For the last few years, Russia's Yuri Milner has been the investor any Silicon Valley startup worth its salt wants to hook up with. He was one of the first, major backers of Facebook in 2009 and has since steered investments in a handful of late-stage Internet giants like Groupon, Spotify and AirBNB through DST Global, the investment fund he manages. Having led a reported $400 million funding round in Twitter in 2011, DST's stake is estimated to have been worth $1.2 billion at the time of the company's IPO in November. Milner himself has also piled money into a string of early-stage companies, including 23andMe, Genapsys and Coursera.
Recently he sat down with Forbes to talk about how the makeup of DST had changed ? sovereign wealth funds from China and the Middle East have replaced Russian billionaire Alisher Usmanov as primary backers ? why he loves Xiaomi, a upstart mobile player in China, and why he started the world's biggest monetary prize in science. He said he was surprised by the growth of Snapchat, but believed there was money to be made from ephemeral communication. He also expects to see 50 Internet companies with a market cap of more than $5 billion in the next decade. Milner rarely gives much away on detail, but he's clearly still bullish on the growth of global Internet powerhouses.
FORBES: How did DST Global do on the Twitter IPO?
MILNER: We'll have to wait and see when liquidity comes, but the Twitter team is doing a very impressive job, and we as investors are very happy. We are a very small part of the story, and it's a validation of the late-stage investment strategy. [Twitter] is an amazing service. To be able to provide this platform for some people to influence other people is a very important function in the world, and done in a very inexpensive and transparent way.
What are some of the big themes that are driving your investments now?
I think the biggest change in the last ten years is that many people are connected now. There are two and a half billion people who are connected to each other and to information, and that drives these amazing business models. We need to store this information in the cloud and search it, so then Google comes. You need to communicate more efficiently? Facebook. You need to shop more efficiently with all the information about goods in one place? Here comes Amazon. All these business models are driven by one simple fact: that everybody is connected. So as time goes by more and more people get connected, the screen size changes. It gets smaller. It becomes mobile. But fundamentally it all drives only one parameter which is the number of connected individuals and the frequency of usage.
One of the interesting themes we have been thinking about is who makes the devices. We found an interesting company in China called Xiaomi. It's a company we like a lot and there is a visionary founder behind it and a strong team. They have a chance to build one of the first consumer brands inside of China, and outside of China. It is really an interesting phenomenon, and very rare. Consumer brands are complicated and you need to understand things about people. Xiaomi has this interesting magic that people stay in a virtual line to buy their products.
The way they sell is truly amazing. They don't have any stores, and so it's Internet-driven sales. They have these periodic auctions where they just auction X number of phones, and all these phones go in a matter of minutes. Then they close the store because they don't have any inventory left. Then they open again in a few days and then they sell again in a matter of minutes. So they are open for very short periods of time for business.
And every two weeks they're rolling out software updates.
Exactly. It's really a combination of the Amazon way of thinking, the Apple way of thinking and the Google way of thinking. It's not really only a hardware company in the making.
Our latest investment is Lending Club. This is another company that emerged based on? helping to connect lenders and borrowers more efficiently. In fact, everything can be done in a more efficient way as long as everyone is connected. The basic business model is in a way similar for everyone but the nuances are different.
So It's about connecting people in an efficient way.
And then using connectivity to iterate on existing business models.
As Xiaomi does.
As Xiaomi does, as Lending Club does. For example, do you need such huge overheads to take money from some people and give it to other people? Maybe the overheads can be dramatically lower. Maybe you don't need the offline banking infrastructure for this. Right? So essentially the lending business can be optimized, and if you optimize it then of course you can provide it in a cheaper way. So essentially you cut out a lot of intermediation, and that's what Internet technology is about.
Now, there is a good side to this, because consumers are benefiting in terms of price reduction. Price, speed, everything is optimized. Consumers are much better off. But intermediaries are not in such a good shape. If somebody was 10 or 20 years ago buying something in place A and bringing it to place B and selling it there, and making his living, he cannot do it now, because all the prices are transparent.
