Why did Facebook just decide to raise money from Russian investment firm Digital Sky Technologies — aside from generally wanting a “cushion” of $200 million before it goes public? As Facebook chief executive Mark Zuckerberg and DST chief executive Yuri Milner tell me in the interview below, there are lots of reasons. One is that DST has invested in five Russian and Eastern Europe-based social networks already — and all of them are “very profitable,” according to Milner. Facebook, Zuckerberg adds, can learn a lot from seeing what’s working for these sites.
For his not-yet-profitable company’s part, Zuckerberg says there’s a lot to learn from these successes. Milner, a serial entrepreneur with more than a decade of experience in the Russian internet business, adds that Zuckerberg and Facebook originally inspired his investments in leading Russian social network Vkontakte.ru, as well as local competitor Odnoklassniki.ru, Nasza-Klasa.pl in Poland, One.lv in Latvia and One.lt in Lithuania. Vkontakte.ru is the largest social network on the Russian-speaking internet, and is especially popular among young people, with 35 million total registered members and 9.5 million daily users.
A striking bit of backstory here. Milner, a beneficiary of Communist-era “Perestroika” reforms, was the first Soviet national to attend business school in the U.S. — at the University of Pennsylvania’s Wharton School, in 1990, as this prescient Daily Pennsylvanian article details. His dream, then, was to become “a bridge” between the developing Russian market and other parts of the world. He went on to found or invest in a number of early Russian internet companies, establishing himself as a powerful figure in the country — especially with the founding of DST in 2005. His firm’s investment in Facebook is perhaps the most global realization of his dream to date.
Note: This transcript has been edited for brevity and clarity.
VentureBeat: Yuri, why did you decide to invest in Facebook, even though you have investments in regionally dominant social networks?
Yuri Milner: We have a unique perspective on this investment because we see something that other people don’t see, because we see the monetization profiles of our other social networks. We’re fanatic believers in social networks. We’re investors in five in Russia and Eastern Europe — an area with 250 million people. Only 60-70 million are online. Facebook has a much bigger audience, while we have expertise in building smaller sites.
Russia has world-class programmers. Vkontakti [Ed. a site that launched as a Facebook clone] has launched features like search that have made it a top search engine in the country. Micropayments are also working. For example, a small number of people are willing to pay a lot of money for value-added services, like registration
Mark Zuckerberg: We’re not going to have users pay for registration, but it’s interesting that it worked.
VB: Mark, how does this investment fit with Facebook’s growth in Russia and Eastern Europe? How many users do you have in Russia and other countries?
MZ: We’re doing really well in Europe, and without getting into specifics, we’re number one in most countries. This growth was spurred by the international [user-generated] language-translation program we launched last year.
DST has a portfolio of many, many social networks. VKontakte is one of the best Facebook-inspired sites; they have a variety of ways of monetizing. Odnoklassniki.ru, and the others have all found different ways to monetize, including online ads, direct advertising, micropayments, gifts — it’s all been very successful. These are indicators of where we expect to go. Although the ideas and insight are local, we tend to think that these things are global.
Sometimes you’ll hear “this is working in Korea or Russia.” Some of the time there might be small adaptations or structural differences you need to make for features, but human behavior — people’s desire to share information — is universal. Features that work in one place can work everywhere. That’s why Facebook and these other social networks have grown in the first place.
VB: Yuri, so Facebook is a competitor to the other sites you’ve invested in?
YM: Product defines everything for social networks, and I do see Facebook as a competitor. All of [our other] social networks are already competing with each other. That is fine, as long as we’re financial investors.
VB: Mark, Facebook has now taken money from international investors in China, Germany and Russia — is this part of a global funding strategy? A way to get your foot in the door in specific, promising markets?
MZ: It’s been less a proactive strategy, but we’ve been open to different experiences. We’re just more focused on best partners to work with.
YM: This is not about us helping Facebook in Russia; that was never part of discussion, and never part of the deal. We don’t have any obligation or commitment — not that they need our help.
VB: Yuri, we’ve previously covered problems that investors have had in Russia. Given your background and today’s investment, can you speak more generally about the opportunities for Silicon Valley investors and entrepreneurs in Russia, and vice versa?
YM: Russia has been largely neglected by big players, but that has allowed local guys to develop. At some point, the market will attract more attention. We have a big stake in Mail.ru [the country’s largest free email service and one of the first billion-dollar Russian internet companies. South Africa-based media conglomerate] Naspers also has a big stake in the company, and we’ve been great partners for a couple of years. Not that many people have tried to get into Russia, though. Yahoo tried to buy but we didn’t agree on the price.
I was inspired to invest in all of these social networks from watching Facebook and Mark. He was the first to do it, and I was fascinated by the way he operated. All of these networks are profitable — very profitable. You’re hearing there’s no business model for social networks, or that Facebook isn’t making money. I’m seeing the opposite. That gives us the confidence to make this investment in Facebook.
[Thanks @dougsherrets for sharing the Daily Penn link.]
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