Instadollars
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.
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Comments:
Dec '10
Re: Instadollars
Preach it, brother.
Govt interference is the number one stumbling block facing most of US industry these days.
With my business alone, I have had a half dozen pretty decent ideas that turned unprofitable once the cost of compliance with the associated regulations was figured in.
Taxes on fees that you have to pay in order to pay the taxes on the fees that you paid to file the paperwork, and 'round and 'round it goes.
I can carry my own weight, it's the 1,200 a-holes on my back that I'm having trouble with . . .
Jan '11
Re: Instadollars
In the future there will probably be pyschological impact studies required for new start-ups.
Feb '11
Re: Instadollars
Indeed, once you move out of the virtual world into the physical world you face a much larger regulatory burden, and this is driving an excessive % of talent and investment funding into things like social networking.
OTOH, there is a danger that even software entrepreneurship will be throttled by overly-expansive granting of patents for software and business processes. If every garage team of 2 programers and 1 marketeer also needs to include 3 intellectual-property lawyers, it's all over.
Mar '12
Re: Instadollars
My husband is in that industry, and I've noticed something. Politically, every programmer I know is either:
1. Intensely libertarian.
2. Extremely statist, mostly because they think a clever bit of coding would just solve everything and we could probably get a computer to run our lives much better than we can.
Aug '10
Re: Instadollars
I've been talking up Instagram to friends for some time. I love the app but am nevertheless shocked at the valuation of the company. Who knew that creating a way to share Instamatic-quality photos would be worth a billion?
Despite my expressions of enthusiasm for Instagram, my (real-life) friends have shunned it. My only Instagram friends are James Lileks and Taylor Swift (for my daughter's benefit, really!).
Re: Instadollars
Instagram has 30 million users, almost all of whom are Facebook users as well (the service is very tightly integrated with Facebook). If Google had bought Instagram, they would have had access to all of those customers and could have cut them off from Facebook with the flip of a switch. Facebook pretty much had to buy it (and overpay) in order to protect themselves.
Re: Instadollars
Interesting point. Could a Google acquisition also have worked as a Trojan horse, allowing Google's search engine into the Facebook tent?
After all, Google makes most of its money off content created by others. Typically, the search and advertising giant earns much more profit at far less incremental effort than the content creators themselves. Facebook, as a successful closed network, is a notable exception, with user content walled-off to Google search and ad engines.
Sep '10
Re: Instadollars
Since the days of the dotcom boom, these transactions have been examples of the "greater fool" theory (IMHO). Invest in something, anything, a dotcom, and self portrait of Helmut Newton, a Picasso, whatever. As long as a greater fool comes along to pay you more than you paid, you are not a fool, you are a genius. No real value is created (or destroyed) it is just buy low and sell high.
Meanwhile, the stock holders of facebook have paid out $1B for an economic benefit that is likely unmeasurable in the forseeable future. Unless....the stock valuation goes up....and a greater fool comes along.
I wish them well, but don't ask for a bailout if the next guy does not show up.
Apr '11
Re: Instadollars
One of the reasons why software is so lucrative is that its uses can be so disruptive to existing industries. The efficiency gained can make entire businesses obsolete overnight. The positive is that it creates more and better jobs than it destroys and the customer gets more value for their dollars. The Startups I've worked for and the ones I've helped finance have all been based on making something someone does faster, easier and more successful through software. They have been financed by pennies compared to what Solyndra blew through and probably would not have existed if there were more government regulations.
The market is the great regulator of bad ideas. They are killed off without mercy, unless they happen to have a huge union to payoff like GM.
Re: Instadollars
Ross, I grant you that many seemingly outlandish transactions follow the "greater fool" profile you describe, but I submit that some of them do in fact make sense. The trick is to carefully analyze the specifics.
Take Google's 2006 acquisition of YouTube for $1.65 billion. YouTube had no business model, just a wildly popular, storage and bandwidth-intensive free service for storing and displaying user-generated videos. Google, on the other hand, has a money-making machine tied to eyeballs and personal data. The more eyeballs, the more ad click-throughs; the more personal data the more effective--and higher priced--each ad. YouTube would have been valueless to most companies, but it's made a lot of money for Google.
Jul '10
Re: Instadollars
My son and 4 others just started up a company called Zoko.com, which is a service to facilitate people trying to put together dinner parties. They're trying to get the internet to help people connect physically, to use it to transcend it. I think they are on to something as they want people to connect and get out of their apartments. Hope it works.
Re: Instadollars
That's great. I hope Zoko is the next overnight success story we will all be reading about in a year or two.