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Yuri Milner’s Unparalleled Global Tech Gold-Mining Machine

FORBES: How a Russian investor Yuri Milner established his “gold-mining machine” (firm DST) and why he believes that the future belongs to Asia. China lifted Milner up from ranked 35 to 20 in the Forbes ranking of the best investors. Investments in Alibaba and smartphone vendor Xiaomi opened Yuri Milner’s way to the Forbes’ top 20 investors. In the past year the entrepreneur preferred China to the US.

It was a dry summer’s evening in 2011 when Russian internet investor Yuri Milner sat down for dinner with Richard Liu, the founder of an up-and-coming Chinese e-commerce company called JingDong 360.

The tiny local restaurant had room enough for five tables, all filled with delivery men who worked for Liu. They were the people driving everything from food to books to clothing to Liu’s customers in the surrounding city.

This wasn’t bustling Beijing but one of the northwest China’s most remote desert cities, Urumqi, a stone’s throw from Kazakhstan. Milner had hopped on a five-hour flight from Beijing and driven through the dusty landscape to see firsthand how JingDong’s founder interacted with his front line.

The delivery men approached Milner and Liu in groups of three or more, toasting their big boss with Chinese rice liquor, baiju. Liu was affable with each employee but when he stood up, he worked the crowd with Clintonian charisma.

He talked almost obsessively about customer service, the same motivational speech he was feeding all the other delivery workers he saw on his nationwide tours. JingDong’s revenues were tripling each year and online shopping in China was growing at a 40% annual clip, compared to 10% for physical stores.

Milner’s wasn’t trying to decide whether to invest in Liu or not. He’d already looked at the numbers and put $500 million into JingDong three months earlier. His trek to a Chinese backwater was for a more important reason.

“You need to stay close to founders,” Milner explains today from his mansion in California’s Los Altos Hills, where he sits in a conference room with modern decor, wearing a grey gym shirt. The former physicist from Russia doesn’t usually drink alcohol, but he did indulge in the baiju that evening to make the most of a few hours with Liu.

As one of the world’s most successful tech investors, Milner’s approach is paradoxical. He shuns board seats on the premise that founders know what they’re doing, but he’ll visit them regularly to help build a long-term relationship.

Meddling is out; lengthy chats about the future of the Internet and the universe itself are in.

Face time is so important that Milner spent 200 days in 2014 traveling, largely to see his portfolio companies in China. It’s why in the next two years after that dinner in Urumqi, as more investors crammed in for a piece of JingDong, Richard Liu left the door open for his effort-making friend.

Milner invested another $250 million from his firm DST Global to amass a total 8.9% stake, an investment now worth $3 billion.

Milner’s biggest win to date is still a punt on 25-year-old Mark Zuckerberg in 2009, when he invested $200 million in Facebook to get a $4 billion gain. The deal was at the center of a 2011 Forbes cover story on Milner.

Since then, his fingerprints have continued to find themselves all over some of the biggest hits in Silicon Valley. DST has taken stakes in AirBNB, Twitter, Spotify, Lending Club, Snapchat and even WhatsApp.

More recently DST has got in on the three most important web companies in China too.

Within months of our 2011 cover story, DST had poured in estimated $500 million into in e-commerce giant Alibaba to amass a stake that is worth around $2.5 billion today. That same year he started spending roughly the same amount on hot smartphone vendor Xiaomi, to build a 7% stake worth $3.2 billion at current valuations.

2011 was a busy year for Milner. Alongside the multi-billion dollar deals in China he marked the 10 year anniversary of his marriage to artist Julia Milner with a lavish wedding at their home. They’d never had one till then. “I wanted to have it in 10 years, on that day,” he says matter-of-factly, referring to the novel nuptials date of 11/11/11.

All told, Milner’s DST has invested $5 billion annually in late-stage Internet companies in as many years, leading to $10 billion in cash from IPOs and stake sales, plus $9 billion in equity.

Aggregate all DST’s realized positions plus the total value of its existing portfolio and you get a remarkable $19 billion

Chinese companies represent half of DST’s portfolio, and around 60% of those gains.

