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Is DST Going to Be The Next Berkshire Hathaway?

by Vincent Chan on May 7, 2010

To many people, DST, the Russian Investment Firm, came to the web industry pretty much out of nowhere. Yet, in the past 16 months, this five-year-old company has purchased nearly 10% of Facebook (worth near $2 billion), led a $135 million financing round for Groupon, invested $180 million in Zynga along with others, and paid $188 million for AOL’s instant messenger service ICQ, which holds more than 50% of Russia’s instant messenger traffic. It’s like they are gathering all the hottest collectable toys today! And they make it look so easy.

So are we witnessing the birth of an Internet giant of this era? What is the story behind this secret company? Why did all the hottest startups take its capital when they still have enough funding in the bank?

Let’s reveal the story behind this extraordinary company now.

Serious Connections

According to its website, DST only has four partners, who have a strong complementary background from operations, investments and finance. And they also have seven analysts, all veterans of Goldman Sachs, Morgan Stanley or Citibank. Their investors are all well known investors or institutions, such as Goldman Sachs, Tiger Global and Alisher Usmanov, one of the Russia’s richest man. A Russian newspaper, Kommersant, estimated that Alisher should own no less than 30% of the company.

Most recently, DST got an investment of $300 million from Tencent, the huge Chinese internet company which has a market capitalization almost twice the size of Baidu, in exchange for near 10% stake.

Based on this long term strategic partnership, DST and Tencent are positioning themselves to benefit from global Internet growth. And obviously, DST’s portfolio companies like Facebook and Zynga will also benefit from these influential connections. Not only increase their exposure to the fast growing emerging Internet market, but also get the expertise from Russia, Euro and Asia Internet companies which are traditionally better at monetizing online games and social networks.

Invest for the Very Long Term

Yuri Milner, founding partner of DST, has analyzed all the tech IPO in the past 10 years, and he thinks that many companies went public too early. In his point of view, some companies didn’t have to go public that early. He thinks that if IPO is only driven by liquidity concerns, companies can get the additional capital from private sources, like DST, in order to release the financial pressure of the company.

Based on his experience, it turns out that only providing 5-10% of the liquidity could be enough for a good company to move forward for a few years and still makes IPO. In this way, the team will have more time to focus on product development making the enterprise more valuable in the long term. The fresh capital will also provide a cushion for the company as it continues its fast-paced growth and explores new revenue sources beyond advertising.

Like what Mark Zuckerberg said:

Facebook did not need the money. The financing will serve as a cash buffer to support our continued growth, allowing us to scale.

and Mark Pincus, CEO of Zynga, said:

Milner is a natural choice for any Web business that is at scale and interested in bringing more investors—but not in an IPO. He already had a very sophisticated understanding of social gaming. It was a very good alignment of goals.

After all, given that Yuri Milner greatly admires Warren Buffett, who is known for his long term investment advice, it’s not surprising that they have similar investing style.

Creative Financing

Their strategy is to make huge bets on market leaders at very generous valuations that other investors can’t afford. DST’s terms are very different from traditional VC deals. For example, they first invested in Facebook in May 2009 at a $10 billion valuation and later funded employee buyouts at a $6.5 billion valuation (a 35% discount for common stock). They did a similar deal with Zynga as well.

In this way, it will provide an attractive exit opportunities for early employees and founders. Milner explained, as the company grows, the spread between common and preferred stocks will become narrow. That’s why they want to invest early.

Also, according to VentureBeat, DST not only did not request a board seat, their deals happened really fast. From start to finish, it only took about a week with a term sheet of one or two pages. This investing style is extremely similar to what Warren Buffett did 🙂

The way they bought preferred stock from the company and common stock stock from employees has become the hottest new way to invest in startups. People refer it as “DST deals”.

Expert in Scaling and Monetizing Social Networks

In the eye of DST, display ads are dumb. They believe that social media sites can do much more than that, such as virtual goods, micro-payments, social ads…etc, because the site knows who the customers are.

Yuri Milner was the CEO of Mail.ru, a Russian web portal, where he turned the company around operationally and positioned it to become the number one Russian speaking website. Their portfolio also includes two large social networking sites in Russia, Forticom and vKontakte.

With all these companies, DST already controls 70% of all Russia’s web traffic. Most importantly, these sites have already figured out how to make money using various business models, such as collecting micro-payments from users and selling virtual goods, something Facebook not very good at in this stage.

You may ask why those Russian sites are so profitable? One of the reasons is that Russia has the word’s most engaged social networking audience, according to comScore. The average Russian web user spent 9.3 hours on social sites, while the U.S. users spending 4.5 hours on them.

Given all these track records and experience, Milner is confident that Facebook, which has more than 400 million users, will be able to get into these new sources of revenue.

The Man – Yuri Milner

As you can tell, Yuri Milner, who earned an MBA at the Wharton School, is not a regular entrepreneur. He really knows how to play this game.

Marc Andreessen, a Facebook board member once said:

Yuri and his team were bringing in a level of knowledge about these businesses that was the best I’ve ever seen. They are walking encyclopedias of all business models of Internet businesses globally.

Milner was able to convince Mark Pincus, Zynga’s CEO, to get their additional funding when his company was already cash rich. Mark once said:

Milner already had a very sophisticated understanding of social gaming. It was a very good alignment of goals.

Although his company has so much capital, Milner did not blindly invest in big name startups. He typically follows a company for one to three years before investing. Prior to investing big money in to major US consumer web companies, Milner bought into smaller Eastern European web companies which is using similar strategies to better understand their different business models. Like Andressen said:

Milner and the DST team are walking encyclopedias of Internet business models.

At the same time, he is aggressively pursuing new investment opportunities. He spends as much as 75% of his time traveling to meet global startups which are in his potential investment list. He told Bloomberg BusinessWeek:

“I am making big investments. You just have to be personally involved. We monitor close to 50 companies globally that can be potential investment opportunities. I’d like to see DST as a significant global investment company in the Internet arena.”

DST is planning to invest $1 billion dollars on emerging web social startup companies around the world. And most of the new investors he is bringing in now are non-Russian. Milner really turns DST into a global investment group.


Although we are still not sure if DST’s investment will eventually pay off, it seems to me that Milner and his team are doing some great things for the startup and web community. Their real Big Hairy Audacious Goal probably is to become the Berkshire Hathaway of the tech industry in modern time. Can they make it? Is Milner going to be the next Warren Buffett? Time will tell.

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