FEB 1999 | Age 24 | Neva Digital Headquarters, St. Petersburg
The internet craze had reached Russia. Every day, newspapers carried stories of American dot-com companies whose stock prices had doubled, tripled, quadrupled. Money was flooding into anything with a website and a pulse.
Alexei watched the frenzy with the detached interest of someone who had seen it before. In his past life, he'd watched the dot-com bubble inflate and burst. He knew how it ended. But he also knew that the aftermath would create opportunities.
"Everyone wants to invest in internet companies," Boris said, dropping a stack of prospectuses on the desk. "We're getting calls daily. 'Neva Digital should spin off. Neva Digital should IPO. Neva Digital should raise venture capital.'"
"What do you think?"
"I think the valuations are insane. A company with no revenue and a website is worth fifty million dollars? That's not investing. That's gambling."
"It's a bubble. Bubbles create opportunities—for those who know when to exit."
"You want to participate?"
"I want to use the bubble to fund our digital expansion. Spin off Neva Digital as a separate company. Raise capital from Western investors at inflated valuations. Use that capital to build real infrastructure."
Boris raised an eyebrow. "Sell high?"
"Sell high. Then, when the bubble bursts, buy back the pieces we need at pennies on the dollar."
Alexei called a meeting with Katya Volkonskaya, head of Neva Digital, and Mikhail Antonov, the new CFO he'd recruited from McKinsey.
"Neva Digital is currently a division of Neva Group," Alexei said. "We're going to spin it off as a separate company. Neva Group will retain fifty-one percent ownership. The remaining forty-nine percent will be sold to outside investors."
"What's the valuation?" Katya asked.
"Our current revenue is two million annually. But if we project five years out—assuming we capture the internet growth—we can justify a valuation of one hundred million dollars."
Katya blinked. "That's fifty times revenue."
"That's the market. Dot-com companies are trading at a hundred times revenue. We're being conservative."
"And what do we do with the capital?"
"Build. Data centers. Fiber optic networks. Software platforms. Real infrastructure that will survive the bubble when it bursts."
"When do you think the bubble will burst?"
Alexei chose his words carefully. He couldn't say "I remember it happening in 2000." He had to sound analytical.
"Historical patterns suggest that bubbles last two to three years. The NASDAQ started its run in 1998. That puts the peak in 2000 or 2001. We have a window of twelve to twenty-four months to raise capital and build."
The next three months were a blur of investor presentations. Alexei traveled to London, New York, and San Francisco, pitching Neva Digital to venture capitalists, hedge funds, and institutional investors.
The response was overwhelming.
"Russian internet is the next big thing," one VC gushed. "Fifty million users by 2005. You're the first mover."
"Neva Group has real assets," another investor noted. "Unlike most dot-coms, you have revenue, customers, infrastructure."
"Our digital platform is already integrated with water, energy, and telecom," Alexei explained. "We're not a pure internet company. We're an infrastructure company with a digital layer."
The investors didn't care about the distinction. They saw "internet" and opened their checkbooks.
By June 1999, Neva Digital had raised fifty million dollars from a consortium of Western investors, at a valuation of one hundred twenty million dollars. Neva Group retained fifty-one percent, worth sixty-one million dollars. The cash went into Neva Digital's balance sheet.
"We need developers," she said. "Good ones. There's a talent shortage in Russia. We have to pay top dollar."
"How top?"
"Senior developers are demanding eighty thousand dollars annually. That's four times what we pay experienced engineers."
"Pay it. We have the cash. And when the bubble bursts, we can renegotiate."
"We're also building a data center. Twenty million dollars. State-of-the-art. Redundant power, redundant cooling, redundant internet connections."
"Location?"
"St. Petersburg. Near our existing fiber backbone. We can connect it to the water and energy networks for monitoring."
"Approved. What else?"
"Fiber to the home. We're rolling out broadband internet in St. Petersburg and Moscow. One hundred thousand connections by year-end. Two hundred fifty thousand by mid-2000."
"Cost?"
"Fifteen million for construction. Five million for customer acquisition. Total twenty million."
"Do it."
By September 1999, the bubble was showing signs of strain. Dot-com companies were burning cash faster than they could raise it. Stock prices were becoming volatile.
"The NASDAQ is up fifty percent this year," Boris observed. "That's not sustainable."
"It's not," Alexei agreed. "But the bubble hasn't peaked yet. We have another six to twelve months."
"How can you be sure?"
Alexei couldn't explain that he remembered the peak—March 2000—from his past life. So he pointed to the data.
"Look at the IPO pipeline. There are dozens of companies planning to go public in the next six months. Each IPO will bring more money into the market. That will drive prices higher. But eventually, the supply of new money will run out."
"And then?"
"And then the bubble bursts. The companies with no revenue, no profits, no business models—they'll collapse. The companies with real assets, real customers, real infrastructure—they'll survive."
"And us?"
"We'll survive. We have fifty million in the bank. We have revenue. We have customers. And when the bubble bursts, we'll buy distressed assets from the companies that don't."
By December 1999, Neva Digital had grown substantially.
NEVA DIGITAL - DECEMBER 1999
REVENUE:
├─ Internet access: $8M
├─ Data center hosting: $3M
├─ Software licensing: $2M
├─ Data monetization: $1M
└─ TOTAL: $14M
PROFIT: $2M (after heavy investment)
CUSTOMERS:
├─ Broadband internet: 120,000
├─ Business data services: 800
└─ Total: 120,800
ASSETS:
├─ Data center: $20M
├─ Fiber network: $15M
├─ Software platforms: $10M
└─ TOTAL: $45M
CASH RESERVES: $30M (after investments)
"The numbers look good," Boris said. "But we're still burning cash on expansion. Without the fifty million we raised, we'd be losing money."
"That's the point of the bubble. Use other people's money to build infrastructure. Then, when the bubble bursts, we own the infrastructure debt-free."
"And the investors?"
"They own forty-nine percent of a company that will be worth more after the bubble than during it. They'll do fine—if they hold."
"But they won't hold. They'll panic when the bubble bursts."
"Then we buy their shares at a discount. When the dust settles, Neva Group will own one hundred percent of Neva Digital again—plus all the infrastructure we built with their money."
Boris shook his head. "That's ruthless."
"That's business. They wanted to gamble on dot-com hype. I wanted to build digital infrastructure. Now we're both getting what we want."