It's generally harder to be a broker these days.
Right. So if intermediation is optimized then a lot of people who were in involved in this are under pressure. For example, people in retail stores, those at the counter taking payments.
In the world of media sales we're seeing transactions carried out by programmatic buying and algorithmic auctions.
You need less [sales people], and that means there will be a parallel social phenomenon. It's actually taking place. According to our rough calculation, 100,000 [retail] jobs are lost in the U.S. every year because of how efficient e-commerce is.
One hundred thousand jobs?
Right. This just shows that intermediation is under pressure and there is a social cost. The more efficient you are, the less people you need to make the same thing. So the social cost of efficiency is an important subject, and things are happening now much faster than they used to. The question then is will people be able to adjust to that pace of change. Because few hundred years ago there was not a lot change in your lifetime. You inherit the tools from your parents and you give them to your children. There may be have been a few percent improvement in harvesting, but when improvements now happen this quickly the question is how fast people can adjust.
What are the social implications of that?
I'm not an economist but I believe? there are a lot of jobs being created. But is it the same amount of jobs being created? They are different jobs, engineering positions. So are we capable of retraining people at that speed? That's a relevant question.
Back to DST Global's investments. Last time we spoke its primary investor was billionaire Alisher Usmanov, probably one of the few people in 2008 who could invest as much money as he did while a global economic crisis was raging. What's happening with your investors at the moment?
He was the first investor. Before DST he actually invested in a company that I started called Mail.ru, becoming the largest investor. And his investment in Mail.ru really allowed us to bring it to a completely different level and lead to successful IPO in 2010. His investment in Mail.ru allowed us to make the first investment in Facebook, because the first investment in Facebook was done by Mail. He then became the largest investor in our first fund. And we have evolved since that time. He is a very interesting person, and a very special person. When the crisis was so deep that nobody was willing to invest, he without any prior technology experience invested in Internet companies and could see potential, and he became our first backer. When I first met him I was amazed at how much he was reading. More than 200 pages a day of various kind of information. He has a very interesting perspective on a number of sectors and investments strategies. And since that time we raised the second fund and the third fund, and our investor base now is truly global. It's mostly sovereign wealth funds and high-net worth individuals from around the world, mostly from U.S. and Asia. As our investment portfolio became more global, our investor base also became more global and diversified quite dramatically from this first fund.
To what extent is Mr. Usmanov still involved?
He was the largest investor in the first fund. He was one of the investors in the second fund and he's not an investor in the third fund. But he was definitely the one who helped us to get going when 2009 was the year when there was a lot of fear in the markets and if anything people were getting out of investments.
Can you say anything about the origins of the sovereign wealth funds?
It's Middle Eastern and Asian. There are a few sovereign wealth funds who are backing us right now and they probably [make up] the bulk of the capital. And the next largest piece is high-net-worth individuals and then there is of course a GP contribution as well so we are part of that funding base also. And the money that I made while I was building Mail, I basically was reinvesting into the funds, personally. But our first success was determined by that first funding.
Why move your headquarters to Hong Kong?
I spend time in the U.S. and the team as well but we thought China was an important market for the next few years and you can see a lot of innovation beginning to take place in China. Tech innovation. It used to be the case that the ideas were mostly borrowed from the U.S., and then localized in China. But now more and more you see companies that are innovating dramatically. And you see the emergence of huge businesses like Tencent, Alibaba and Baidu. It also allowed the mergers and acquisitions market to emerge. Now not only do you have a venture capital market but an M&A market, so smaller companies get acquired by bigger companies and that makes the investment environment more vibrant. So the exit now is not only an IPO but a local acquisition. There was a lot of activity in the last few years in that space in China. So all that combined brought us to the idea of having our headquarters in Hong Kong, and have some native Chinese speakers. Probably we're the largest investor in China in that space.
