Panic buy a worrying sign for investors
Online photos are supposed to be a core Facebook competence. Paying $1bn (€760m) for the popular picture-sharing app may boost the social network in mobile but paying over the odds for revenue-free rivals is usually the hallmark of anxious, mature firms — not a growth company seeking to go public for billions.
It’s impossible to say exactly what Facebook gets for the oodles of cash and stock it is handing over to Instagram, founded just two years ago by Kevin Systrom and Mike Krieger.
Traditional metrics don’t apply — Instagram is just embarking on an actual business plan, and the firm was worth just $20m a year ago. What it does have are lots of users, more than 30m, and super-fast growth.
More than 1m more users signed up in 12 hours for its new Android app last week.
Facebook is clearly acquiring the firm for other reasons. People are spending an increasing amount of time connecting via their mobile phones. This shift is worrying for the formerly desktop-focused Facebook, the prospectus of which warns of the risks to its business of an increasingly mobile internet.
Most smartphones use operating systems made by Apple and Google. If Facebook doesn’t run well on these phones, rival social networks such as Google+ could get a leg-up.
Buying two-year-old Instagram could help give Facebook an advantage. It hopes to use the experience it is gaining to “build similar features in our other products”.
Instagram has figured out the easiest way to date of putting pictures on the web and how to capture the attention of mobile users. These are valuable skills and tools in Facebook’s fight against other social networks.
What’s worrying for potential Facebook investors is why Mark Zuckerberg and his merry hackers couldn’t produce their own version of Instagram. He says this is a one-off. “But providing the best photo-sharing experience is one reason why so many people love Facebook and we knew it would be worth bringing these two companies together.”
The precedent is worrisome, though, if it means every time a start-up encroaches on one of Facebook’s presumed strengths, it will need to take out its chequebook to defend its turf. That’s hardly a robust justification for a lofty valuation.
* For Instagram chief executive Kevin Systrom and company, it’s a windfall like none other.
Systrom owns 40% of Instagram, according to sources. That will net him $400m (€305m) to take home as a result of the deal.
* Co-founder Mike Krieger holds about a 10% stake, and will net about $100m.
* Benchmark Capital, a venture capital firm, has about an 18% stake, netting roughly $180m from the deal.
* Andreessen Horowitz and Baseline Ventures, two investment firms backing Instagram, each have about a 10% stake, netting just under $100m apiece.
* The rest of the company’s 13 full-time employees will each get a portion of a nearly $100m pool, with specific amounts awarded according to how long the employee has worked at Instagram. Not a bad payday for the workers of a 15-month-old start-up company.
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