[Infowarrior] - Russians Spend Big For a Piece Of Facebook

[Richard Forno]

May 27, 2009
Russians Spend Big For a Piece Of Facebook
By CLAIRE CAIN MILLER

http://www.nytimes.com/2009/05/27/technology/internet/27facebook.html?hpw=&pagewanted=print

A Russian investment firm, Digital Sky Technologies, has invested $200  
million in the social networking company Facebook in return for a 1.96  
percent stake, the two companies said Tuesday.

The investment values Facebook’s preferred stock at $10 billion, a $5  
billion drop from October 2007 when Microsoft paid $240 million for a  
1.6 percent stake. With the latest round of financing, Facebook has  
raised about $600 million since it was founded in 2004.

Mark E. Zuckerberg, Facebook’s founder and chief, said that the  
Microsoft investment was made at the “absolute peak of the market” and  
that it was a part of Facebook’s partnership with Microsoft, which  
includes advertising and search agreements.

“Relative to the economic conditions for when the Microsoft deal  
happened and that being more of a strategic partnership than a  
straight financial investment, we feel really good about the progress  
we’ve made,” Mr. Zuckerberg said in a conference call with reporters.

At the time of Microsoft’s investment, Facebook’s $15 billion  
valuation drew criticism for being unrealistically high and a sign of  
a bubble in social network investments. With the new valuation,  
Facebook is demonstrating to its critics that it is living up to its  
early promise. Facebook turned down better-known firms in the United  
States who reportedly offered to invest at lower valuations.

As with any private company valuation, it is simply a data point,  
venture capitalists say. Only when Facebook is sold to another company  
or sold to the public will a value be determined.

“It’s hard to extrapolate that’s what the company is worth at this  
point,” said Braden Berg, a lawyer in the Silicon Valley office of  
Mintz Levin who works with start-ups and venture capital firms. He  
said it was a valuable valuation, “and that may have been one of  
Facebook’s motivations.”

The fresh capital will provide a cushion for the company as it  
continues its fast-paced growth and explores new revenue sources  
beyond advertising.

Facebook did not need the money, Mr. Zuckerberg said. Its revenue is  
growing 70 percent year over year. He said the company would be able  
to run its operations from cash flow in 2010, even without the  
additional capital.

“The financing will serve as a cash buffer to support our continued  
growth, allowing us to scale,” he said.

Yet some Facebook observers have questioned whether a company growing  
so quickly, particularly overseas, where the online advertising market  
is smaller, can achieve these financial goals.

Facebook had 307 million visitors worldwide in April, almost triple  
the number a year ago, and 79 percent of them are outside the United  
States, according to comScore. It is quickly using cash to pay for the  
bandwidth and storage needs of the exploding user base abroad.

Digital Sky Technologies, which will not get a seat on Facebook’s  
board, will be able to help Facebook, which makes most of its money  
from ads, figure out new ways to make money outside the United States.  
It is a prominent Internet investor in Russia and Europe, where it  
owns stakes in Web companies that account for 70 percent of all page  
views on the Russian-speaking Internet, according to the firm.

Its portfolio companies include two large social networks, Forticom  
and vKontakte, and a Russian Web portal, Mail.ru. They have various  
business models, such as collecting micropayments from users and  
selling virtual goods.

These companies have figured out how to make money outside the United  
States much better than Facebook has, said Yuri Milner, chief  
executive of Digital Sky Technologies. He said that he was confident  
that Facebook would also be able to tap into these sources of revenue.  
“We believe the current valuation reflects that,” he said.

Digital Sky Technologies also plans to buy at least $100 million of  
Facebook stock from current and former employees, the companies said.  
Details of the transaction will be announced in a few months. This  
will let some Facebook employees receive cash before the company is  
sold, something Mr. Zuckerberg said would not happen in the near future.

“It’s not something we’re thinking about right now, it’s not something  
we’re rushing toward,” he said. “We’ll do it when it’s the right thing  
for the company.”