How often are you in China?
Half the year?
That would be an overstatement but I'm there very regularly and this is an important place for us as a firm.
Would DST Global ever invest in Xiaomi? [Milner made a personal investment in 2011]
The mandate that we have [of investing in late-stage internet companies] is very specific. We have a way to address it by offering those opportunities directly to our investors. Which we do.
Have some of your investors invested in Xiaomi?
Yes. And others did not. But we as a fund can only do what is in our scope.
How much of a threat do you think Xiaomi poses to dominant device makers like Apple and Samsung?
I would not really compare it against, or make this call of who will get disrupted. But it is definitely a new phenomenon. It's different in a few substantial ways. The distribution is all virtual. There are no physical stores. Second, even the virtual store is not open 24/7 it just opens up for a short periods of time and then closes down again. There is almost a complete absence of any kind of advertising. There's a very significant social networking element. The founder has more than 5 million followers on Weibo. So what happened in the course of the last 10-15 years, all of a sudden to be a hardware company you do not need to have production facilities. So you can outsource production to other players and you can be more virtual as an organization. Xiaomi is really capitalizing on that as well.
Another distinctive feature is the pace of operating system upgrades ? they almost do it on a bi-weekly basis. I think the amount of feedback that they get from users, and then analyzing it is unprecedented. They are on a constant dialogue with users more so than other players in this space. And of course the vision of the founders and the team is really impressive. There's a lot to be learned about the way they're running a hardware company as if it's a software company.
Last time we met you were focused on Mary Meeker's prediction about the rise of mobile and social, and some of the biggest players in mobile / social today are messaging platforms. The big players are WeChat, WhatsApp and KakaoTalk with hundreds of millions of active users. What do you make of this market? Is it a fad as some suggest, or are these companies poised to become the next big players in mobile and social networking itself?
This is a new phenomenon that emerged over the course of the last few years. It is definitely a new way to communicate. The scale that some companies were able to achieve just in the course of a few years is really extraordinary. It's an interesting variation of social because of the access to your phone book, so you can spread extremely quickly. It's sort of a combination of something very local, which really sits on your phone, and something which is going on on the server. So it also often provides more secure communication, which is appealing to some people. So it's an interesting new phenomenon, which has to be acknowledged, and I do believe that there will be a number of interesting companies emerging in this space.
These platforms are struggling to get much headway in the U.S., the big market they want to crack but cannot. Why do you think that is?
There is a significant presence of other communication tools like Facebook, and the Facebook Messenger app. I think there is a very significant marketshare of Apple's communicator in the iPhone. Because iPhone have such significant marketshare in the U.S. I think that changes the landscape. I would just say that the dominance of big players in US is probably the reason why globally it's more open for startups.
Snapchat reportedly said no to a $3 billion offer from Facebook. Why do you think they did that?
I cannot comment on this. It's up to them to make those kinds of considerations.
A buzzword that's going around in mobile is "ephemeral," tied to the idea of self destructing photos and messaging. Do you think that has a future?
I think they discovered something very interesting about human beings, in a way that we actually value this no-trace communication. It was not obvious if you just think about it, but it turns out that some part of our brain is probably wired for those kinds of services. So I think it's a significant innovation. I think it's maybe one of the few significant innovations in the last couple of years that you can actually build a business around that.
So can you monetize that?
Well the future will tell, but at least these businesses can reach a certain scale, which is completely not obvious. I think that there is probably room for other businesses to be built based on this concept. So if you ask yourself what else can disappear you can probably build a few other businesses just based on that concept. But I think it's a fascinating concept, and it's so unexpected.
Did it surprise you?
Yes it did surprise me. It fascinates me. It looks like this is something organic to young people for sure, which is very interesting.
Not leaving a digital trail that future bosses can judge them by.
