already grown into a large company. Tiger Global formed a group of analysts, one of whom worked closely with our company. This was tremendously beneficial for the company, and helped us monitor general trends. In addition, we started to visit Tiger’s portfolio companies (in the Middle East, India, and Germany) and interact with the founders and executives of these companies. In my opinion, this is a form of corporate governance, because company-level training, where there are general shareholders, is taking place.

Talent Equity Institute: What’s happening with the company now?

Kamil Kurmakaev: 2014 was a big year for the company in terms of events – the company has grown and has changed its share capital structure. Our Russian shareholder bought out a portion of shares from Tiger Global to become the majority shareholder. We’ve entered a new stage, which includes cooperating with companies that Tiger Global and Finprombank invest in. Not only e-commerce, but other closely-related business matters – financial service, loyalty programs – we found a lot of interesting overlaps. At the same time, we’re establishing the Board of Directors’ work, but it’s too early to say what the new system will look like. The independent members of the Board haven’t changed, but it’s possible that there may be some changes in composition, such as adding Russian independent directors.

Talent Equity Institute:How do you motivate independent members of the Board of Directors?

Kamil Kurmakaev: In the early stages, businesses like ours don’t usually have enough money to pay independent directors. One of our independent directors, Michael van Swaaij, had been an investor from the beginning, and was therefore interested in increasing the value of his shares. The second member of the Board of Directors was given an option at 0.5% of his work.

Talent Equity Institute: But from a legal standpoint, isn’t Michael an independent director?

Kamil Kurmakaev: Yes, we look at him as an independent director because he’s not affiliated with any major shareholder. Michael’s minority share didn’t have any impact on his ability to make an objective, independent judgment, though he wasn’t formally an independent director.

Talent Equity Institute: Kamil, at the moment, serious discussions are ongoing about how having representatives from investment and venture capital funds on an entrepreneurial company’s Board of Directors doesn’t ensure a long-term vision for the business, because a primary goal for a fund is to sell their shares, to “withdraw” from the business. Did you ever have a situation where the representatives of funds were colliding with the independent directors because they had different timelines?

Kamil Kurmakaev: In this sense, everything was simple for us: e-commerce is a fairly capital-intensive business that only becomes profitable after 7-8 years of work. There aren’t really any examples of companies in this industry that have been able to produce positive cash flow in the first few years of work. This means that there’s always a choice in front of the company – attract additional funding, or die. This kind of situation makes any discussions on long-term perspective that omit consideration of current financial tasks pointless. We didn’t have such conflicts on our Board of Directors because everyone understood that – both representatives of funds and independent directors. I think that what you’re talking about is more relevant for companies that are in more mature stages of development, and are already self-sufficient. In those kind of companies, a situation where funds are “twisting arms” is possible, but that is more of an indication that the founders of the company haven’t maintained a controlling position in management. In my experience, complete removal of company founders from management (or becoming less influential) happens rarely in technology businesses because these shares, in isolation from the people that started the company, dramatically lose value.

Talent Equity Institute:What kind of advice would you give to growing businesses about forming their systems of corporate governance? Would you have done anything different?

Kamil Kurmakaev: I don’t contest that there are other ways to do it. An employer can see the business as his own creation. If he has a distinct vision, then it’s possible that communicating with funds and advisors will be harmful. In addition, this communication comes with a price – at a minimum, time. There’s a purely financial price, for example, you give shares to certain funds. If the entrepreneur’s style is very unique and personal, then communication could be harmful. But there are several living histories that show that business problems can be a result of not a root cause, not economic challenges, but because of managerial errors. When you’re alone and there’s no one to correct you, these situations can arise. In my opinion, to painstakingly build a system of corporate governance is the right way to go, despite the fact that it takes a lot of time and effort.

Talent Equity Institute: We often hear the opinion that there are certain specificities of Russian business (different forms of ownership, different external (environmental) conditions), which is why a western model of corporate governance isn’t completely appropriate for us.

Kamil Kurmakaev: I would be interested to ask those who share this opinion what kind of car they drive. There are best international practices that have repeatedly proven their effectiveness, and to rely on these practices is just like driving a nice car. But, to continue the analogy, if a car is built for a country with a warm climate, then the cold Russian winter won’t be easy for you. It is the same with corporate governance – a carbon copy of the western model doesn’t always work. If you try to transfer it to a developing business in Russia, it will most likely fail. Certain issues will be solved too slowly, as there isn’t always a month to wait and convene the Board of Directors. Therefore, any model needs practical adaptation, and I think our history illustrates this approach.

This article was published as part of the eighth issue of Talent Equity Newsletter "Effective Corporate Government".

To read all other journal issues, please follow the link to TE Newsletters page.