That doesn’t mean Milner has forgotten Silicon Valley; he refuses to deny that he took part in Pinterest’s recently reported $367 million funding round, which suggests he may have had a hand in that too.

The one flub he admits to is Uber.

DST was presented with three opportunities to invest in in the riding-sharing company’s that’s now valued at upwards of $40 billion, but Milner passed each time because he was concerned that founder Travis Kalanick couldn’t handle legal battles with regulators and cities around the world. 

“I underestimated Travis. That was a big mistake,” he says, shrugging. “I have not been sleeping well.”

If there’s a single characteristic to Milner’s investing it’s this: a few big bets, very early on, with the goal of huge rewards. Over five years Milner’s team has reviewed 250 companies across the globe and invested in a small fraction.

DST has closed four funds, the first of which was backed by Russian steel billionaire Alisher Usmanov, and the last of which was backed by sovereign wealth funds, high-net-worth people on the U.S. east coast — and no Russian money. “I’m a strong believer investor base should be global,” Milner says.

Milner works quietly and rarely announces his investments. Till now hardly anyone knew that he’d also got a piece of messaging-success story WhatsApp, making him one of only two investors in the world (the other is Sequoia Capital) to do so. He bought a stake from the founders for $125 million within weeks of Facebook snapping up the messaging giant for $19 billion last year.

Milner won’t discuss the Facebook deal, but a source close to the messaging giant says he had been trying to invest in the company for three years before finally getting a handshake agreement from the startup’s founder Jan Koum in January 2014.

Milner had spent much of that time building a relationship with Koum, a fellow Russian speaker who had visited Milner’s Los Altos home, and in the end DST’s money was taken as a form of insurance in case the Facebook deal fell through.

Born in Moscow, Milner studied theoretical physics at Moscow State University before turning his hand to business, building Mail.ru through the 1990s into Russia’s biggest Internet portal.

In 2005 he founded DST Global to invest in internet firms like the Russian social networking giant Vkontakte, and staffed his firm with a handful of top dealmakers from Goldman Sachs, the bank that took Mail.ru public.

“[Goldman] made the first introduction to Facebook. That’s how everything is connected,” he says, twirling his finger in the air.

He spent the post-2008 financial crisis flying to Silicon Valley and wooing founders like Zuckerberg, before putting $800 million into Twitter and backing Zynga, Groupon, AirBNB, and more recently Snapchat, Spotify and Lending Club. DST has cashed out of Zynga and Groupon, but continues to hold a stake in AirBNB.

Milner’s big quest in China kicked off all at once in 2011. Soon after moving DST’s headquarters from Moscow to Hong Kong midway through the year, he sealed his three most important deals with JingDong, Alibaba and Xiaomi within a few months.

By that time DST already had eyes on the ground. Fast-talking Harvard MBA graduate Shou Chew had spent a year getting to know key partners at China’s two dozen or so top financial advisors, firms with names like E-Capital and Zero to IPO. One named China Renaissance, led by CEO Fan Bao, told Chew about fast growing JingDong.

That led to Milner’s first meetings with Liu in December 2010 and the agreement to buy an 8.8% stake for $500 million.

With JingDong under his belt, Milner had the street cred to reach out to Alibaba founder Jack Ma, who he’d already met in 2005, to eventually buy a single-digit stake in Alibaba too.

The Chinese advisory firms were useful to start building DST’s network, says John Lindfors, who manages DST’s Hong Kong outpost. “But the most important people from a sourcing point of view were actually other founders.”

By the time the JingDong deal was sewn up, Chew was working his network of founders to stalk DST’s next target, Xiaomi. The company was almost completely unknown outside China, but founder Lei Jun was an entrepreneurial star nationwide.

Chew asked to be introduced to a couple of startups for whom Lei was an angel investor, and through them scored a meeting with Lei in March 2011. In September 2011, a month after Xiaomi launched its first smartphone but before it had sold a single device, Milner, Chew and Lindfors sat down with Lei around a small coffee table in Xiaomi’s cramped offices, drinking green tea.

