What the “Paradise Papers” missed: the Kremlin tech investment portfolio

What the “Paradise Papers” missed: the Kremlin tech investment portfolio
Russian tech whizz Yuri Milner got Kremlin money to invest into Facebook, Twitter
By Adrien Henni in Moscow November 7, 2017

According to leaked documents examined by the International Consortium of Investigative Journalism (ICIJ), the hundreds of millions  dollars used by Yuri Milner’s fund DST (Digital Sky Technologies) to invest in Facebook and Twitter in 2009-2011 came “from the Kremlin.”

“Obscured by a maze of offshore shell companies, the Twitter investment was backed by VTB, a Russian state-controlled bank often used for politically strategic deals,” writes the New York Times, a member of the ICIJ.

“A big investor in Mr. Milner’s Facebook deal received financing from Gazprom Investholding, another government-controlled financial institution,” the US journalists note.

According to records from the Panama Papers, Gazprom Investholding provided hundreds of mns of dollars in loans to Kanton, a company based in the British Virgin Islands which owned one of the DST investment vehicles used to buy shares of Facebook.

Milner’s companies sold those holdings several years ago, and “no one has suggested that Mr. Milner or his companies had any connection to the propaganda operation,” concedes the US newspaper, but the Russian billionaire “retains investments in several other large technology companies and continues to make new deals.”

These deals illustrate “how the Kremlin has extended its long financial arm not only to [DST] but to some of America’s technology giants,” conclude the US journalists. Citing pundits from US think tanks, they underline the Kremlin’s ties with VTB and Gazprom and the use of these vehicles “for politically important and strategically important deals.”

Russian money everywhere?

It is hardly deniable that DST’s historic backer Alisher Usmanov has ties with the Russian government — especially with Prime Minister and former President Dmitry Medvedev — just like any Russianbnaire still living in Russia. A key shareholder of Mail.Ru Group, an LSE-listed company which controls most of Russia’s social networks, Usmanov has “numerous ties” with Kanton, reports the ICIJ.

It is also likely that Milner — even though he moved a long time ago to Silicon Valley, where spent about $100mn on a 25,000-square-foot house — has kept ties with his native country’s business and political elite.

Meanwhile, the ICIJ journalists did not say much about a plethora of other powerful tech companies from the US or elsewhere which have received Russian state money, directly or indirectly. Examples range from such digital superstars as Uber, Shazam and Spotify, to, oh my God, major US players in the field of data storage and online media.

Here are the most notable cases, by alphabetic order, as reported by East-West Digital News over the past six years:

Airbnb — In 2011 this startup raised $112 mn in a round led by Andreessen Horowitz with participation from DST Global, which brought $40mn in the deal.

Alibaba — In 2011, DST Global led a consortium that invested $1.6bn in exchange for a less than 5% stake in the Chinese e-commerce giant. The fund sold a portion of the Alibaba stake in 2015 — estimating the return on his investment at 500%-600% — and entirely divested its stake in late 2016.

Clearspring Technologies (AddThis) — In 2011 the Russian state-owned fund of funds RVC participated indirectly in a $20mn round in favor of Clearspring Technologies. This US company (later rebranded to AddThis and ultimately acquired by Oracle) facilitates content sharing through social and news networks. It processes a huge volume of data about what content is viewed, shared and clicked on by users. The 2011 investment was made through Institutional Venture Partners XIII (IVP), a later-stage venture capital and growth equity firm which was joined earlier by a fully owned UK subsidiary of RVC.

Dropbox — In 2011, the popular US data storage service secured $250mn investment, a fraction of which came from Russian state coffers. The money also came through Institutional Venture Partners XIII (IVP).

Gawker Media — In early 2016, Columbus Nova Technology Partners, a California-based venture fund controlled by Viktor Vekselberg, acquired a minority stake in this company, one of the largest media players in the USA. Gawker owns seven media brands covering politics, technology, sports, car culture and other topics. The company needed to strengthen its financial reserves as it was preparing for a costly privacy lawsuit. Vekselberg is a prominent and openly Kremlin-connected Russian billionaire. In 2010 then president Dmitry Medvedev appointed him to head the Skolkovo project, an international tech hub now under completion on the outskirts of Moscow.

Mr. Vekselberg is also a backer of Maxfield Capital, a venture fund, which has invested in numerous startups across the world, including Californian farming data platform Onfarm and Boston-based online security startup nCrypted Cloud. Among this fund’s portfolio companies is also NFWare, a startup with Russian roots that develops virtualization solutions for network infrastructure with the obvioulsy Kremlin-inspired goal of entering the European and US markets.

Groupon — In 2010, this social commerce company secured a $135mn round of financing led by DST.

Hyperloop One, the Californian startup which aims to commercialize next-gen transportation technologies, has just received an undisclosed amount of Russian and Chinese state money via the Russia-China Investment Fund (RCIF). The Californian startup had already received funding from Russian investors several times in the past: once last year from the Russian sovereign fund RDIF and three times from Dagestani businessman Ziyavudin Magomedov, through his fund Caspian VC Partners (CVC).

