Everyone has heard the news now that Facebook bought Instagram for $1 billion. Actually, it was a billion dollars worth of cash and Facebook stock, but whatever. Close enough. In the ethereal world of tech companies, it’s hard to know if $1 billion is a lot or a little to pay for, well, anything. Trends change, intellectual property is nebulous, and companies can’t keep making the same product or they die.
So while it’s tricky to figure out what a company’s capitalization (or the price of all its shares, public or private) is, it’s pretty easy to see that Instagram got really, really, really lucky in getting scooped by Facebook for a thousand million bucks.
Here’s an simplistic timeline of Instagram’s journey from startup to imaging clearinghouse:
March 5, 2010 – Instagram founder Kevin Systrom recieves $500,000 of seed funding to get cracking on his photography software. This means, on that day, Instagram was worth…$500,000. Not hard to see why.
February 2, 2011 – Instagram chases $7 million more in financing. The terms of the deal offer an Instagram a valuation of $25 million.
April 3, 2012 – Instagram, getting a little big for its britches, pursues $50 million more in venture capital, for a 10% stake in the company. That means the company, on April 3, 2012, was valued at $500 million. Remember that.
April 9, 2012 – Instagram is sold to Facebook for $1 billion.
Do you see the problem here? I feel like this would be a brain teaser in ‘Financial Highlights for Children’. It’s valued at $500 million, then six days later it’s sold to a really rich company for $1 billion. Rich companies don’t normally stay rich for very long when they pay twice market price for anything.
So what happened?
Neither party is making any official explanations for the move, but the $50 million infusion was in the works about a month before it was announced. Tech companies, especially ones developing apps, can certainly experience huge gains over short periods. Look at Instagram’s geometric growth up to that point. But, there’s more to the story than just “Man! Instagram really appreciated quickly!”
Facebook is the internet’s largest photograph database. It’s the WORLD’S largest photograph database. They saw some competition in Instagram, especially after Instagram managed to move a million copies of its Android app in about 12 hours. So, they took out the competition before things got out of hand (unless you count paying double market value for a company as “out of hand,” in which case Facebook definitely did NOT act before things out of hand.
Another possible factor: Mark Zuckerberg is really rich, and rich people never know what things cost.