On the surface, investing in Xiaomi looked incredibly risky. Hardware manufacturers in China were two a penny and Samsung and Apple were devouring global smartphone profits. Xiaomi wanted to sell its phone exclusively online but that business model had been tried and tested by Google on its Nexus phone, which wasn’t exactly  a mainstream hit.

Milner put those problems aside and found himself struck by Lei’s methodical plan for a “triathlon” of hardware, software and Internet services.

“You can’t just be good at one thing but all three,” Lei had said during the meeting.

“Often you have ambitious entrepreneurs and they don’t know how to achieve it,” Lindfors says. “But he was the guy who had the whole package.”

Hours later the DST trio filed out of Lei’s office and got into their car, with Chew in the front seat and Milner and Lindfors in the back. As they zoomed through Beijing traffic they talked excitedly over one another.

“We were making all kinds of speculation of where he could take the business over time,” Lindfors remembers.

Milner turned to the others. “I really want to invest in this company,” he said. Lei later told them he never expected DST to invest, but after a few months of due diligence Milner’s company went on to spend $500 million over multiple funding rounds, including three exclusive rounds, to amass a 7% stake worth about $3.2 billion at its latest valuation.

How did he get the exclusive funding?

“Maybe there were not too many others who really believed in this company,” he answers cryptically, before repeating his mantra. “In order to believe you need to stay close.”

Milner continues to keep Lei Jun close, meeting him about ten times a year, typically on the Xiaomi founder’s home turf. Colleagues talk of hours-long conversations with founders like Lei, that start off on small details and lead on to bigger ideas. Last year Milner gave Lei a miniature model of the universe as a gift.

As ever, Milner isn’t big on details when pressed on how he makes his investing decisions. China was all about “becoming comfortable with the environment” and being on the ground, he says. He picks founders who look like they will change the world over the next 10 to 20 years.

To infiltrate close-knit Silicon Valley and then even-closer-knit China, it helped that Milner found it hard to call any one part of the world home, even though he has properties in Russia, Israel and Silicon Valley. “When you travel 200 days [a year] you get the strange feeling that you don’t belong anywhere,” he says, gesturing. “Like, literally!”

This global outlook translates to Milner’s main hobby, promoting discourse on the “bigger questions” of the origins and future of the universe, which he calls his “mission.”

Several years ago he co-founded the Breakthrough Prize, a glitzy annual ceremony that that’s become a kind of Oscars of science prizes. In last year’s event, the winning scientists seemed perpetually stunned as they came on stage to receive their multi-million dollar awards from the likes of Benedict Cumberbatch and Kate Beckinsale.

That’s just the start of Milner’s offbeat projects. Another is his funding of an organization called the Global Brain Institute. Milner has an optimistic view of the future of artificial intelligence, unlike Elon Musk, Bill Gates and Stephen Hawking, because he doesn’t think computers will ever be completely autonomous from humans. Instead we’ll eventually be part of a global symbiotic brain between computers and humans.

Francis Heylighen, a silver-haired math genius with bushy goatee and large glasses is currently building the world’s first mathematical model of what that global brain will look like, thanks to 1.5 million euro from Milner’s pocket over the last five years.

Milner reached out to Heylighen in 2011, in between his multi-billion dollar deal talks in China. When Heylighen got the email he thought it was spam. 

“It can’t be that I get an email from a billionaire,” he remembers thinking. 

But he replied, and soon enough found himself in a two-hour long conversation with Milner over plates of lasagna at the Hotel Amigo, Milner’s favourite haunt in Brussels. Milner agreed to fund Heylighen’s team if they could come up with a model to run a computer simulation of the global brain.

Heylighen is currently in his fourth year of research, updating Milner once or twice a year by video conference and bi-annual reports.

Why is Milner so keen to find a formula for the web anyway? Heylighen suggests it potentially opens the door to making predictions. And there may also be a cultural driver too. He notes that another Russian science colleague often gravitated towards big theories that could explain complex systems. “Russians like philosophies that can explain everything.”

For Milner the answer to investing isn’t complex. It’s simply about meeting the right person, which involves being everywhere all the time. 

“That’s why investing is so difficult,” he says. “Each time it’s slightly different. If there was a formula, everyone would be doing it.” 

 

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