On its surface, the DST investment is a rather strange announcement. As a startup, why would you give away share in your company for money you do not need? Admitted, $200 million is nothing to sneeze at, but Zuckerberg claims that it is just a “buffer” and a “cushion” for Facebook. The company has no immediate plans to spend the money.
Some raeders may remember that Microsoft invested $240 million in Facebook in exchange for a 1.6% share back in October of 2007, which valued Facebook at about $15 billion. DST’s investment and 1.96% stake now values Facebook at $10 billion, which suggests that Facebook believes that its market value has dropped by about one third. However, Zuckerberg mentioned during a conference call that the two deals can’t really be compared as the investment packages are different – Microsoft, for example, contributes search technology and advertising sales.
DST, largely unknown in the U.S., claims it is one of the leading internet investment groups globally with significant stakes in Eastern European and Russian Internet businesses.
“This investment demonstrates Facebook’s ongoing success at creating a global network for people to share and connect,” said Zuckerberg in a prepared statement. “We’ve worked hard to bring more than 200 million people – 70% outside of the U.S. – onto Facebook to share with friends, family and co-workers. 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. We’re looking forward to working with the DST team.”
DST’s motivation to invest in Facebook is somewhat clear. If the company can grow its business, it may be worth much more in a few years than it is already. So, what is it that Facebook wants from DST? In the end, Zuckerberg mentioned that Facebook has been EBITDA positive for five quarters straight, has been growing its advertising business by 70% year over year and that it expects to be cash-flow positive by 2010. Plus, it still sits on a pile of money from Microsoft.
The answer could be rather simple. Zuckerberg confirmed that he is “excited” about exploring paid services and this is an area where DST has substantial experiences especially in Asia and Europe. If DST can help Facebook to monetize its business better than today and even pays for it, what’s not to like about that? DST chief executive Yuri Milner suggested that Facebook could be monetized in a similar way as Google, with a “whole bunch of free services” as well as a “small number of paid services” that bring in substantial revenue. “It works for Google and the same applies to Facebook,” he said.
Zuckerberg said that he is not thinking about an IPO for Facebook just yet, but profitability and financial strength will be key for such a move. Paid services are a natural evolution for the company from the current stage of a free service. Be prepared to learn about premium Facebook services in the near future.
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