The Smart Value of Dumb Money for Startups

Coming off the TechCrunch Disrupt conference this week, one of the interviews that sticks out most in my mind was that of Yuri Milner, CEO of the Russian Internet holding company Digital Sky Technologies, by veteran TV host Charlie Rose. Milner has quickly made a name for himself by investing hundreds of millions of dollars in hot tech properties Facebook, Zynga and Groupon. But it didn’t seem like Milner had any sort of overarching philosophy, agenda or insight into the technology market.

The only observation he offered that struck me as novel was to measure a company by dividing the age of its founder by its estimated market cap. For Facebook, Milner said, that ratio is close to one, as Mark Zuckerberg is 26 years old and the company is worth $25-$26 billion, in Milner’s opinion. “So for every year of his life Mark Zuckerberg was producing $1 billion of value,” he said. But while Groupon’s CEO is also under 30, Zynga’s Mark Pincus has been around for more than a few decades — so this doesn’t really describe a consistent investment theory. (Maybe Milner was hoping he’ll be able to get a stake in ChatRoulette and its teenage founder to offset his mean age?)

When Rose asked who his biggest influences were, Milner named Zuckerberg, Pincus, Kleiner Perkins VC John Doerr and Accel VC Jim Breyer, calling them “the smartest people I’ve ever met.” Frankly, I was surprised. I mean, obviously, these are some of the leading thinkers and doers in technology. But to me this seemed a little light — after all, Milner invested in Facebook a year ago today, and wasn’t a significant adviser to the company before then. Shouldn’t he have some deeper and less clubby mentors or models?

By playing dumb, Milner is making some of the smartest investments possible. It doesn’t serve him to go up on stage and wax about the “third wave of innovation” like Doerr had done before him. Taking a respectful back seat while providing money to allow startups to operate freely, cash out employees and avoid going public — “one to three years of run to really focus on product,” he said — is a valuable and effective approach. It’s how a virtual unknown gets a stake in these companies, unlike Twitter’s last massive round, which came from the likes of Morgan Stanley and T. Rowe Price .

Still, if Milner is ever going to get a return on this investments, the IPO market has to come back. So it’s a matter of biding his time. Banker Frank Quattrone said at the conference that the public market is hungry for “category-defining, earth-shaking companies,” and cited Facebook, Twitter, Zynga, LinkedIn and Skype as examples.

But for many entrepreneurs, private funding isn’t the dumbest of dumb money. “We all know what Wall Street’s values are,” said Etsy CEO Rob Kalin on a panel Wednesday. “I don’t want those people owning my company.”

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