Yes and this whole concept of just not having information stored. Because just before these businesses start to emerge, the idea was to have as much information as possible. So you can have your memories and go back and do many things.
Life logging seems a prime example of that.
And it turns out there is significant room for a different extreme here, which is not storing any information. That's probably how our brains operate. Probably they have a way to sort out which information needs to be stored.
My brain is only going to remember part of this conversation.
Right. And so the brain has some way of dealing with information but the Internet was previously suited for storing everything. So maybe this is something going back to our roots where our brains are hardwired to store some information but not all of it.
You've said before that the Internet constitutes the ongoing development of a kind of collective brain. Perhaps we'll see more of that in the future ? not all data automatically being stored and parsed through, but only the most valuable data.
As the human brain does.
Let's talk about the Breakthrough Prize coming up on December 12, now the world's biggest monetary prize in science. Why did you set this up and what are you hoping it will achieve?
Fundamental science and the people who practice it are less and less appreciated in our world. In fact I think they're almost marginalized in public perception. If you look at the list of celebrities that we have globally, you'll see a lot of entertainers and athletes and some politicians and a small number of businessmen, but you don't really see any scientists in the top 200 or 300. And I think it's not a good thing for society at large. It wasn't always the case. There was a time when people like Einstein were well known and recognized by the public. They had a lot of influence on certain decisions. Now it's very different. I don't think scientists have any significant influence over policy making and they are not very well known to the public.
The prize that we launched together with Mark Zuckerberg and Priscilla Chan, Sergey Brin and Ann Wojcicki, Jack Ma and his family foundation and myself with my wife Julia, is designed to try to address this issue. To elevate the importance of fundamental science, to create a platform for scientists to become more well known and also to provide some monetary rewards for the best minds in the world; $3 million for each prize, and we collectively give over $20 million a year in life sciences and physics.
We somehow evolved from the position when we were really interested in asking big questions about the origins of the universe, how life began and if there is other life in the universe. Those are the big questions that we have the ability, because of our amazing brains, to ask and answer in a more meaningful way compared to 200 years ago, and yet those questions are rarely in the center of attention for the general public. Instead we focus on the very short term problems that have an immediate impact on our lives. Which is understandable, but when Paul Dirac, the famous British scientist, came up with his relativistic quantum mechanical equations -he made a major breakthrough that allowed us to ultimately build semiconductors and create computers and the whole Silicon Valley. There's always a way to put these discoveries to use and eventually a significant fraction of GNP in the world is based on discoveries made all those years ago. But do those people get credit, and do we celebrate them?
Do you hope to create celebrities out of some of these scientists?
That would really be a good outcome if some of them would become celebrities using this platform. There would be an additional inspiration for young people in school to see some scientists get credit and recognition for what they do, and that there is some decent monetary reward for the best of them.
It would really be great if once a year, at least for an hour, people would focus on big questions. Just one hour a year. That's what this ceremony is and we hope it will be televised. One hour a year is not a big tax to think about these questions. As you try to think those through maybe some of those things all of us are doing can be put in some sort of perspective because there is definitely a big world out there and we are not in the center of the universe. And yes there is a lot happening around and yet there are this big overwhelming questions and once in a while we have to focus on them.
And become more contemplative as a species.
Yes. Would you agree?
Sure. Looking ahead, what are some late-stage companies and tech entrepreneurs that we should look out for in 2014?
Companies that are scaling globally. So that's Spotify, AirBNB, Xiaomi, which has just branched out of China and gone into Taiwan and Hong Kong. They are really positioning themselves as global players as well. We believe that in the next 10 years there will be 50 companies in the Internet space with a market cap of more than $5 billion. And there will be 10 companies in that space in the top 100 global companies. The combined market cap of all these companies will be $3 trillion, as opposed to $1.5 trillion right now. So I think the whole market will double in terms of capitalization. There will be a big tide that will be raising many boats, some more than others.
|Source - forbes.com||Read Full Interview|