There is a saying that by aiming for the stars you might miss but still hit the moon.
However, if the people connected to Russia-based internet services group Mail.ru ever thought about this they would regard it as unduly pessimistic.
Their own development in creating a business that dominates the Russian-language internet market has also led to some of the most high-profile corporate venturing deals ever made.
The history of Mail.ru has been dominated for much of the past decade by Yuri Milner who was born, appropriately enough, just seven months after another Yuri, Gagarin, became the first person in space in April 1961.
In 1999, Milner had created an internet investment vehicle, Netbridge, to clone US online business models for the Russian market before merging it with shares in Port.ru, a holding company for the Mail.ru operations.
Milner had reportedly personally provided $750,000 of the capital behind Netbridge, with a similar investment coming from Gregory Finger, a Moscow-based fund manager at New Century Holding, which reportedly provided another $2.25m of a $4.5m total commitment as its first internet investment.
Mikhail Vinchel, a third co-founder, sold his remaining shares in Mail.ru in March this year, and in July became an investor in venture capital firm Buran.
Milner was initially chief executive of Mail.ru but, according to a profile by news provider Forbes, delegated much of the operational management to Dmitry Grishin, who joined the company as technical director after graduating in robotics and complex automation from Moscow State Technical University in 2001.
Grishin, who owns about 1.8% of Mail.ru, became chief executive in 2003, and in March this year added Milner’s chairman title after the company floated on the London Stock Exchange in November 2010. Grishin has also this year set up a $25m venture capital fund, Grishin Robotics.
But while US-listed internet portal Yahoo tried and failed to buy a stake in Mail.ru in early 2006, South Africa-based media group Naspers succeeded in buying a stake of undisclosed size in the Russian business in August that year at a reported $550m valuation.
In May 2006, Milner founded Digital Sky Technologies (DST) as a vehicle to take full ownership of Mail.ru.
DST increased its holding in Mail.ru to a majority stake in 2008 as Russian oligarch Alisher Umanov invested $350m. Hedge fund Tiger Global acquired 12% of DST and investment banks Goldman Sachs and Renaissance Capital’s Private Equity unit – subsequently known as Elbrus Capital after a management buyout – each bought 5%.
Naspers, meanwhile, was using its MIH corporate venturing unit to increase its interest in Mail.ru to 42.88%, as at March 31, 2009, as the portfolio company reaped the benefit of its strong market share and cashflow.
This Mail.ru balance sheet was then partially invested in corporate venturing deals in the US and Russia.
In Russia, Mail.ru was developing its portfolio with a reported $1bn invested in 30 businesses between 2005 to 2011, according to Forbes, including buying ICQ, the instant-messaging service once owned by internet services provider AOL and online games developer Astrum founded by Igor Matsanyuk – who subsequently set up venture capital firmIMI.VC – and minority positions in VKontakte, the largest Russian social network, and 21.35% of online payments provider Qiwi.
Mail.ru paid $112.5m to increase its VKontakte stake to 39.99% from 32.55% in July last year.
In America, Milner invested $200m in social network Facebook in March 2009 at $4.54 a share before lead-ing a later-stage round for the platform’s main online games developer, Zynga, in January to April 2010, and then backing online discount coupon provider Groupon in April 2010.
Also in April 2010, another of Naspers’ portfolio companies, China-based media group Tencent, invested $300m for 10% of DST at a $3bn valuation in order to tap into developments in the Russian internet economy.
This followed Mail.ru’s success in applying Tencent’s own business model – such as selling virtual curren-cies in online games and providing instant messaging services – in Russia.
Naspers had invested in Tencent in 2001 and uses a theory of geographical arbitrage to share online business ideas with portfolio companies around the world.
In July 2010, Naspers sold its then 39.3% stake in Mail.ru to DST, giving Milner and his backers full ownership. In return for the shares and a further $388m in cash, the South African company took a 28.7% holding in DST.
DST then split effectively into two businesses, DST Global as an investment vehicle to make further venture capital investments outside Russia, and Mail.ru Group to hold a portion of the shares in Facebook, Zynga and Groupon but primarily as the continuum company operating in Russia.
Mail.ru Group subsequently raised $912m in its London flotation co-ordinated by investment banks Goldman Sachs and JPMorgan in November 2010, while DST Global raised $1bn for a second fund in May last year and has been considering a third vehicle this year, according to newswire Bloomberg.
DST Global has done a series of large, later-stage investments, including buying a further $50m of Facebook shares at $20.85 each in December 2010, reinvesting in Groupon’s $950m round in January 2011, leading China-based online retailer 360Buy’s $1.5bn round in April 2011 at a $6.4bn valuation, joining a consortium backing US-based room reservation services provider AirBnB in July 2011, investing $400m in social messaging company Twitter in August 2011, as well as backing medical services company ZocDoc in September 2011, Sweden-based credit company Klarna’s $155m C round in December and online company Zalando in February this year.
A number of these deals, including ZocDoc and 360Buy, have been with DST backers, such as Tiger and Goldman Sachs, and the firm has hired a number of senior executives from the US investment bank, including John Lindfors, Alexander Tamas, Shou Zi Chew and Rahul Mehta.
Goldman Sachs also provided Verdi Israelian, former co-head of its European special situations group (CIS), as chief financial officer to Mail.ru Group, while the investment bank was an early investor in Brazil’s MercadoLibre, which has Marcos Galperin as chief executive. He is also on the board of the Russian company.
Milner, who splits his time between Russia and the US, also set up an early-stage investment vehicle, Start Fund, in January last year.
Start Fund is a joint venture between Milner and David Lee’s and Ron Conway’s angel fund, SV Angel – that has also backed Twitter and AirBnB – to offer $150,000 in convertible note funding to all compa-nies participating in the Y Combinator incubator run by Paul Graham.
Tencent also backs a number of Y Combinator incubatees, including EveryMe earlier this month.
As at April 26 this year, Naspers retains 29% of Mail.ru with three board members – Charles St Leger Searle, Mark Sorour and Hein Pretorius – while Tencent owns 7.8% after being diluted through the Russian company’s initial public offering (IPO).
Usmanov’s New Media investment vehicle owns 25.3% of Mail.ru as well as a reported 75% of DST Global, according to Forbes.
Naspers has applied the same strategy that has worked so successfully in China by effectively finding one local company with a strong management team and then investing for the long term and reaping returns through dividends.
Mail.ru, which made a secondary share placing worth $480m in April, paid its first dividend of $795m this year after selling shares in portfolio companies, including $855m of Facebook stock, at their IPOs.
Naspers’ share worked out at $230m, on top of the estimated $60m it received from Tencent through its dividend this year. Tencent, in turn, received $62m from Mail.ru’s dividend.
However, Mail.ru might have to wait longer for the next flotationof a portfolio company given Pavel Durov, VKontakte’s founder and co-owner, tweeted in May that: “No IPO is being planned. Facebook’s IPO has destroyed the trust of many individual investors in social networks, so [our] IPO is postponed indefinitely.”
Given Mail.ru’s websites reach 84% of Russian internet users on a monthly basis and, based on page views, the company is the world’s fifth-largest online business, posting a net profit of $208.6m last year, there is no reason Naspers will want to sell out soon.
The stars are nearly within its reach.