SAN FRANCISCO — Is it crazy for Facebook, a start-up that has not yet even gone public, to be throwing $1 billion at Instagram, an even younger start-up?
To some, the rich price tag on the deal, announced Monday, was yet more evidence of a bubble in the technology industry, especially because Instagram, a mobile app that allows people to share their smartphone snapshots with friends, has not made any revenue.
But the history of Silicon Valley suggests that expensive purchases of start-ups by start-ups may not always be so crazy.
In 2002, the hot start-up turned juggernaut was eBay, then an online auction service. It bought a small online payments company, PayPal, for $1.5 billion. The PayPal division of eBay now brings in almost as much revenue as eBay’s merchandise.
In October 2006, a year after it went public, Google paid $1.65 billion for YouTube, a video uploading site that had no revenue and little prospect of profit. At the time, the price raised eyebrows. But YouTube dominated the competition and became a significant online advertising platform for Google.
Reid Hoffman, a co-founder of PayPal who went on to found LinkedIn, the social networking site, said in an interview on Tuesday that acquisitions were made partly to gain something valuable, but also to stave off the competition. “History shows they fail most of the time, but when they win it’s very valuable,” he said. “There’s always the blended question of opportunity and threat.”
Young hot technology companies are nothing if not aware of their mortality. Because so many started out by wounding an older tech giant, they know they can be killed, or at least severely injured, by that which lurks in the rented office space of Silicon Valley — an even hotter, younger technology company.
In part, that anxiety feeds the guiding logic here: eat the new start-up before it eats you, or before a competitor grabs it. And be sure to keep extending your reach if you want to stay relevant.
“Anything they can do they will do to keep customers coming back — that’s extremely valuable to these companies,” said Len Lodish, a marketing professor at the Wharton School at the University of Pennsylvania.
In this way, Facebook’s purchase of Instagram was an effort to push into a new area before its rivals. As YouTube and PayPal did for Google and eBay, Instagram offers something that Facebook desperately needs — a whole new audience that uses technology in a totally different way.
Never mind that Instagram has no immediate promise of making money. Facebook had to make another calculation before going public, which is expected to happen in the coming months, and confronting new pressures from impatient shareholders, said David Charron, who teaches entrepreneurship at the Haas Business School at the University of California, Berkeley.
That calculation was whether it was worth a billion dollars to be sure that Instagram would not lure away Facebook users.
But in the unpredictable world of Silicon Valley, sometimes buying the newcomer does not work.
In the spring of 2005, Yahoo, still a major player in search and online media, bought Flickr, a photo-uploading site. A Yahoo spokeswoman at the time described it as part of “the next generation of Web services.”
Yet Yahoo languished, and Flickr failed to innovate and keep pace with the shift to social networking, photo sharing and mobile devices. Today, Yahoo finds itself severely challenged by the next generation of Web services.
News Corporation, a traditional media company, spent over $580 million for MySpace in 2005, when it was the dominant social network. News Corporation sold MySpace last June, after its users had defected, chiefly to Facebook. The price: $35 million.
One challenge for Facebook will be to keep Instagram users happy. On Tuesday, some expressed fears that the app would be destroyed by its new owner.
A user named “monkm” wrote: “Congrats on the purchase … I must add however that most of us on IG are on here because it’s not FB.”
An especially vitriolic comment written by a user named “brianbrutal” said: “Stick to being overlord of Facebook. We don’t want you on Instagram.” The comment was deleted.
But several people welcomed Mark Zuckerberg, Facebook’s founder, back to the service after he shared a photo of his dog, Beast, giving the pet a moment of fame. It was only Mr. Zuckerberg’s fourth post on Instagram since he signed up for the service in October 2010. That is a lot of millions of dollars for each image
Instagram: the History and Evolution:
Instagram co-founder Kevin Systrom showed-off the beta version of Instagram for Android. It was mentioned that the app will be released on Android soon. Little did we know how soon they meant, seeing as Systrom’s been teasing Fandroids for what seems like an eternity.
Over the weekend, the company opened registration for Android users so they will be the first in line to get the app when it officially launches. So if you want to be among the first to get the app, be sure to register here.
Instagram: a brief history
Instagram is a photo sharing application that allows users to take a photo, apply a digital filter, then share it on a variety of social networking services, including Instagram’s own. It’s popular among iOS users, primarily because that’s been Instagram’s only outlet so far.
It was developed in San Francisco by Systrom and Mike Krieger when they chose to focus their multi-featured HTML5 check-in project Burbn on mobile photography. The Instagram app was launched in iTunes on October 6, 2010.
Since the launch they’ve added features like hashtags, new and live filters, instant tilt shift, high resolution photos, optional borders, one click rotation and an updated icon. It was named Apple’s “App of the Year” for 2011.
