12 rules of investing like Yuri Milner
Vladislav Solodkiy, Managing Partner, Life.SREDA VC:
1. He hasn’t financed most of the entrepreneurs he spends time with. While other investors endeavor to build institutions that will last for decades, Mr. Milner runs what is essentially a one-man show with a rolodex that’s decidedly global. His firm, DST Global, is staffed primarily by a small team of ex-Goldman Sachs bankers based mostly in Asia who help with due diligence and fundraising. And in an industry of consummate networkers, he has taken it to the next level, hosting lavish parties for an eclectic network across various geographies and industries.
2. Invest in attention (not in revenue) – it is the most expensive thing today (and money will come). Twitter’s $14.4 billion IPO, he says, is a testament to the power of social media. He considers the company “the largest influence mechanism in the world,” he says. Why its extraordinary market valuation? “Because exercising or trying to exercise influence is something people do very often.” He worked in finance for a few years before coming across a 1999 report by Morgan Stanley analyst Mary Meeker, describing the tech boom in the U.S. and how the industry was starting to grow in Europe. “This was a revelation,” says Mr. Milner. “How can it be that a company without any revenue could be worth $50 billion?” he asked himself. “I was like, ‘I like that! Brilliant!’ ”
3. Unlike many other investors, he often doesn’t take board seats and gives his votes back to the founders. In 2009, Mr. Milner put his first $200 million into Facebook, a large sum at the time for an investor outside of Silicon Valley. One reason he thinks that he was able to get involved with Facebook is that he was willing to invest during the height of the financial crisis. Pre-IPO investments in even high-flying tech companies that are not yet profitable usually conform to a specific pattern: A prestigious VC firm gets certain preferences when it invests (i.e., it gets its money out first should the company go public) and gets seats on the board (which means it gets a direct voice in the future of the company—almost always one that advocates an IPO as soon as possible). Milner offers something radically or foolishly different: an investment with no such preferences and no board seats. In effect, his money is like IPO money—no advantages for regular shareholders—without the burden of an IPO (the time suck of a road show, the administrative costs of being public, the short-term earnings pressure of the market).
4. He might be the most controversial money guy in Silicon Valley—sought after, feared, and derided in more or less equal measure. The message seems clear: Milner may have invested in virtually every social media powerhouse, from Facebook to Twitter to Spotify. He might be the vanguard of an entirely new financial philosophy. To many, Milner’s success is not just too much, too fast, but also somehow unfair. Which might help explain—and Milner very much wants to explain himself—how it is that he has gone from investing in a macaroni factory in Moscow to upending the American technology business. He is trying to say his success story ought to be just as appealing as any in the Valley. To many, Milner’s success is not just too much and too fast in a land of too much and too fast but … but … and here people start to petulantly phumpher … somehow unfair: Here’s an outsider who has handed out money at outrageously founder-friendly terms—paying huge amounts for relatively small stakes, essentially buying exclusive access to the most desirable companies on the web! It is his outsiderness that seems most irritating and even alarming. How is it that an outsider has spotted opportunities that the Valley’s best investors missed? Does Milner’s success suggest that the rest of the world is starting to horn in on what has been, to date, as American as apple pie—the Internet future and Internet riches?
5. Effect of “crazy dumb Russian money”. What Yuri Millner did to put Facebook back into the double-digit billions? Marc Andreessen: “Yuri came through Silicon Valley in 2008 or 2009 for the first time, and he basically said “I’m in business and I want to invest.” Top American investors were bidding at the $5, $6 and $8 billion level for Facebook and Yuri came in at $10 billion. “I was on the Facebook side of this and I had friends who were bidding on and I’d call them up to say “You guys are missing the boat, Yuri is bidding 10. You are going to lose this”. They basically said: “Crazy Russian. Dumb money. The world is coming to an end, this is insane.” What Yuri had the advantage of at the time, which I got to see, was that Yuri and his team had done an incredibly sophisticated analysis. What they’d basically done is watch the development of consumer Internet business models since 2000 outside of the U.S., so they had these spreadsheets that were literally across 40 countries — like Hungary and Israel and Czechoslovakia and China — and then they had all of these social Internet companies and e-commerce companies that had turned into real businesses over the course of the decade but completely ignored by U.S. investors. What Yuri always said was that U.S. companies are soft because they can rely on venture capital, whereas if you go to Hungary you can’t rely on venture capital so the companies have to make money. So he had a complete matrix of all the business models across all of these countries and then came all of the monetization levels by user and then all adjusted for GDP. He had the secret spreadsheet and you didn’t.” The dumb money has just bought itself potentially unlimited access to what is arguably the most important company to hit the Internet in a decade. One of the fastest accelerations in digital history has just begun.
