Leonid Dovbenko: We Compete with the Strongest Companies on Planet

Yalla!Market is a Dubai-based 15-minute delivery start-up set to transform the Middle East delivery market. Founded a little more than a year ago, the company already covers almost all living communities in Dubai and plans to expand into Abu Dhabi and other GCC cities.

In conversation with Durov's Code, Leonid Dovbenko, CEO and founder of Yalla!Market, talks about why business environment in Dubai is different from the rest of the world, how to raise funds in the UAE and when to expect Yalla!Market's IPO.

— The first thing I would like to ask you is about Dubai. Why did you choose this city?

— The story is as follows: in Russia, I created one business and expanded it nationally. Then I started a second one, and later on a third one, so I had to make about 80 flights a year. The third time, I realised that I didn't want to fly from Tyumen to Krasnodar via Moscow, so I decided to go abroad. Fairly quickly we opened a company in Kazakhstan, but it turned out that there was not much difference between Kazakh and Russian cities, such as Yekaterinburg or Novosibirsk. There was just another Russian city there.

I started to think about where to go next. Naturally, we looked at English-speaking countries: we travelled around the US for a month, then made cold calls to Australia and looked for opportunities in London. America and Australia seemed to be too far away – it's not clear how to enter these markets, besides, the time difference is too big, and it's very difficult to live with no contact with the family. I was left with only one option and that was London. But Europe did not seem to be too attractive because of high taxes, mature markets and not too young competitors (over 50 years old). Even if we beat them, the benefits are unclear, since it is the state that will make money on that since all profits are taken away in the form of taxes.

Thereafter, I started looking at megacities: Hong Kong, Singapore and Dubai. There the situation is the opposite – no taxes and a booming economy. Each of these cities is a hub in its respective part of the world, so you can expand your operations further from there. We rejected Singapore the first. I went there and made my first sale within just a week, so we found product market fit there. But Singapore is an island.

Before starting Yalla!Market, I was working in the restaurant IT sector. You see, on an island the number of restaurants is limited and just cannot grow tenfold. Hong Kong, in its turn, appeared to be too Chinese and expensive. Dubai, however, is quite small and compact. It is also close to Russia and relatively cheap compared to other options. Besides, in Dubai they can build as many skyscrapers as there is free land in the desert, which means the number of restaurants will continue to grow. In that respect, Dubai is a good market for us. Also, I really enjoyed my vacation there and thought it would be cool to live there.

I came to Dubai with my first restaurant automation business, iiko – it is still running successfully. We are now the number two company in the UAE, growing twofold or threefold every year. We are Carrefour and Papa John's main IT supplier. Having said that, we have only spent $500k to break even – this is an amazing case of expanding into a foreign market.

I built that business and then left the operations management. I was in a fairly relaxed state of mind as an entrepreneur, as I had three days off a week and so on. I started thinking about what to do next. At one point, it became popular among Russians to launch dark stores around the globe. At the peak, there were 17 companies founded by Russian-speaking founders in this segment.

It happened so, that Samokat and Yandex.Lavka are the number one and number two companies in the world in this segment in terms of performance. But the world does not know about it except Russians. Our country can export not only oil, but also a business model. Delivery from dark stores is the first case of business model export in the history of Russian business.

— How did you start Yalla!Market?

— About a year ago, in early August 2021, we made our first sale. When I was in IT, we were supplying software to Yandex.Lavka and Samokat, and were quite surprised with the fact that someone could open 50 dark stores a month, it seemed just impossible. There is no restaurant chain in Russia that has more than 1000 outlets, and Samokat has 1,100! This is a fast-growing retail business with a unique focus on speed. I observed them developing from the inside, as I was selling them software. The requests to link new dark stores to software were coming one by one… How can you even open them so quickly? These guys are not humans, they are aliens.

Now, the next logical question is: Why Dubai? I have been living here for four years, I have a successfully running business here. I was personally involved in the automation of Papa John's delivery, and I know how it works. I live here, so I know all the problems and miss the super fast delivery we are used to in Russia. In the early stages, I supplied software to the world's top companies and saw from the inside how quickly they were growing. I realized that it would be cool to transfer this business model to Dubai.

