Facebook, Instagram, and Bubblenomics

Facebook has bought Instagram for $1bn, not bad for an iPhone mobile photo site with c 30 million users. Is it worth the money? Hell no, its not worth a tenth of it, so what is interesting therefore is why Facebook bought it, and why now. GigaOm's view is that it's to knock out a potential competitor, I think this is part of the truth but not the whole truth, as it were. But it points to the reason - the Facebook IPO.

Facebook has about 1 bn users, that is about 50% of all the current PC using internet population globally, so, into and after the IPO, where will growth come from? The other billion? Maybe, but in general those in the countries where it already exists have got it if they want it, and those who do want it but can't afford it are too economically uninteresting from an Ad-serving point of view. So the Great Leap Forward will come from mobile, and no doubt its baked into the business plan for IPO and onwards.

But, we also hear the rumours that Facebook's own mobile picture sharing service has not been setting the world alight, so they needed something better, and Instagram was that Something Better. They had to do a deal, or else the IPO Biz Plan Story was at risk, and in the Bubbletime, the timing and pricing of the IPO is all. $1bn is shocking for such a small company, but not if its seen as a core of a $100bn story, and if it can be done mainly in stock (I still don't Know the % of stock but would assume its the majority of the deal consideration)

That is the Demand side logic. Even so, $1bn?

So we need to look at the Supply side - is there anything else? Apart from a (limited) choice there is a fascinating funding story, as GigaOm reports:

A few days ago it was rumored to be valued at $500 million. A few months ago it was $300 million. Its last round — just a year ago – valued the company at $100 million. The rising valuation of the company was reflective of the growing audience it has been garnering, despite being just on the iPhone. It had reached nearly 30 million registered users before it launched an Android app, a turbo-charging event for the company.

Sounds to me there were some very savvy investors in this company, a view which is reinforced by the rumours that the last round was closed just before the sale:

Because the rumors are true, right before its billion dollar acquisition from Facebook, Instagram closed a $50 million Series B round from Sequoia, Josh Kushner’s Thrive Capital, Greylock and Benchmark at a $500 million valuation. The round was led by Sequoia, as first reported by AllThingsD’s Liz Gannes.

This is Silicon Valley remember, so you have to assume the people in the know (and I class most of Instagram's investors in that group), knew that Facebook needed to buy (or at least was able to make some shrewd guesses) and priced - and timed - a rare asset investment (and sale) accordingly. Facebook then has to top that new valuation, and then some to make it interesting - and Voila! - $1bn

So Facebook overpays, but gets its 100x more valuable IPO underwritten. As to the Founders staying with the company, I wonder how long their earnout period is. As an old boss of mine once observed, when you have several hundred million dollars in your pocket, Miami starts to beckon...