Why Facebook needs DST in Russia

There's more to the DST investment in the social-networking site than $200 million.

Updated at 8:30 p.m.: to correct that DST has no funding from the Russian government.

As reported earlier, Facebook is taking a $200 million round of funding from Digital Sky Technologies, a Russian investment company. While Facebook CEO Mark Zuckerberg said in a conference call Tuesday morning that Facebook revenue numbers were up, that the company was growing, and that Facebook was, "on track to creating a nice, self-sustaining business," he explained that at Facebook, "we're open to interesting offers."

With many companies wanting to invest in Facebook, what made the DST offer so interesting?

Regional knowledge

Facebook COO Sheryl Sandberg told me that Facebook was "not actively seeking investments." DST input will be key to Facebook's Eastern European business growth, though. "This is an investment with a strategic partner. We're excited for the learnings," she said.

New Facebook investor Alexander Tamas of Digital Sky Technologies. Facebook

But a source familiar with DST laid it out for me a bit differently: if Facebook wants to be successful in Russia, DST can bring a lot to the table besides knowledge. DST is close to the government there, the source said, and while outright involvement (or obstruction) from the Russian government is highly unlikely, if Facebook wants its business to go more smoothly, DST can help.

For example, should Facebook want to hire Russians, a connected investor like DST could help. DST influence could be even more important if Facebook wanted to acquire companies in the region.

DST's Alexander Tamas told me his company is private and does not have many interactions with the government. There is no government funding in DST. Still, our source says that DST's connections to the government, subtle though they may be, are important because the Russian market is not friendly to outsiders. "It's a market where you want a partner," I was told.

DST's investment gives it no power over Facebook in the United States, and reportedly no control of the company nor access to U.S. customer data. But through this arrangement, Facebook will likely have an easier time growing its market share in Russia, of obvious benefit to its new investor.

DST: Let them compete

A strong Russian Facebook will also force a competitive evolution of other Eastern European social sites. Tamas says that DST has more than a dozen social network investments, including the top three social sites in the region in terms of traffic (Forticom, VKontakte.ru, and Mail.ru). These sites, and others in the DST portfolio, compete with each other to an extent, and DST is fine with this. "We don't interfere with operations," Tamas says. This arrangement is in stark contrast to many U.S. venture funds, where investors and entrepreneurs expect that the funders' full attention will be on growing their portfolio company businesses. U.S. VCs often make sure their potential portfolio companies are, if anything, potentially cooperative before they invest, and will not take on companies competing for a market they are already in.

However, when your portfolio controls 70 percent of your market, as Tamas says DST's does (the market being the Russian-speaking Internet), there is no avoiding the competition. Adding Facebook to that stable will give DST an even more commanding position on the Russian social nets, even if Facebook itself will become just one of the region's big social sites.

DST's leadership position also creates an opportunity for DST to create a region-wide advertising network for these social sites, but Tamas said there are no plans to create an advertising network across the DST sites, "at this stage."

Facebook's Sandberg says that the approach of taking regional investors is not new to Facebook; Hong Kong's Li Ka-shing sunk $60 million into the company in 2007.

See also: Kara Swisher interviews Sandberg and Alexander.

Related: Facebook investment puts spotlight on Microsoft stake .

Additional reporting by Dan Farber in Carlsbad, Calif.

 

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