Another reason is that the super fast delivery business model is the so called “Uber game”. That is, you have to burn $12 billion over 15 years, as Uber did, to become profitable. The Uber game cannot be sustained anywhere else in the world, except for 25 cities, 15 of which are located in the GCC countries. When I calculated all the costs I realized that that was the only place where the business model would immediately have a positive EBITDA. The important thing for me is that this is not an Uber game; I don't like and don't know how to play it. I always build profitable businesses.

— When I was preparing for this interview, I looked through your accounts on social media. I liked your status in VK: "If you want to move to Dubai, text me, I'll talk you out of it.” It rather amused me, and here's the question: Why so?

— This status came about when a huge number of Russian entrepreneurs started leaving the country. Previously, if someone was planning to go to Dubai, they did it very carefully. However, in March, many people came and started trying to launch something here.

Dubai is a unique place on the planet. If you have built a successful product market fit in Dubai this does not mean you can build the same one elsewhere, and vice versa. It's a place where hundreds of nationalities live on a very small territory that has no taxes. In my opinion, it is very dangerous to replicate a business model from elsewhere to Dubai because even if it succeeds, there might be no sense in that. Dubai is not a market, it’s a small dot on the map, where founders can live very comfortably. Even if you run a business here, it can be a small, unscalable one. For many business models Vietnam, Indonesia or Latin America are much better suited than the Arab world and Dubai in particular.

My advice would be as follows: don't move to Dubai because you feel good in Dubai. First, decide where you are going to move your business, then decide where you are going to live. These are different things.

— In your blog on vc.ru you once wrote that, thanks to the housing density your company can cover almost all of Dubai. What about other cities? If Dubai is so unique, how promising is it to expand into other cities, even in the UAE?

— Yes, Dubai is unique, but Abu Dhabi also suits our model. We need to open about 15 dark stores to fully cover it. Yes, there are a lot of cottage communities there and in that case, 15-minute delivery probably won't work. However, it takes other companies two hours to deliver food there, which means that even a 30-minute delivery would be much better.

In other cities, we can open two or three dark stores and make a half-hour delivery. Otherwise, there would be no point in that. If we talk about other countries, for example, Doha, the capital of Qatar, is a big city with a super high concentration of ultra high net worth individuals living in the area that can be covered with five dark stores. In this respect, this is a unique place on the planet. If we talk about Saudi Arabia, there are six cities there in which several million people live on a relatively small area. The buildings there may not be as tall as in Doha, but the communities are still very compact.

It's not about Dubai, it's about the fact that in the GCC there is a significant number of cities that have over one million citizens. Besides, people in this region live in the same cultural environment.

Here, we have a unique combination of factors important for building a successful business, as labour costs are low, while purchasing power, living standards and incomes are high. At the same time, a lot of rich people live within a one dark store radius. In the US, such conditions are only found on Manhattan; the rest of America is comprised of one-story buildings.

— Initially, you had almost no competitors here, right? Then Talabat came along, then Carrefour? How hard is it to work and expand operations in this market now?

— As for the competition, this is not quite true. Talabat opened its first dark stores three years ago, and by the time we launched ours, they had already opened around 20 outlets. But even now, Talabat delivers food in 40 minutes, they are not aiming at making super-fast deliveries. Recently, Careem has also opened dark stores, but their results in this area are average. Noon has also opened three dark stores, and Deliveroo is working in the same direction. But only Yalla!Market systematically does 15-minute deliveries. You could say that we were the first in this niche, and now we are the biggest in it, although our business is still very small.

Delivery business in Dubai is differentiated by segment, and we focus on the upper middle class – people for whom time is more important than price. Our customers have no idea how much tomatoes cost. We have the most expensive tomatoes in Dubai, but our customers still make 10 orders a month – this is the highest frequency in the world. In no other company on the planet do customers order so often. Our LTV is $2-3 thousand per customer.

— What is more important in such business: offline or online infrastructure? What is more difficult to build, or rather, what was the greater challenge in building Yalla!Market: setting up a supply chain or making an IT product?

