This article was taken from the December 2011 issue of Wired magazine. Be the first to read Wired's articles in print before they're posted online, and get your hands on loads of additional content by subscribing online.
This is my first trip to Moscow, and Yuri Milner, the world's most successful investor in social media, is taking me to his parents' apartment, which he bills as a typical middle-class Moscow dwelling. It's drab Soviet brick outside. The none-too-reliable-looking lift is encircled by a crumbling staircase. But inside the apartment is genteel and highly recognisable. It's cramped but comfortable, filled with way too many books. Milner's father, Boris, is an 81-year-old former professor -- a specialist, during the Soviet era, in American management practices, no less -- who has written or edited more than 50 books and is eager to show his guest all of them. His less garrulous mother, Betti, who lays out a table of tea and copious sweets, is a doctor who practised at the Moscow Department for Disease Prevention for almost 40 years.
The message seems clear: Milner may have invested in virtually every social-media powerhouse, from Facebook to Twitter to Spotify. He might be the vanguard of an entirely new financial philosophy. He might be the most controversial money guy in Silicon Valley -- sought after, feared, and derided in equal measure. But at heart he is just a nice Jewish boy. Which might help explain -- and Milner very much wants to explain himself -- how it is that he has gone from investing in a macaroni factory in Moscow to upending the American tech business. I believe, too, he is trying to say his success story ought to be just as appealing as any in the Valley.
It certainly hasn't played that way in the tight-knit club of Valley venture capitalists. In fact, the more successful Milner has become, and the faster he has compounded his success -- beginning with his night-raid investment in Facebook in 2009 and now encompassing major positions in Zynga, Groupon, Twitter and Spotify -- the more suspect and outré he has come to seem. He's definitely not your conspicuous non-consumption Valley billionaire.
Kara Swisher, who, with Walt Mossberg, runs The Wall Street Journal's D Conference, one of the prestige events in the technology business, told me with arch inflection how Milner -- a Vladimir Putin lookalike with a dark undershirt always peeking out of his collar -- had shown up at the conference with a blonde model towering over him. (Swisher was only slightly sheepish when she found out this was his wife.) What's more, a whisper campaign has dogged his American adventure. Indeed, among the early backers of his investment fund, Digital Sky Technologies, was Alisher Usmanov -- one of the richest men in Russia, whom even other Russian oligarchs find, to say the least, a little dodgy Usmanov's résumé includes alleged Kremlin associations and an overturned conviction for fraud and extortion. He also has a near $18 billion (£12 billion) fortune in mining, steel and telecoms, as well as the obligatory stake in a Premiership football club.
His house has not helped, either. Milner, who runs his business from a no-frills office suite in Moscow, is spending more and more time in the Valley and so has bought a place in Los Altos Hills -- not just the Valley's most expensive house but, at a reported $100 million (£63.3 million), among the most expensive in America. (Milner is embarrassed about this and seems aware that he may have misjudged exactly how this purchase would be seen.)
To many, Milner's success is not just too much and too fast in a land of too much and too fast but... but... and here people start to bluster petulantly... somehow unfair: here's an outsider who has handed out money at outrageously founder-friendly terms -- paying huge amounts for relatively small stakes, essentially buying exclusive access to the most desirable companies on the web! It is his outsiderness that seems most irritating and even alarming. How is it that an outsider has spotted opportunities that the Valley's best missed? Does his success suggest that the rest of the world is starting to horn in on what has been, to date, as American as apple pie -- the internet future and internet riches?
That's why I'm here in Russia -- to try to figure out just what his advantage is. If he is a game changer, how exactly does he game change? I'm curious, too, about what he's after personally: he seems to want respect from the Silicon Valley folk, but why would he? Why does he care what they think? Milner's rise as a power-brokering investor happened so fast -- his fund went from zero equity to more than $12 billion in US assets in under two years -- that his story has not had time to come out. Russia may well be the most captivating place on Earth for businesspeople, because it is purely about cause and effect. All of the power dynamics are on the surface: here's who has the money, here's who has the influence, and here's who controls the resources, so all you need is the gumption and the savvy to take advantage of them.
After the collapse of the USSR, a class of robber barons, the oligarchs, rose to control much of Russia's vast resources. In a disorganised and corrupt process of privatisation, they came to control vast reserves of Russia's export wealth: oil, minerals, lumber and wheat passed very cheaply from government to private hands. A not inconsiderable point: a disproportionate number of the oligarchs are Jewish. The Jews in the USSR, often kept from taking official career paths, came to thrive in the grey and black markets. Hence, they were among the only capitalists in Russia when capitalism emerged.
