Russian VC Invests $200M in Facebook

Facebook received a tidy $200 million infusion of cash May 26 from Russia-based Digital Sky Technologies, a global investment group with interests in Eastern European and Russian Internet businesses.

Digital Sky made the investment in privately held Facebook in exchange for preferred stock, which became a 1.96 percent equity stake for a $10 billion valuation. Digital Sky also said it is planning to offer to purchase at least $100 million of Facebook common stock from existing common stockholders.

The Moscow-based company joins Microsoft as a major Facebook investor. Microsoft bought a $240 million equity stake in Facebook at a $15 billion valuation in October 2007.

The details of the investment plan will be announced to eligible participants during summer 2009, Facebook founder and CEO Mark Zuckerberg said in a conference call. Digital Sky will not be represented on the Facebook board or hold special observer rights, Zuckerberg said.

Since its launch in 2004, Facebook has grown into the world's largest social networking company, but has yet to make a profit. Zuckerberg said he believes that will change within the next year as Facebook's targeted advertising and micropayment income streams mature.

"We've worked hard to bring more than 200 million people—70 percent outside of the U.S.—onto Facebook to share with friends, family and co-workers," Zuckerberg said. "A number of firms approached us, but DST stood out because of the global perspective they bring, backed up by the impressive growth and financial achievements of their Internet investments."

No specifics about how cash will be used

Zuckerberg did not specify how the new infusion of cash would be used, just that "it is a key part of our whole equity position going forward."

However, it is well known within the industry that Facebook is in the process of planning and building its own data centers so it can extract itself from its current co-location-based IT system.

"We expect to be cash-flow positive in 2010," Zuckerberg said. "We feel now [with this investment] that we have the buffer we needed. Despite a tough economy, our sales are up and we've been scaling well. Our ad products are continuing to evolve online and tens of thousands of businesses are now using this system."

Zuckerberg said he had been evaluating a number of investment offers but that he and Facebook decided they are only "open to interesting offers from investors like DST with deep understanding of the Internet space. DST's thinking and leadership in this area are impressive. As we scale worldwide, a good cash cushion like this is nice to have for the flexibility it affords us."

Digital Sky estimates that its five other social networking companies receive more than 70 percent of all page views recorded in the Russian-speaking Internet, targeting a potential audience of over 300 million people. It estimates that its companies hold positions among the top three busiest sites in Russia, Ukraine, Kazakhstan, Georgia and Armenia.

DST's Internet properties include Mail.ru, Forticom and vKontakte.

"Our investment underscores our belief that social networks fundamentally change the way we communicate," Digital Sky Chief Executive Yuri Milner said.

"By every important metric—user growth and engagement, technological innovation and financial performance—Facebook is on a similar trajectory [to our other investments], though on a much more global scale," Milner said.