Rocket Internet — DST Global injected several hundreds ofmn $ in this German startup incubator, becoming its second largest backer after Swedish AB Kinnevik.

Shazam — In 2011 the Russian state-owned fund of funds RVC participated indirectly in a $32mn round of financing for this famous London-based startup. The investment was made through Institutional Venture Partners XIII (IVP). Kleiner Perkins Caufield & Byers as well as Shazam’s earliest investor, DN Capital, also participated in the round. In 2015, a privately-owned Russian fund contributed $8.5 mn to another Shazam funding round.

Spotify — In 2011 Spotify raised no less $100 mn from a consortium of investors which included DST, Kleiner Perkins and Accel.

Uber — The shareholder structure of this startup is a nest of Russianbnnaires, namely Alisher Usmanov, who discreetly invested several dozens of mns of US dollars in 2015, Ziyavudin Magomedov, whose fund CVC presents the Uber stake as its “first trophy asset,” and Mikhail Fridman, which made a “strategic investment”of $200 mn in the company via his fund Letter One in early 2016. But not only that. In Putin’s homeland, the infamous US startup is making friends with two top Russian companies. One of them is Sberbank, the national savings bank, with which Uber agreed “to explore the co-development of financial technologies with global potential” some time ago, prior to accepting a capital injection from Sberbank’s corporate fund SBT Ventures. Uber’s second Russian accomplice is Yandex, the local Internet search giant which belongs to its founders and NASDAQ investors but not yet, most suprisingly, to the Russian state. The two companies have plans to merge their taxi businesses in Russia and several neighboring countries.

Business interests or Kremlin plot?

The emergence of Russian investors on the global tech venture scene started in 2009, when DST acquired a stake in Facebook for the first time. The deal, completely unique at that time, was seen by many as desperate and vulgar, Wired recalled: “On the one hand, DST was buying a small stake in Facebook, valuing the entire company at $10bn, on the other, Facebook was debasing itself by taking Russian money. Russian money!” In the following years, a variety of Russian, or Russia-connected funds got involved in countless tech investment deals across the world.

Surely some of these Russian investors do have connections with their government — and it cannot be ruled out that their motivations in conducting certain deals were not exclusively business-oriented. But Kremlin inspiration, if any, has probably been the exception rather than the rule. In particular, seeing the Kremlin’s hand in DST’s investments in Facebook is probably more a speculation than a reflection of reality.

As a matter of fact, the first DST funds were not only backed by Russian investors, but also by such organizations as Tencent Holding (China), Naspers (South Africa), Tiger Global (USA) as well as Goldman Sachs, to which DST Global was closely connected. Thus Milner’s fund can legitimately remind that “Mr. Usmanov was just one of 50 passive investors in DST Global’s fund that invested in Facebook, and VTB Bank was one of 40 passive investors in the DST Global fund that invested in Twitter.” “Money is fungible. You can’t just say that this specific dollar went all the way to Facebook,” Milner added in an exchange with The New York Yimes. At least from a formal point of view, this is true.

DST Global is also formally right when it argues that “all [its] investors — including Mr. Usmanov, VTB Bank, and a number of sovereign wealth funds from all over the world — are passive investors.” Indeed, while committing funds to be invested by DST Global, these backers are not supposed to have any influence on the fund’s investment strategy.

Some other facts make the theory of a political, Kremlin-inspired motivation in DST’s investments even more dubious: In 2009-2011, when the fund invested in Facebook and Twitter, the state of Russian-American relations was far from the current hysteria. It might be that the Kremlin wanted to lend a helpful hand to Milner by having a state-backed bank provide him with some funding, but it sounds less likely that Putin or Medvedev, at that time, designed a politically-motivated plan to gain influence on US social networks via DST.

DST Global was a passive investor in Facebook and Twitter: with tiny stakes in their capital, Milner’s fund did not have any board seats, and claims not to have had any influence on these companies’ operations and management.

DST Global divested its position in Facebook in 2013 and in Twitter in 2014, shortly after each of those companies went public. At that time, Putin had a much clearer understanding of the political impact of social networks, following a period of political unrest in Russia in which opponents made a large use of them. In addition, the US-Russia relationship had deteriorated, so why in this context would Putin have let Milner loose any chance to maintain his alleged influence on Facebook and Twitter? In 2015, DST Global launched its fifth fund without any Russian backers — in contrast with the previous DST funds, — confirming in a way the international dimension of the fund rather than alleged Kremlin ties.

The rise of Russian, or Russia-connected investors on the international tech scene has more to do with the globalization of the venture market than with Kremlin plots. True, the Russian government has shown over the past few years a growing willingness to exert a global influence in the field of technologies — but Russia still lags far behind the United States in this respect.


Adrien Henni is the editor of East West Digital News where this article first appeared