Milner, a half-generation younger than the first rank of oligarchs, was selling grey-market computers when the end of the USSR arrived. He bought old DOS machines, imported or smuggled from the US, and delivered them at appointed street corners.
His father wasn't pleased. Milner was slacking off his studies as a physics graduate student and doing things that could get him into trouble with the authorities. His father's solution was both predictable and a wild leap into uncharted waters: his son should get an American MBA. In 1990, Milner enrolled in the University of Pennsylvania's Wharton School, where a close friend of his father is a professor.
This leap for Milner was radical in all the obvious, transformational, emotionally topsy-turvy ways that might be imagined (he was a great oddity at Wharton), but it was also a leap into one of the most dramatic and picaresque moments of American capitalism. It was the age of the takeover artist -- Michael Milken, Carl Icahn, Ronald Perelman, Henry Kravis -- and Milner fell in love with them all: "These are very romantic figures for me, and they are very American."
Meanwhile, his own country was imploding and turning into, for some, a highly profitable free-for-all. Watching from afar in Philadelphia and filled with envy, Milner, after Wharton and a three-year stint at the World Bank, came back to Moscow. He went to work for the now-imprisoned enemy of Putin and founder of Yukos, then Russia's largest oil company, Mikhail Khodorkovsky, who in the 90s was in the process of devouring, some would say by extraordinary means, great parts of the Russian economy. Milner proposed to Khodorkovsky that they try a legal takeover -- American style, and the first ever in Russia -- of a confectionery company.
The takeover failed (Milner wrote a book about the experience, pleasing his father), and he went out on his own. In 1998, he assembled a group of investors and bought a macaroni factory.
Russia had just defaulted on its debt, and Milner figured that was the end of the days of imported macaroni. But macaroni was hardly the point.
Nobody in the digital world knew that the man in the Russian macaroni factory existed, but his nose was pressed to the glass.
Sitting up late at night in the factory, as his cashflow mounted, Milner was focused on the US. It was the apogee of the dotcom moment, 1999, and Milner fastened on to an American business theory. The theory held that the internet is an advertising medium where users themselves create the vast amount of content. In other words, as Milner understood it, the same ocean of advertising revenues that had gone to traditional media might now go to the internet, but without the off-setting costs of creating content. "From margin standpoint," Milner noted, "this is very magical."
But then the bubble burst spectacularly. Mail.ru, then the biggest internet company in Russia, valued at its height at $100 million, crashed too. Milner, with his macaroni cashflow, bought it on the cheap. The grey-market Soviet hustler turned would-be Russian oligarch had become a dotcom entrepreneur.
I first met Milner in 2009, a few months after he had made a surprise investment of $200 million for a two per cent stake in Facebook. Milner was the new boy in town. He obviously knew few people, did not travel in elite tech circles, and failed most of my name-dropping tests. Though through Mail.ru he knew the Goldman Sachs guys in Russia.
The decision to invest in Facebook was partly the result of a gossipy Moscow dinner with the Russian Goldman guys, during which the bankers mentioned that Facebook might be looking for major investment. This was just after Lehman Bros collapsed and the world economy had plunged into crisis. MySpace, the leader in social media, was sinking fast. But Milner was stirred. What's more, he had money in the bank. He had created a separate fund to invest in international, and especially American, internet companies, with Usmanov taking the biggest stake. The oligarch has the money and an interest in internet properties, including, along with Mail.ru, an investment in the news sites Livejournal.com in the US and Gazeta.ru in Russia. The fund is called Digital Sky Technologies, and Facebook is its first target.
But even at this dire international financial moment, a call from an unknown Russian, however flush he might be, to then Facebook CFO Gideon Yu seemed quixotic. Yu politely expressed his lack of interest in Milner's offer. But Milner got on a plane, flew to California, and called Yu from San Francisco. Yu, begrudgingly impressed, agreed to a meeting. Milner proposed a game-changing deal.
Pre-IPO investments in even high-flying tech companies that aren't yet profitable usually conform to a specific pattern: a prestigious VC firm gets certain preferences when it invests (ie it gets its money out first should the company go public) and gets seats on the board. Milner offered something radically or foolishly different: an investment with no such preferences and no board seats.
