Russians Spend Big for a Piece of Facebook

A Russian investment firm, Digital Sky Technologies, has invested $200 million in the social networking company Facebook in return for a 1.96 percent stake, the two companies said Tuesday.

The investment values Facebook’s preferred stock at $10 billion, a $5 billion drop from October 2007 when Microsoft paid $240 million for a 1.6 percent stake. With the latest round of financing, Facebook has raised about $600 million since it was founded in 2004.

Mark E. Zuckerberg, Facebook’s founder and chief, said that the Microsoft investment was made at the “absolute peak of the market” and that it was a part of Facebook’s partnership with Microsoft, which includes advertising and search agreements.

“Relative to the economic conditions for when the Microsoft deal happened and that being more of a strategic partnership than a straight financial investment, we feel really good about the progress we’ve made,” Mr. Zuckerberg said in a conference call with reporters.

At the time of Microsoft’s investment, Facebook’s $15 billion valuation drew criticism for being unrealistically high and a sign of a bubble in social network investments. With the new valuation, Facebook is demonstrating to its critics that it is living up to its early promise. Facebook turned down better-known firms in the United States who reportedly offered to invest at lower valuations.

As with any private company valuation, it is simply a data point, venture capitalists say. Only when Facebook is sold to another company or sold to the public will a value be determined.

“It’s hard to extrapolate that’s what the company is worth at this point,” said Braden Berg, a lawyer in the Silicon Valley office of Mintz Levin who works with start-ups and venture capital firms. He said it was a valuable valuation, “and that may have been one of Facebook’s motivations.”

The fresh capital will provide a cushion for the company as it continues its fast-paced growth and explores new revenue sources beyond advertising.

Facebook did not need the money, Mr. Zuckerberg said. Its revenue is growing 70 percent year over year. He said the company would be able to run its operations from cash flow in 2010, even without the additional capital.

“The financing will serve as a cash buffer to support our continued growth, allowing us to scale,” he said.

Yet some Facebook observers have questioned whether a company growing so quickly, particularly overseas, where the online advertising market is smaller, can achieve these financial goals.

Facebook had 307 million visitors worldwide in April, almost triple the number a year ago, and 79 percent of them are outside the United States, according to comScore. It is quickly using cash to pay for the bandwidth and storage needs of the exploding user base abroad.

Digital Sky Technologies, which will not get a seat on Facebook’s board, will be able to help Facebook, which makes most of its money from ads, figure out new ways to make money outside the United States. It is a prominent Internet investor in Russia and Europe, where it owns stakes in Web companies that account for 70 percent of all page views on the Russian-speaking Internet, according to the firm.

Its portfolio companies include two large social networks, Forticom and vKontakte, and a Russian Web portal, Mail.ru. They have various business models, such as collecting micropayments from users and selling virtual goods.

These companies have figured out how to make money outside the United States much better than Facebook has, said Yuri Milner, chief executive of Digital Sky Technologies. He said that he was confident that Facebook would also be able to tap into these sources of revenue. “We believe the current valuation reflects that,” he said.

Digital Sky Technologies also plans to buy at least $100 million of Facebook stock from current and former employees, the companies said. Details of the transaction will be announced in a few months. This will let some Facebook employees receive cash before the company is sold, something Mr. Zuckerberg said would not happen in the near future.

“It’s not something we’re thinking about right now, it’s not something we’re rushing toward,” he said. “We’ll do it when it’s the right thing for the company.”