The big plan
During an interview at IGNITION West, Systrom laid out their grand plan for Instagram, citing evolution as the key to success.
“It’s about your ambitions about where you want to be in the future. I think about communication and sharing. Frankly photos are the way to get started,” Systrom said, but Instagram is about communicating and sharing.
“It’s about going through false starts… Brbn was a false start. The best companies in the world have all had predecessors. YouTube was a dating site. You always have to evolve into something else,” he said.
And of course, no business would thrive without generating revenue. As every other business on the internet these days, Instagram will soon be making money through ads. They want to create an advertising platform on Instagram that’s easy to use by creating tools that appeal to end users and brands alike.
Felling the walled garden
Instagram and Hipstamatic, a digital photography application for iOS devices, entered into a partnership that would allow photos from the app to be directly ported into Instagram.
“I’m a huge fan of what Hipstamatic is doing and all they’ve accomplished,” Systrom said. “They were iPhone App of the Year in 2010 and we got 2011. We have a huge amount of respect for that whole team both as fellow photographers and entrepreneurs.”
“Really it comes down to this: People post Hipstamatic photos on Instagram all the time, and we just want to make that experience easier.”
he partnership could open up future partnerships with other apps or businesses in the photography line and beyond.
Pictures paint more than a thousand words
Instagram already has seven million users all over the world and the number is only going to get bigger when the Android app launches. There are loads of awesome photos available on Instagram today and these photos are inspiring others to follow suit.
To get an idea of how awesome photos are on Instagram, check these out: #Springscape, Anthony Danielle, and this list of Best Instagram Photos Ever Taken. If you’re new to Instagram and you have no idea how it works, it’s like Twitter for photos, wherein you get to follow people and see their work.
Keep-Away From Google
Facebook paid a high premium in part to keep a popular mobile tool out of the hands of a different social-networking provider, such as Google Inc. (GOOG), said Ray Valdes, a research director at Gartner Inc.
“The value really is not what Instagram is, but what Instagram could have been in the hands of competitor,” Valdes said. “That’s the reason why the valuation was so high.”
The deal marks the first time Facebook has acquired a product and company with so many users, Chief Executive Officer Mark Zuckerberg wrote on his profile page. The company also announced the transaction on its website.
Facebook, which intends to raise $5 billion in the biggest IPO of an Internet company, says it plans to let Instagram remain independent.
“We need to be mindful about keeping and building on Instagram’s strengths and features rather than just trying to integrate everything into Facebook,” Zuckerberg wrote. “Millions of people around the world love the Instagram app and the brand associated with it, and our goal is to help spread this app and brand to even more people.”
Instagram was introduced in October 2010 by Kevin Systrom and Mike Krieger. Building on its popularity among iPhone users, last week the company added an application for devices that use Google’s Android operating system. Systrom didn’t respond to a request for comment on last week’s funding round, reported previously by blogs AllThingsDigital and TechCrunch.
Instagram received seed funding of about $500,000 from Andreessen Horowitz and Baseline Ventures in 2010. It raised a $7 million round in 2011, when it had 1.75 million users, from Benchmark Capital and a group of angel investors including Twitter Inc.’s Jack Dorsey and Quora Inc.’s Adam D’Angelo.
The startup closed its most recent financing just days before Facebook’s purchase was announced, the people with knowledge of the matter said.
Apple Startup Help
The purchase extends the role of Apple’s App Store as a platform for building companies, said Carl Howe, an analyst at Yankee Group. It may also be the largest purchase price for an app built for the App Store, he said.
“You’re going to see valuations in app companies in general be a little surprising,” Howe said.
Many of Instagram’s backers have close ties to Facebook, including Marc Andreessen, who sits on the board of the social network, and Benchmark general partner Matt Cohler, who was one of Facebook’s earliest employees and worked as a senior vice president of product management there until 2008. He remains a special adviser to Facebook CEO Zuckerberg.
Systrom himself once received a job offer from Zuckerberg in the early days of Facebook and turned it down.
“I decided I wanted to stay in school,” Systrom told Fast Company magazine last year. “That’s one of those decisions that I look back at — I would’ve loved to have been part of Facebook’s growth over the years.”
Marketers including Nike Inc., Tiffany & Co. and Burberry Group Plc have begun using Instagram to promote products using photos, Lieb said. Gap Inc.’s Banana Republic unit held a contest on the site asking users to submit pictures of their New Year’s Eve outfits for a chance to win a trip to New York City.
“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,” Zuckerberg said.