The proposal represented, too, a philosophically new and audacious view: once a company reaches a certain size -- a billion-dollar valuation, by Milner's reckoning -- its investment profile changes. It holds enough market share and has established enough brand identity that it represents significantly less risk than VCs have traditionally considered startups to have. But that's not how the rest of the world interprets it. Instead it's seen as a desperate and rather vulgar deal on the one hand -- Milner buying a small stake in Facebook, valuing the entire company at $10 billion -- and, on the other, Facebook debasing itself by taking Russian money. In fact, it seemed like a desperate deal for both parties (in the midst of the banking crisis, Facebook had only two other bidders for that round, and none from the top tier of VCs).
Back in 2009, I didn't come out and say, "Facebook has taken Russian money, so what does that tell you about the state of the industry and the state of social media? It tells you that social media is probably not such a great investment." But it was certainly what I was thinking. I peppered Milner with questions about more conventional issues: the burden of privacy concerns weighing on Facebook, the callowness of Mark Zuckerberg, the shadow of MySpace. The Russian was not just monosyllabic but, I detect, bored. Or brooding. I was not getting that, in a matter of months, it would be clear that social media was transforming the fundamental behaviour of the internet. And I was not getting the big picture of Yuri Milner, that he had, unbeknown to anyone, altered the power equilibrium of technology money. "I have invested in four social networks. More than any other," Milner explained. "But that's in Russia and Poland..." In other words, in a market that can hardly be compared to the US.
Although Milner seemed to have made a chump's deal without all the protections that early-stage money is usually entitled to, for a period of time he had got one thing: a right of first refusal on any other Facebook stock that changes hands. The dumb money had just bought itself potentially unlimited access to arguably the most important company to hit the internet in a decade.
More than a year later, I ran into Milner in the lobby of the Ritz-Carlton in San Francisco. Since we'd last met, he had raised his stake in Facebook to almost nine per cent, and had made the obvious leap into Zynga and Groupon. If he was not yet loved by the Valley, he seemed to have come to know almost everyone there. In fact, he had become something of a ubiquitous figure, speaking at every technology conference. "How are you?" I asked, wondering if I should suggest coffee, but Milner was often so terse that this seemed a scary thought. His phone rang. Conversation over. I read the answer to my question in the paper a day or so later. Google had reportedly made a $3 billion bid for Twitter, which was countered by a bid for a stake in the company from Kleiner Perkins that valued the business at $3.7 billion, which in turn was countered by a bid from Milner that valued the company at $4.2 billion. Twitter took the Kleiner money at nearer the Milner valuation, until eight months later when it took the Milner money, too, although this time at an amount that valued the company at $8.4 billion. It's the new reality of social media: wherever something is happening you now find Zelig-like Milner. Money for him is no object.
In October last year, Milner had coffee with Mark Zuckerberg at a Palo Alto Starbucks. The two had developed an easy relationship.
Zuckerberg said he was thinking about raising another billion or two. If he was going to do it, he wanted it in 60 days. Milner said that even for him it was a lot, but he'd deal.
Milner, not only the largest outside investor in one of the world's most sought-after companies but, thanks to his relationship with Zuckerberg, one of its gatekeepers, cut Goldman into the deal.
Goldman agreed to put in $375 million of its own capital against Milner's $125 million and raise the rest from its standing clients.
Last January, on the day before the offer was to be made, The New York Times's Andrew Ross Sorkin called Goldman and said he had the story, causing great gnashing of teeth. The firm believed that if the offer were issued after a story in the Times, it might be in violation of rules about marketing securities, hence, in a panic, Goldman issued the offer via email before the story broke.
Two things happened: Goldman's clients clamoured to invest, and the offer was immediately oversubscribed by a factor of 13, giving a dramatic preview of Facebook's IPO strength. Within days, Goldman's lawyers, suddenly nervous, nixed it. At any rate, they nixed it for Americans -- but not for Goldman's foreign clients, who, including Milner's stake, completed a $1.5 billion round that valued the company at $50 billion (£31.67 billion).
I asked Milner if he'd co-operate on a profile for Wired. He equivocated but was much more forthcoming when he discussed his own rising position in the social media revolution. It was clear that his horizons were continuing to expand -- from investor to worldwide intellectual force. "I must analyse," Milner says considering my request, "from what I do now, what the impact will be two, three or five years in the future. What is the statement I want to make? It's an opportunity to take a position on global scale."
