The week just closing started off with a bang in Silicon Valley when local start-up Facebook—some sort of pre-IPO social networking web site; you may have heard of it—bought Instagram, a younger start-up, for $1 billion in cash and stock.
Instagram, a company known for its iPhone-only photo sharing application, famously has only 13 employees, no revenue, no discernible business model, and is not yet 2 years old. Yet each of the company’s twenty-something-year-old founders is now worth hundreds of millions of dollars. And the savvy venture capitalists who invested $50M on Thursday came back to work after Easter to a doubled nest egg, for probably the highest internal rate of return in financial history.
What does Instagram have? Nothing, apart from 30 million iPhone users and accelerating growth thanks to the long-awaited Android version, which fueled another 5 million downloads in its first five days of release.
Instagram also represents, or represented, the highest-profile example of the trend toward smaller, more tightly knit online communities growing independently of Facebook. Bloomberg Businessweek commentator Ben Kunz explains:
Facebook’s acquisition of Instagram is a signal that smaller, closed networks are growing popular by giving audiences more control over what they share. The networking giants, such as Facebook and Google, will have to allow consumers new ways to build tighter social circles. And marketers will face new challenges in “going viral” among the masses.
Facebook has grown so large that it is starting to resemble a global utility—more universal login resource and friend location service than a true community. And the market is responding. Ricochet itself is my favorite example of a smaller, tightly knit network. But others targeting a broader audience abound, such as Pinterest, Path and Pair, to name only a few.
The Instagram deal reminds me that it remains possible to achieve extraordinary success, even in hyper-regulated California and this our Age of Obama.
Here's what troubles me: the very possibility of Insta-success is nowadays limited to the software industry--Mega Millions doesn't count--which is the last mostly unregulated business activity left in our land of the formerly free, home of the brave. In software, success is as simple as a cadre of nerds at keyboards delivering product that delights users. A software start-up has no need to seek government approval to launch its product; there are no mandatory quality procedures delaying each product iteration; no factories to unionize; no emissions for EPA to clamp down on; precious few worker compensation claims to litigate; no cost of goods; no transportation headaches; nothing but pure intellectual input translating directly to profit.
We should celebrate the success of US software entrepreneurs, including the Instadollars team. But we must simultaneously rein in our out-of-control government so we can once again celebrate success more generally. The opportunity to succeed, not the Buffett Rule or free contraceptives for all, is the real fairness issue facing the electorate this November.