A prevailing philosophy in venture capital is that allowing partners to negotiate personal investments can put their interests at odds with those of the company. An investor can choose to increase the value of a startup he owns using money from his employer, thereby increasing his paper wealth.
DST sees things differently. The firm does not generally invest in start-ups, so it allows partners to do so individually or to pool their cash. It requires that every deal be pre-approved by the compliance department, a company spokesperson said. DST does this, according to interviews with several founders who have taken partner money, because it allows them to spot entrepreneurs the company might want to invest in later. And it often is.
This practice is a little-known example of how Milner defies Silicon Valley convention. Milner is the richest and most powerful Russian in global technology, and his position has come under intense scrutiny in the past two months since his native country invaded Ukraine. His companies have publicly condemned the war and Milner has donated to Ukrainian relief efforts, most recently pledging $100 million to Tech for Refugees on April 28.
Milner, a dual citizen of Israel and Russia, rose to prominence with hugely lucrative bets on Airbnb Inc., Alibaba Group Holding Ltd., Facebook and Twitter Inc. He built his first fortune – which is now worth 3 $.8 billion, according to Bloomberg Billionaires Index – with funding from Kremlin-linked sources. DST said it had not mined Russian silver for over a decade.
Personal investment was another controversial and ongoing element of DST’s formula. Here’s how it works: if a partner finds a young startup they want to invest in, they write a personal check, a so-called angel investment. If other partners wish to support the same company, they finance the operation via a fund that they control. There are at least two: an older fund called Apoletto and a newer fund, Gemini, a spokesperson said. These are sometimes referred to in corporate disclosures as DST Global Partners.
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Side investments happen in other companies, but they are rarely as organized and commonplace as at DST. “It’s interesting to have a business model around this,” said Emily Pahnke, who teaches venture capital and entrepreneurship at the University of Washington. “By investing earlier than the fund’s investment thesis, they are putting their hands in the door and keeping it open.”
Partner funds typically invest just under $25 million, the DST spokesperson said. Part of the talk is that the startup could get backing from the main DST fund later, although that isn’t guaranteed, said people familiar with the investment talks who asked not to be identified because the talks were private. Any future investment will be subject to due diligence and analysis by the company, the spokesperson said.
Ryan Petersen, the founder of freight startup Flexport, recalls an approach from DST partner Rahul Mehta in 2015. Mehta explained that Flexport, then valued at around $100 million, was too small for DST, which likes invest once companies are at least five years old. times the size, Petersen said. Mehta negotiated a small investment from the Apoletto fund and made no promises about DST’s future money, Petersen said.
Two years later, DST led Flexport’s next funding round, valuing the company at over $900 million, and Mehta was named a board observer. At this point, Mehta “was already very useful,” Petersen said. Flexport is now valued at $8 billion.
Renaud Laplanche already had a connection with DST when he was ready to start his latest business. DST backed its previous startup, Lending Club, which burned hot before Laplanche was ousted over concerns about the company’s loan disclosures. For his next fintech venture, Upgrade, Laplanche has secured money from the DST Partners Fund. “From their perspective, the initial investment gave them an idea of where the business is at,” Laplanche wrote in an email.
In November, DST co-led a $280 million investment in Upgrade. “They already knew a lot about the company,” he wrote.
Something similar happened with Indian car market Cars24, where a personal investment spawned a $200 million round led by DST in 2020, said Vikram Chopra, the founder and CEO.
DST makes many of these transactions, but they remain in the minority, a spokesperson said. Partner funds are used for more than start-up investments. Apoletto contains a public equity portfolio valued at more than $800 million, according to data compiled by Bloomberg. Regulatory filings from Robinhood Markets Inc. and DraftKings Inc. list Apoletto among shareholders, alongside DST.
Funds benefit from a virtuous circle. The vast majority of that $800 million is rooted in stock that partners receive as part of their earnings from DST investments, including from Airbnb and DoorDash Inc. These can potentially be sold for cash for make more start-up investments.