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In return, DST is getting preferred stock worth 1.96% of Facebook, valuing the social network at $10 billion. This is the first time Facebook has raised major equity funding since late 2007, when Microsoft (MSFT) invested $240 million in exchange for a 1.6% stake that valued the site at $15 billion.
In a move that will help Facebook employees unlock some of the value of their shares before the company goes public or is sold, DST will purchase at least $100 million of Facebook common stock from current or former Facebook employees. DST co-founder Yuri Milner tells BusinessWeek that the agreement to buy common stock was not a precondition of the equity investment. "These are two separate transactions," Milner says in an interview. DST and Facebook say they will release details of the plan this summer.
Facebook considers the investment a "good buffer" and will use it for expansion, rather than to fund existing operations, CEO Mark Zuckerberg says in an interview. "It might come in handy if we want to expand," Zuckerberg says. "We felt the valuation was good. Having additional money will allow us to explore new things, such as building data centers or acquiring companies." Sales are rising, and the company has no concrete plans to spend the cash, he adds. Facebook Chief Operating Officer Sheryl Sandberg said as recently as April that the company did not need additional financing.
Over the past year, while most companies have grown cautious and cut back on expansion, the social networking Web site has pressed ahead with aggressive growth plans. However, Zuckerberg says, the investment does not portend a strategic change. "This doesn't signal any shift in strategy," he says.
Zuckerberg also reiterated that Facebook has no plans to sell shares to the public soon. "For a lot of start-ups, you get the feeling that the IPO is really the end goal," he says. "That's really not the case for us. We view that as one milestone along the way. We don't see it happening in the immediate horizon. It's not something we're rushing toward. We'll do it when it's the right thing for the company."
On a conference call following the announcement, Zuckerberg also reiterated the company's forecast for sales to rise 70% this year. Some analysts remain skeptical that the company can achieve such growth during a recession. For instance, eMarketer speculates that Facebook's main source of revenue—global advertising—will increase 20%, to $300 million, from $250 million. "Where is that [70%] going to come from?" says Debra Aho Williamson, eMarketer senior analyst. "I can't see it coming solely from advertising. Either he has some new revenue stream up his sleeve or he is crazy."
On the call, Zuckerberg said Facebook was drawn by DST's expertise in developing business models that help social networks make money. Based in London and Moscow, DST is a four-year-old investment group. According to its Web site, DST has raised and invested more than $1 billion in over 30 companies, including Russian Web portal Mail.ru, Russian social network Vkontakte.ru, and Forticom Group, which owns and operates other social networks in Russia and Eastern Europe.
While other private investors have offered to buy Facebook shares for valuations in the range of $4 billion to $6 billion, DST co-founder Yuri Milner expressed confidence in the company's ability to make money on its Facebook stake. Although Facebook and other U.S.-based social networks have had a hard time making money from their growing number of users, Milner said the social networks he has invested in are making much more money per user than Facebook is now. Milner said Facebook would be able to generate more money from advertising and forms of e-commerce, such as micropayments for virtual gifts given to a person's friends. "We see monetization patterns that will be very applicable to Facebook going forward," he said. "For us it was almost a no-brainer."
Milner says he does not need to use only traditional metrics, such as price-to-earnings multiples, in valuing his Internet investments. "That's not how we look at it," said Milner. "We see things that others don't see."
Milner, who received part of his education in America, founded DST in 2005 along with fellow Russian businessman Gregory Finger. A 1990 article in the Daily Pennsylvanian, the newspaper of the University of Pennsylvania, said Milner was "the first Soviet citizen ever to study at Wharton," Penn's prestigious business school.
In the story, Milner said his goal was to return with his degree to the Soviet Union to take advantage of the developing free markets and serve as a bridge between his native country and the West. "My idea is to be in the most useful place in the proper time," Milner said.
Almost two decades later, Milner is hoping he has found that place in Facebook.
Ante is an associate editor for BusinessWeek.