Insta-Double For Instagram Investors – Eyeballs 2.0

My friend Ted channeled his inner headline writer and demanded that I write a post about Facebook’s billion dollar acquisition of Instagram titled “insta-double for Instagram investors.”   For those unaware, Instagram closed a $50 MM funding round last week which valued them at $500 MM.   So investors did indeed double their money over the weekend.

This whole deal makes me feel like a dinosaur.   Look, I don’t record the nightly news on a VHS tape or anything (shout out, Dad!), and I know how to use a computer.  I stream music via Pandora and internet radio, and if you gave me a cassette tape I wouldn’t have any way to play it.   Which is to say, I’m not a Luddite living in the analog world refusing to adapt to technology.   But I do remember the internet bubble, and of all of the recent deals bringing monstrous valuations to web based companies, this one flummoxes me the most.  As I wrote last night on Twitter:

There are a number of high flying web-centric companies currently occupying investors and traders minds.   I’m not a fan of any of them, but I can understand how, given a few lucky breaks and innovations, they each might somehow manage to grow into their valuations.  POSSIBLY.   Some day.   While none of these companies have impenetrable barriers to entry, most of them actually do have revenue models, and do make some kind of money.

$GRPN:  targeted “coupons” (I know, I know: “Deals!”) for the internet age.

$NFLX: streaming video

$P: streaming music

$ZNGA: online games

$LNKD: job search/recruiting (you’re not the customer – you’re the product!)

$YELP: community based (supposedly) higher quality reviews

Then, of course, there’s Instagram, which, seriously,  puts sepia tints and thick black borders around squared picture mail.   As far as I can tell, there is no revenue model, and no threat of any sort of revenue model.    I can see $LNKD getting more employers to pay to see your information so that they can hire you.  I can see $ZNGA getting people to spend some money to upgrade their gaming experience.  I can see $NFLX getting people to continue to pay for content delivery.   I can see $GRPN possibly leveraging real-time deals with the new Twitter-centric world (although I’m not sure why you’d need GRPN for that – processing I guess?).  I can see $YELP possibly leveraging some synergistic angle with advertising and or a deals-based company like $GRPN.

But I can’t see how Instagram makes any money. Ever.  We already had a monstrous bubble based on the “eyeballs” valuation metric.  How’d that work out?

So is it different this time?  As Twitter user @ddd responded to my Tweet above: “nope, they paid a billion bucks for the place people choose to spend their time doing that.”    As I said, I lived through the first internet bubble which was based on this kind of thinking, so let me just go to the Tech experts who know this business much better than I do.

Dan Frommer @ SplatF:

“The biggest threat to Facebook is a mobile-only or mobile-first social network that captures the increasing amount of time spent on smartphones in a way Facebook can’t or doesn’t.

In my experience, that’s exactly what Instagram does. I’m still addicted to Facebook on the old desktop-browser web, but when I’m on my phone, I gravitate to Twitter and Instagram. Path is another example, but Instagram is more developed — that’s the deal I’d make, too.”

Alexia Tsotsis @ Techcrunch:

“Many are comparing this buy to Google’s $1.65 billion acquisition of YouTube, which makes sense from both a user and vertical integration stand point. Facebook, which was rumored to be building its own standalone photosharing, is well aware that much of the “stickyness” of the platform revolves around photosharing, especially via mobile.”

Om Malik @ GigaOm:

“My translation: Facebook was scared shitless and knew that for first time in its life it arguably had a competitor that could not only eat its lunch, but also destroy its future prospects. Why? Because Facebook is essentially about photos, and Instagram had found and attacked Facebook’s achilles heel — mobile photo sharing.”

Congrats to the crew at Instagram – I mean that – it’s an impressive feat when you can build a billion dollar business with no regards to revenue.   Amazing.

I do wonder, however, if after closing the Facebook deal anyone at Instagram privately uttered my favorite line: Sold to you, SUCKA.


Why Facebook’s $1 Billion Instagram Deal is Brilliant

Instagram raised $50 MM at a $500 MM Valuation Last Week

Here is why Facebook Bought Instagram



disclosure: no positions in $P, $LNKD, $GRPN, $NFLX, $ZNGA, $YELP

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