Many VC firms ban side investing. Yuri Milner’s DST encourages it

Many venture capital firms frown upon or even bar their partners from using their own money to make side investments in startups. At DST Global, the investment group run by the Russian-Israeli billionaire Yuri Milner, personal investing is institutionalized.

A prevailing philosophy in venture capital is that allowing partners to broker personal investments can put their interests at odds with those of the firm. An investor might choose to bid up the valuation of a startup he holds using his employer’s money, in turn increasing his paper wealth.

DST sees things differently. The firm doesn’t typically invest in young companies, so it allows the partners to do so individually or pool their cash. It asks that each deal is approved by the compliance department beforehand, a spokesman for the firm said. DST does this, according to interviews with several founders who took partners’ money, because it allows them to scout entrepreneurs the firm might want to invest in later. And it often does.

The practice is one little-known example of how Milner defies Silicon Valley convention. Milner is the wealthiest and most powerful Russian in global technology, and his position has come under heightened scrutiny in the last couple of months since his birth country invaded Ukraine. His firms have publicly condemned the war, and Milner has made donations 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 extremely lucrative bets on Airbnb Inc., Alibaba Group Holding Ltd., Facebook and Twitter Inc. He built his early fortune — now worth $3.8 billion, according to the Bloomberg Billionaires Index — with funding from Kremlin-connected sources. DST said it hasn’t tapped Russian money in more than a decade.

Personal investing was another controversial, and ongoing, element of DST’s formula. Here’s how it works: If a partner finds a young startup he wants to invest in, he writes a personal check, a so-called angel investment. If other partners want to back the same company, they finance the deal through a fund they control. There are at least two: an older one called Apoletto and a newer fund, Gemini, a spokesman said. These are sometimes referred to in corporate disclosures as DST Global Partners.

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Side investments do happen at other firms, but they’re rarely as organized and commonplace as they are 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 sooner than the investment thesis of the fund, they are getting their leg in the door and keeping that door open.”

The partner funds generally make investments of quite a bit less than $25 million, the spokesman for DST said. Part of the pitch is that the startup could get backing from the main DST fund later, though it isn’t guaranteed, said people familiar with investment negotiations who asked not to be identified because the talks were private. Any future investments will be subject to a diligence and analysis review by the firm, the spokesman 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 about $100 million, was too small for DST, which likes to make investments once companies are at least five times the size, Petersen said. Mehta brokered a small investment from the Apoletto fund and made no promises about future money from DST, Petersen said.

Two years later, DST led Flexport’s next funding round valuing the business at more than $900 million, and Mehta was appointed as a board observer. By that point, Mehta “was already super helpful,” Petersen said. Flexport is now valued at $8 billion.

Renaud Laplanche already had a connection to DST by the time he was ready to start his latest company. DST backed his previous startup, Lending Club, which burned hot before Laplanche was ousted over concerns about the company’s loan disclosures. For his next financial-technology venture, Upgrade, Laplanche got money from the DST partners’ fund. “From their standpoint, the early investment gave them the inside track on how the company was doing,” Laplanche wrote in an email.

In November, DST co-led a $280 million investment in Upgrade. “They already knew a lot about the business,” he wrote.

Something similar happened with the Indian vehicle marketplace Cars24, where a personal investment beget a DST-led $200 million round in 2020, said Vikram Chopra, the founder and chief executive officer.

DST does a lot of these deals, but they remain in the minority, a spokesman said. The partners’ funds are used for more than startup investments. Apoletto contains a portfolio of public stocks valued at over $800 million, according to data compiled by Bloomberg. Regulatory filings from Robinhood Markets Inc. and DraftKings Inc. list Apoletto among shareholders, alongside DST.

The funds benefit from a virtuous circle. The vast majority of that $800 million is rooted in shares the partners receive as part of their profits from DST investments, including from Airbnb and DoorDash Inc. Those can eventually be sold for cash to make more startup investments.