A month later, Milner called to tell me that he was one of six tech figures chosen to brief the leaders of the G8 nations in Deauville, France. It is a remarkable example of his rising profile and the amount of power he has come to wield. Why Milner? Partly because he has so ably insinuated himself into extraordinary networks, but also because he is the only one who has roots in an upstart economy. Milner spoke last. Italian prime minister Silvio Berlusconi was asleep, and the other G8 leaders -- David Cameron, Barack Obama, Dmitry Medvedev -- were distracted by their iPads.
Milner gave a smart and clarifying speech about social technology.
He sees networks like those created by Twitter and Facebook as steps in the development of a global brain. The entire social landscape adds up to a new collaborative consciousness that transforms the nature of information and, as well, the existing monopolies of it.
Milner may be a kind of prototype for his idea of a global brain; certainly he has achieved some sort of "global being" status. Travelling alone, or often with his wife and daughters (aged six and four) and his mother-in-law, and keeping his Moscow office staffed 24/7, he seldom spends a consecutive week on one continent. Quite frequently he will do every continent, except Antarctica, in a week.
This is part of the discordant behaviour that makes him an anomaly, if not a sore thumb, in his Los Altos Hills neighbourhood.
Silicon Valley, despite being at the centre of the digital world, is hopelessly insular and actually rather hermetic. Even its famous immigrant culture emphasises joining the SV way. For all its talk of innovation, it resists almost anyone who's not part of its mainstream. Before Milner, it was even difficult to buy your way in: money in the Valley, the money that gets the best deals, always has a certain pedigree.
But Milner's upstart and almost otherworldly status, although not necessarily helping him make friends with his new neighbours, has given him a new and, in many ways, disquieting advantage in the circumscribed digital world. He might be among only a handful of people who operate in multiple markets at the same time, without local infrastructure. This makes him a kind of free-floating state -- a connector, a go-between, the ultimate independent player. It is not just his access to global capital or his facility in markets where being an American is not necessarily an advantage (in the past 12 months, he has invested more than $1 billion in Chinese internet companies) or his incredible and ever-expanding sources of intelligence in the fast-growing global digital market. No, it is simply that he likes it: he's happiest being in transit.
And yet, of course, Milner, despite his global consciousness and peregrinations, is Russian. While in some sense he has tried to move himself from this base -- Mail.ru went public in London in 2010, and DST is all but set on doing business in only non-Russian-speaking countries -- his home and base are in Russia; until two years ago, the majority of his capital was still Russian (today, 70 per cent of his capital comes from outside his country); and, one suspects, the people who can most complicate his life are Russian. Indeed, despite his global expansion and the personal fortune he has amassed on paper from DST -- two per cent annual fees on the fund's $1 billion in capital; 20 per cent on gains of more than $10 billion -- he seems very much attentive to the politics of Russia.
Milner's invitation to interview him in Moscow, which arrived as though it had always somehow been expected, came with a condition attached: that I come first to St Petersburg and moderate a panel at what is called the St Petersburg International Economic Forum.
Like much Russian capitalism, it's an insular imitation of something: in this case, the World Economic Forum in Davos.
Milner is the organiser of the panel as well as one of its main draws. He is the interviewee as well as the stager of the interview. In fact, he lays it out for me: these are the people I should call on to speak for the Russian view; this is whom I should call on to speak for the American view; this for the international view; and Yuri Milner for the view in between.
The Russians on the panel include Dmitry Grishin, whom Milner has installed as CEO of Mail.ru, now the second-largest internet company in Russia, and Arkady Volozh, CEO of Yandex, the largest internet company in Russia. The Americans are Mary Meeker, a former Morgan Stanley analyst who now works as a VC at Kleiner Perkins, and Jim O'Neill, the Goldman banker who coined the term BRIC. And representing the international view are Daniel Ek, the Swedish cofounder and CEO of Spotify, with whom Milner has been in the process of negotiating an investment, and Peter Vesterbacka, the roving head of marketing for Rovio, the company that created
Angry Birds. Although Milner seems sceptical about the company's claims that it will shortly be bigger than Facebook, he has discussed investing in Rovio.
Successful people, it should not be a surprise, are often trying to explain their success to themselves as much or more than to other people. As Milner takes me on a tour through his Moscow, he seems to be marvelling at himself. But not at all in a prideful way. He's almost a witness, trying to explain and illustrate both his ordinariness and his uniqueness.
