How Russian And Chinese Investors Are Dominating The Web Outside North America

Have you heard of Digital Sky Technologies (DST)? Chances are that until the last few weeks, you’d never registered the name but you now know there is some connection with Facebook? In fact, Digital Sky Technologies is a Russian Moscow-based investment firm which already owned some 1.96% of Facebook, which it bought for some $200m in 2009, and with the most recent $125m investment it now has a 10% stake in the social network.

But if I told you it owned ICQ (all of it) and has stakes in Groupon and Zynga — you might be starting to think that we should all learn some more about Digital Sky’s portfolio:

• Mail.ru — DST wholly owns this having acquired it in 2006. It is the largest free e-mail service of the Russian web. A London IPO is planned for some time in the near future. Mail.ru also offers a search facility and was once one of the largest search destinations in Russia — although it provided the search facilities via the largest Russian search engine Yandex. Later it developed its own search tools.

• VKontakte — VKontakte (meaning “In Contact”) is a Russian social network which is popular in Russia, Ukraine, Belarus and Kazakhstan and which has an interface similar to Facebook’s — though it also has features similar to YouTube and MySpace. According to ru.Wikipedia.com, it has 14.3 million unique Russian users and overtook Odnoklassniki in January 2009. DST owns 25%.

• Odnoklassniki — VKontakte’s main Russian social networking rival with 7.8 million unique Russian users happens to be wholly owned by DST.

• Nasza-klasa.pl — Moving to Poland, this site with a name mean “Our Class” is still the leading Polish social network, owned 70% by DST.

Who Owns Digital Sky Technologies?

Hopefully by now you agree that DST is a significant web investor particularly since I’m only scratching the surface of its investments. But who owns it? Digital Sky Technologies is owned by a number of Russian investors including Alisher Usmanov, Yuri Milner, Gregory Finger, Igor Matsanyuk and Sergey Orlovsky.

But it is also part owned by Goldman Sachs, New York private equity firm Tiger Global and Russian investment bank Renaissance Capital. Most intriguingly, Chinese company Tencent owns 10% and Naspers from South Africa over 28%.

Boom Markets Produce Boom Investors

As far as the web is concerned, the Russian and Chinese markets are particularly interesting for the future of web investments. Why? Of the growing emerging markets known as “BRIC” (Brazil, Russia, India and China), two markets have high degrees of barrier protections from outside — and that doesn’t include either Brazil or India! You will immediately leap to think of both censorship and business subsidies when I talk of protections — but both culture and in particular language offer Russian and Chinese investors an advantage over all the rest.

The major global markets where the rules of language combined with the rules of doing business have given local players a strong advantage over web companies arriving from outside are Russia and China together with South Korea and Japan.

Unfortunately the Microsoft–Yahoo alliance has disrupted the search marketing business structures in those last two markets giving Google a shoe-in in Japan and meaning that search engines in Korea are still finding their way.

So with Japan and South Korea not in the frame just yet — the two markets where investments into local search and social marketing entities are doing exceptionally well remain Russia and China. So far, we have only considered DST, but the following organizations from Russia and China are worth following in 2011:

• Alibaba — Alibaba, the business-to-business deals site was founded by Jack Ma in 1999 and claims more than 50 million registered users in 240 countries. Its listing on the Hong Kong Stock Exchange on 5th November 2007 was the biggest IPO after Google at that time. It has an annual revenue of $6.4 bn and recently took second place in terms of the share of Chinese online advertising ahead of Google and behind Baidu.

• Tencent — You may never have heard of them, but Tencent is the world’s third largest internet company by market capitalization. It’s revenues in 2009 were $1.8 bn and it is best known for its ownership of QQ, a popular Chinese instant messenger service and the Chinese search engine SOSO.

• Baidu — Baidu is the leading search engine in China created in 2000 by co-founders Robin Li and Eric Xu. In December 2007, Baidu became the first Chinese company to be listed in the NASDAQ-100 index and its 2009 annual revenue was $651m.

• Netease — Netease was founded in China by William Ding and is best known for its 163.com web portal which attracts more visitors than CNN or the BBC. In 2009, its total revenues were $560m.

• Yandex — Yandex has fought hard to retain its position as the number one search engine in Russia, fighting several attacks from Google successfully. Sberbank, the state-owned Russian bank, bought a “golden share” in Yandex from a Dutch investor which now gives it a veto on the acquisition of any stake of more than 25% in the company. Roughly 61% of the company is owned by investment funds with 24% in the hands of managers and employees. 2009 revenue was $278m.

Through this column, I’ll be keeping an eye on what these companies are up to but for our closing comment today, we return to DST CEO Yuri Milner who, according to The Financial Times on 3rd February 2010, said of the potential for Russian web technology investments, “If you’ve got a great project, sooner or later you’ll wind up in this office”. Russian and Chinese investors are in the game.