6. “Relationship investments” as trust and insurance for founders. “You need to stay close to founders,” Milner explains. 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. 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 getting a handshake agreement from the startup’s founder Jan Koum in January 2014. DST’s money was taken as a form of insurance in case the Facebook deal fell through.
7. “In order to believe you need to stay close.” 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 (from XIAOMI) 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.
8. Fintech is the next big thing. DST and their partners personally (Tom Stafford, partner of DST, is responsible for fintech and does a lot for the industry) are very hungry for fintech and have already invested in a number of big companies such as Stripe, Funding Circle, SavingGlobal, LendUp, Xapo, LendingClub, Klarna, etc.
9. Don’t hide and don’t be afraid of your mistakes – have your own “wall of fame” with missed opportunities. The one flub he admits to is Uber. DST was presented with three opportunities to invest in the riding-sharing company 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.” Also, for example, DST didn’t invest in Square.
10. Milner may be a kind of prototype of a new generation of “global Russians”—certainly he has achieved some sort of “global being” status. Traveling alone, or often with his wife and daughters and his mother-in-law, he seldom spends a consecutive week on one continent. Quite frequently he would do every continent, save Antarctica, in a week. This is part of the discordant behavior that makes him an anomaly, if not a sore thumb, in his new Los Altos Hills neighborhood. Silicon Valley, despite being at the center of the digital world, is a hopelessly insular and actually rather hermetic place. Even its famous immigrant culture emphasizes joining the SV way. For all its talk of innovation, it resists almost anyone who is not part of its mainstream. Before Milner, it was even difficult to buy your way in—money in the Valley, the best money, the money that gets the best deals, always has a certain pedigree. Even New York money, not to mention money from God knows where, is regarded as lesser and suspect. Milner was one of six technology figures who had been chosen to brief the leaders of the G8 nations at this year’s summit in 2011 in Deauville, France. It was a remarkable example of his rising profile and the amount of power he has come to wield. The G8 Internet colloquiums included a series of high-profile speakers from among the digital elite: from the US, Zuckerberg and Google’s Eric Schmidt; from Japan, Hiroshi Mikitani, CEO of online retailer Rakuten; from France, Maurice Levy, head of ad agency Publicis Groupe, and Stéphane Richard, CEO of France Telecom. And then Milner. Why Milner? Partly because he has so ably insinuated himself into extraordinary networks, but also because he is the only one here who has roots in an upstart economy. That gives him unique perspective. He may be among only a handful of people who operate in multiple markets at the same time, without local infrastructure. This makes him a kind of free-floating state—a connector, a go-between, the ultimate independent player.
11. ‘Behind every successful man there is always a great woman’ (by Mark Zuckerberg). 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.
12. Be fundamental and do something that matters. Born in the Soviet Union in 1961, he was (like many Russian boys) named after Yuri Gagarin, the cosmonaut who that year became the first man launched into outer space. At age 12, Mr. Milner became interested in physics when a family friend involved in weapons development came over. After graduating from Moscow State University, he spent the next five years as a physicist. But while working on his Ph.D. he realized that he didn’t have what it took to stand out in the field. “I was not smart enough,” he says. “If you really want to do fundamental physics, you have to be extremely smart.” “Everyone was super scared to invest in anything,” he says. He has continued following developments in his old field, science. “I don’t have any other hobbies,” he says. “I don’t collect anything, and I’m not interested in sports, aside from going to the gym a few times a week.” He joined Google founder Sergey Brin and Facebook chief executive Mark Zuckberberg to launch an annual “Breakthrough Prize” in life sciences, which grants recipients from around the world $3 million each for their research. Previously he launched another annual award, the Fundamental Physics Prize, in which winners receive $3 million each (from the likes of Benedict Cumberbatch and Kate Beckinsale) for discoveries and research in the field. Past winners have included scientists Edward Witten and Stephen Hawking. He believes that attention to the sciences is being crowded out by our “celebrity-driven society,” he says. Mr. Milner hopes his efforts will help shift society’s focus to people working to solve longer-term questions such as “How did the universe come to be?” and “Why do we exist?”. 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 agreed to fund Heylighen’s team if they could come up with a model to run a computer simulation of the global brain. 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.” Recently he was personally funding a bold new effort to scan the skies for signs of intelligent alien life. Man’s quest for discovering life on other planets is getting a $100 million boost from a Silicon Valley magnate. For Mr. Milner, searching space is a passion project born from his belief that Silicon Valley’s greatest minds and latest advances can be put to a greater use in solving one of humanity’s most enduring questions: Are we alone in the universe? For his new project, the investor has won support from many of the world’s top minds in
astronomy, including an endorsement from Stephen Hawking.