In early 2009, as Russian investor Yuri Milner scoured the social media landscape for possible targets, he didn't wait for Facebook to call. Milner hopped on a plane and met directly with Facebook CEO Mark Zuckerberg in Palo Alto, Calif., paving the way for his company, Digital Sky Technologies, to pay $200 million for an almost 2% stake. "I am making big investments," says Milner, who estimates that he spends as much as 75% of his time traveling. "You just have to be personally involved."
Milner, 47, expects to get similarly involved with many additional companies in the next five years. Moscow-based Digital Sky Technologies, which in December led a round of funding in social gaming site Zynga, plans to invest more than $1 billion in social Web startups around the world, mostly outside Russia, Milner says in an interview with Bloomberg BusinessWeek. "We monitor close to 50 companies globally that can be potential investment opportunities," Milner says. He expects to announce at least one deal by midyear. "I'd like to see DST as a significant global investment company in the Internet arena."
Digital Sky tends to take small stakes in large, established social media companies that might otherwise be on the verge of an initial share sale. Such a big infusion—typically at a higher valuation than earlier-stage investments—gives an enterprise time to pursue growth without facing the pressures of a publicly traded company. Milner is "a natural choice for any Web business that is at scale and interested in bringing more investors—but not in an IPO," says Mark Pincus, CEO of Zynga, which was approached by Digital Sky when it wasn't yet looking for additional capital. "He already had a very sophisticated understanding of social gaming. It was a very good alignment of goals." In December, DST led a $180 million round of funding in Zynga. Other investors include Andreessen Horowitz, co-founded by Internet pioneer Marc Andreessen. (Bloomberg LP, or a subsidiary of the company, is an investor in Andreessen Horowitz; Bloomberg LP owns Bloomberg BusinessWeek.)
DST's stakes in Russian Web giants
Milner says he invests for the "very long term," comparing his style to that of Warren Buffett, an investor he admires. He declined to disclose potential targets, but analysts say candidates include microblogging site Twitter and Foursquare, a mobile service that helps users share information about their whereabouts. DST's investments so far "are the leaders in their categories," says independent IPO analyst Tom Taulli. Foursquare co-founder Dennis Crowley and Twitter spokeswoman Jenna Sampson didn't respond to requests for comment.
Digital Sky is an investor in Vkontakte.ru, Russia's largest social network, and Mail.ru, a Russian Web portal that, like Yahoo! (YHOO), provides e-mail and other communications services. Russia has the "world's most engaged social networking audience," according to comScore, which monitors Web traffic in 40 countries. In January, the average Russian Web user spent 9.3 hours on social sites, comScore says. The U.S. ranked 18th, with users spending 4.5 hours on social sites.
One of Digital Sky's Russian Web portals is also bidding for AOL's (AOL) ICQ instant messenger business, according to a person familiar with the matter, who asked not to be identified because the discussions are not public. With more than 42 million active users and more than half of Russia's instant messaging market, ICQ could fetch $90 million to $200 million, according to analysts' estimates. Digital Sky's interest in ICQ was previously reported by The Wall Street Journal.
Web business: "walking encyclopedias"
Digital Sky's approach carries risks. It spends large sums for small stakes, gaining less sway over operations than investors that put up less money at earlier stages. Yet Milner—who earned an MBA at the Wharton School—actively dispenses advice, visiting Zynga monthly, Pincus says. Milner "is ready to give input, but it's a soft touch," Pincus says. "He is a trusted advisor."
Fellow investors concur. "Yuri and his team were bringing in a level of knowledge about these businesses that was the best I've ever seen," says Andreessen, a Facebook board member. "They are walking encyclopedias of all business models of Internet businesses globally." Having worked with DST on the Facebook and Zynga investments, "We'd happily do a third," Andreessen says.
Milner, who also holds an advanced degree in theoretical physics from Moscow State University, says he's in no hurry to see Facebook sell shares and may remain invested after an IPO. "As long as [Zuckerberg] is leading the business, we'll be an investor," Milner says. Digital Sky has increased its initial stake by making "opportunistic" purchases from other investors, Milner says, though he declines to disclose his current position. Milner says he may increase existing stakes in other companies, too.
The investments have paid off for closely held Digital Sky, Milner says, adding that annual sales have doubled in recent years and the company is "overall very profitable." Digital Sky says its companies "comprise well over 70% of all page views in the Russian speaking Internet." DST has no current plans to sell shares, Milner says. Some of his portfolio companies, he says, may go public before Digital Sky does.