— Both. You have to do it all together, it's like two magic crystals. The IT part was quite easy to do, since previously we’ve been working with IT products for the delivery business for 15 years. Setting up a supply chain, of course, is much more difficult. It cannot be built solely on experience, it takes time, tests, millions of experiments. You have to go through 30,000 products to select just 1,000. Moreover, this work needs to be done constantly, and we always try to "hack the system." Any retailer with 20 years of experience in the market is a priori more efficient than a start-up. We, however, very quickly learnt how to do many things such as to import tomatoes from Tashkent, for example. And with ready-to-eat food, too, we're going to beat everyone, of that I'm sure.

— For some reason when it comes to fast delivery, I hear people talk a lot about tomatoes. Is it some kind of a benchmark in this business? Is it hard to deliver delicious tomatoes? What's the secret?

— It's just that I like tomatoes myself. I can distinguish between 50 varieties. Previously, there had not been good tomatoes in Dubai, so I was suffering. In general, I've made it for myself and it turned out that there are a lot of tomato fans here, and not only Russians. In Yalla!Market tomatoes are a product with 100 percent retention rate: the one who ordered them, always repeats the order.

Tomatoes are a complex and delicate commodity. If a tomato is picked from a branch too early, it will arrive in good condition, but will lose 50 percent of its flavor. If picked too late, 50 percent of the crop will be lost during transportation due to shaking. For these reasons, good tomatoes are really very expensive: those lucky ones who get them pay for all the unlucky ones. This is the way the dark store business works: if you manage to deliver a tasty tomato to a customer, it characterizes your processes.

— Aren't you afraid of Yandex coming to Dubai? Maybe their taxi service or, a delivery service?

— Right now our competitors include Uber, Deliveroo, and Delivery Hero. Uber is worth about $40 billion, Delivery Hero is worth about the same, and Deliveroo — $8-10 billion. We are already competing with the strongest companies on the planet. If Yandex comes in as well, so welcome. The bigger they are, the harder they fall! Initially, when we entered this market, we realized that we would be competing with the best companies in the world. And we think that's their problem, not ours. They will compete with us because they will be behind anyway.

— Could it be that delivery robots will appear and displace delivery drivers? In November, Yandex said it would launch rovers in Dubai. And then there will be drones that will fly and deliver everything faster than couriers. What will you do in that case?

— We cannot be displaced by such companies. As soon as drone or robot delivery technology emerges, it will affect the delivery driver market, not us. We will just start using new technology. We're interested in this issue, and we dream about it. Right now, we are working with ten companies in this segment. But there are several problems here, the first one being the regulatory framework for the use of technology en masse - it is not ready in any part of the world. Some three robots that drive around Skoltech or at a campus of some US university are still more for hipsters than for real business with high flow.

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The second problem that partly protects us and unfortunately throws Dubai back into the Stone Age is the delivery drivers labour costs. They work for $3 an hour, while Yandex robots cost $6 an hour.

I like technologies, but this is still a case where “a grandmother with a kettle” is cheaper than a vending machine. The situation is unlikely to change because there are a lot of migrants around who are willing to work. I think it will take five years for the technology that rovers and drones use to get much cheaper and mature.

When the infrastructure appears, we will work out how to integrate into it. I think drones and robots will be at war with people, not delivery businesses, so we're ready for their arrival.

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However, their technology is not as good as it seems to be. We worked on a pilot project with Yandex and realized that their technology only works in cottage areas. It is quite inconvenient for a resident of a high rise building to come down from the 30th floor to unload the robot. The robot really messes up the user experience and kills the value of fast delivery. In addition, the moment when the robot can take the elevator to the right office is still quite far away. You will have to solve a lot of technical problems to be able to use it massively.

— Previously, we had a conversation with Eugene Grankin, CEO and founder UVL Robotics. He talked about the way he imagines the world in a few decades, with drones flying everywhere and landing on skyscraper rooftops. Parcels will fall through pipes right into the apartment.