Dinner is in his apartment in the outskirts of Moscow. It's three well-secured floors in a comfortable, almost LA-suburban-style high-rise decorated by his wife Julia. They moved here just two years ago -- part of the wide transformation in their lives -- from a much smaller in-town home (which Milner has given to his nephew). Other than the sheer size of the new place, the only element that really distinguishes it is that where someone else might have crammed in a lot of art, Milner has crammed in video screens, each tuned to some global news outlet or real-time social-media application. It's here, before dinner, that Milner tells me that he didn't quite graduate from Wharton -- he was, in fact, a few credits short. It's a pointed admission; he seems to want to clean up the record (and to point out that many successful people in the Valley never graduated, which perhaps increases his credibility).
Dinner itself, still but pleasant, is partly prepared by his wife and partly a take-out buffet of hummus and tabbouleh. His two daughters, whom Milner hopes will demonstrate their English, join us. They are charming if reluctant performers.
In the morning, Milner and his driver fetch me from my hotel.
The first stop is his new synagogue, a tonier and more conservative temple, and with more security, than the one he grew up in.
Jewishness is a pronounced theme in the tour: the Jewish boy, having sweet revenge, has become a member not just of the Russian establishment but of the new-world technology order. But it goes only so far. When I ask how observant he is -- without mentioning that his wife is not Jewish -- his response is piquant: "Very limited." He offers a yarmulke from the communal bin as a souvenir.
We chart the oligarch's rise through neighbourhoods and schools that give neither a sense of destiny nor, for that matter, much sense of the long Soviet pall that fell over half of his life. But, clearly, the fact that the pall has lifted still seems like a marvel to him. He recounts his father's near brush with Stalin and, when we reach Red Square, recalls still with some breathlessness how he was here, with few others, when the Soviet flag was lowered and the Russian flag hoisted. Trying unsuccessfully to jump the queue to visit Lenin's tomb, Milner sketchily outlines his own current place advising the government, appointed by Medvedev to sit on a committee that seems to be akin to the Council of Economic Advisers. Curiously, he casts this in almost pro-American or new-generation terms: the two non-politicians on this committee, he and Mikhail Prokhorov (owner of the New Jersey Nets), have both heavily invested in the US.
Lunch is at a new Italian restaurant with a terrace that overlooks the White House, Russia's parliament, which during the 1991 uprising was occupied by dissidents. Milner points out the stretch of road where he was standing that day and the stretch just ahead where various other bystanders were killed. Milner retreated into this building, on top of which is the restaurant where we are now eating our quail risotto.
We decamp to Moscow State University, where he graduated with a degree in theoretical physics. Walking through the small park, which counts as the campus, in front of the massive building, Milner, who was slotted into the lesser track instead of the more elite one, gives another rueful picture of the system's slights to Jewish students.
It is hard not to read the obvious: who would be more gobsmacked by the implications of social media, the prospect of everyone talking to one another without an arbiter, mediator or censor, than a citizen of the former Soviet Union? Likewise, who would see it as more revolutionary and valuable?
That is the unique insight that transformed Milner and through which he is transforming technology finance: it seemed worth more to him than to anybody else (at least anybody else with money). In a way, he is to social media what Michael Milken in the mid 80s was to many non-creditworthy companies. Like Milken, Milner, in part through the lens of his own life's experience, saw another level of value entirely. If the world was being transformed by social media, it was more valuable than anyone thought. And if technology companies had reached a certain level of value, that was a pretty good indication of their permanence. Accordingly, he upped the anteand put social media and himself at the centre of technological development.
Indeed, there is a different or further mission. He's more beholden, he's more in awe, than the Silicon Valley establishment -- blasé or cynical as any other establishment -- is of its geniuses. There is always something vaguely oppositional about the relationship VCs have with the companies they invest in. They are trying to maximise their positions, to pay as little as possible and cash out for as much as possible. Milner -- now the singular link between the major players of social media, Zuckerberg at Facebook, Mark Pincus at Zynga, Andrew Mason at Groupon, Jack Dorsey at Twitter, Daniel Ek at Spotify -- is not thinking about individual deals but is aligning himself financially and strategically with the founders and reaping the benefits. Already, he competes with the topmost VCs in terms of personal wealth, and he is arguably now more important; Milner is setting the price.
Next year in Scotland, Milner tells me, he'll host a gathering of all internet companies in the world valued at more than $1 billion. He is setting the agenda, reordering the power structure.
In a sense, the elites of Silicon Valley have a good reason to be suspicious of Milner. He has stolen, or at least moved, the centre of their world.
This article was originally published by WIRED UK