— We have the same vision of the future. We are now working on a similar delivery project for NEOM. Each apartment will have a pneumatic pipe that sends a parcel from the darkstore, it can be of any kind: food, goods, that is, anything that is delivered to the darkstore. We think delivery drivers are cool and convenient, easy to hire, and so on. But clearly there has to be a new way to do deliveries, and what it will be is still a mystery. Maybe it will be robots or drones, or maybe it will be pipes, or a teleport if they invent one.

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— How would you describe the investment climate right now? Is it easier to attract funds here?

— My core competency is B2B sales, and I approached investments the same way: funnel, channels, cohorts, segmentation, etc. I realized right away that investments had to be attracted from several sources, so now we have the following ones: Russian and foreign business angels, Russian and foreign syndicates and venture funds. There are also superfunds and Arab family offices. We started communicating and working with all of them at the same time.

Russian and foreign angels give money through Instagram posts. I got the first money through stories. Foreign venture capital funds have already made their bets in the segment, and are not ready to invest in a second company. In this part of the world, if a VC fund has invested in a startup, it will never invest in another startup like it. Americans and Russians do that, but local funds do not; this is not how things are done in the Arab world. In this respect, we were too late: everyone had already given money to other dark stores. Russian funds would not give us money, because I have 17 businesses, and they think that a founder should be ‘hungry’. Syndicates, both Russian and foreign, on the contrary, have been willingly giving us money, since private investors are also part of them.

We first raised $150,000, then $2.5 million, then five million. Now we are on our way to raising $10 million in the A-series round. Among those who have invested in us are two venture capital funds, four syndicates and 180 private investors. We recently signed our first $50 million term sheet with the Arabs.

Probably, the most interesting fact is about 180 private investors. In fact, the most prominent Russian entrepreneurs have invested in us: the founder of the Dodo Pizza restaurant chain, the cofounder and CEO of Grow Food, the founder of Total.ru, the founder of eLama, the CMO of Samokat, as well as Eduard Tiktinsky (RBI Group founder). These are not professional venture capitalists, they have made money, they are interested in Dubai and believe in us. Through investments not only do they want to multiply their capital by 50x, but also learn something. That's a story I like a lot. If we don't learn how to negotiate systematically with the funds, then we'll look for 3,000 private investors, maybe 30,000. With our IPO plans, the sooner we start, the better. Business-angels are very cool to work with, I really like it.

— Is the IPO a recent idea? Has it come about because Dubai and Saudi Arabia have become the new IPO hubs this year?

— No, originally the plan was exactly like that: we increase business volumes to a certain level, and then we make an IPO in order to create liquidity for investors, and expand to Africa in public status. We had a super venture project, in which investors make money on valuation growth. Making an IPO in the local market is the best way to significantly increase a company's valuation, because the IPO market here is very overheated, just like in America 5 years ago. It is growing very rapidly, all IPOs are oversubscribed 50 times. In addition, there is the so-called "Arab valuation premium". We've already met with the Minister of Economy and he said that if we're going to have an IPO, the sheikh will be our personal promoter. The state here is very supportive of such processes.

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On the other hand, local IPOs have another problem - they do not bring much liquidity, because Arab investors’ strategy is to buy a share and keep it for 15 years, and that is not good for the company’s valuation. Obviously, in a year or two we will have to do a second listing in London or New York to maintain liquidity. It turns out that the strategy is as follows: first comes the venture money, then the IPO, then a stock exchange in New York.

— What do you mean by the "Arab premium"?

— It means that when you come to the stock exchange and say that the company has a certain value, no one challenges it, no one says that in fact the industry has a different multiplier. There is just too much accumulated capital and very little experience here. Local investors have no understanding of how to do it in the right way. In this part of the world, all the deals in our segment were averagely valued in the three to four times revenue range. So, we're saying that we have a good chance of being valued in the eight to ten times revenue range at the time of the IPO. But for that we need to reach a certain stage – build solid product market fit, do scaling, then super scaling, IPO, and then continental expansion. We're still at the first stage, building our solid market fit.

— Leo, thank you very much! We have discussed even more  than we had originally planned.