Facebook has a history of acquiring small companies with highly-regarded talent. It has bought e-book publisher Push Pop Press Inc. and mobile messaging app Beluga Inc. since the beginning of 2011. It also hired the staff of location check-in service Gowalla Inc.
“Two years ago we didn’t have a track record in acquisitions,” Vaughan Smith, Facebook’s director of corporate development, said in an interview with Bloomberg last year. “While we expected them to work well, it was still a crapshoot how they’d turn out. We’ve built a culture that supports entrepreneurs, and it’s working incredibly well.”
When the company filed to go public in February, it told investors that its lack of experience in large acquisitions could pose risks for investors.
“Our ability to acquire and integrate larger or more significant companies, products, or technologies in a successful manner is unproven,” the filing said.
Instagram Wikipedia History:
Industry: Mobile software
Founded : 2010
Founder(s): Kevin Systrom, Mike Krieger
Headquarters: San Francisco, California, USA
Products : Instagram
Employees : 14 (as of April 2012) for details of employees click 14 Employees of Instagram Details
Parent : Facebook
Website : instagram.com
Founders of Instagram:
Mike Krieger (left), Kevin Systrom (right)
Instagram is a free photo sharing program launched in October 2010 that allows users to take a photo, apply a digital filter to it, and then share it on a variety of social networking services, including Instagram’s own. A distinctive feature confines photos to a square shape, similar to Kodak Instamatic and Polaroid images, in contrast to the 4:3 aspect ratio typically used by mobile device cameras.
Instagram was initially supported on iPhone, iPad, and iPod Touch; in April 2012, the company added support for Android camera phones running 2.2 (Froyo) or higher. It is distributed via the iTunes App Store and Google Play.
On April 9, 2012, Facebook announced it would acquire the company (and its 13 employees) for approximately $1 billion in cash and stock, with plans to keep it independently managed.
Instagram development began in San Francisco, when Kevin Systrom and Mike Krieger chose to focus their multi-featured HTML5 check-in project Burbn on mobile photography.
On March 5, 2010, Systrom closed a $500,000 seed funding round from Baseline Ventures and Andreessen Horowitz while working on Burbn.
The product launched in Apple’s App Store on October 6, 2010. Shortly after the launch, Josh Riedel joined the company as Community Manager. Shayne Sweeney joined in November 2010 as an engineer and Jessica Zollman was hired as a Community Evangelist in August 2011.
In January 2011, Instagram added hashtags to help users discover both photos and each other. In September, version 2.0 went live in the App Store (iOS). It included new and live filters, instant tilt shift, high resolution photos, optional borders, one click rotation and an updated icon.
On February 2, 2011, it was announced that Instagram raised $7 million in Series A funding from a variety of investors, including Benchmark Capital, Jack Dorsey, Chris Sacca (through Capital fund), and Adam D’Angelo. The deal valued Instagram at around $25 million.
On April 3, 2012, Instagram for Android was released. That same week, Instagram raised $50 million from venture capitalists for a share of the company that valued it at $500 million. On April 9, it was announced that Instagram would be acquired by Facebook for approximately $1 billion in cash and stock. The deal, which was made just before Facebook was scheduled to go public, cost Facebook about a quarter of the cash-on-hand they had as of the end of 2011; the deal was for a company characterized as having “lots of buzz but no business model” and the price was contrasted with the $35 million Yahoo! paid for Flickr in 2007, a website which has since become among the 50 most popular in the world. Mark Zuckerberg noted that Facebook was “committed to building and growing Instagram independently”, in contrast to its common practice of, as CNNMoney.com put it, buying “hot startups, kill[ing] their products, and redeploy[ing] their staff on other projects.” According to multiple reports, the deal netted Instagram CEO Systrom $400 million based on his ownership stake in the business.
By December 2010, Instagram had one million registered users. In June 2011 Instagram announced five million users, passing ten million in September the same year.
Instagram announced that 100 million photos had been uploaded to its service as of July 2011. The total reached 150 million in August. In April 2012, it was announced that over 30 million accounts were set up on Instagram.
Instagram’s new Android version in Google Play crossed more than one million downloads within 12 hours.
In January 2011, Instagram was the runner-up for “Best Mobile App” at the 2010 TechCrunch Crunchies.
In May 2011, Fast Company listed CEO Kevin Systrom at number 66 in the “The 100 Most Creative People in Business in 2011″.
June 2011, Inc. (magazine) included co-founders Systrom and Krieger in its 2011 “30 Under 30″ list.
In September 2011, Instagram won “Best Locally Made App” in the SF Weekly Web Awards.
7×7 Magazine’s September 2011 issue featured Systrom and Krieger on the cover of their “The Hot 20 2011” issue.
In December 2011, Apple Inc. named Instagram “App of the Year” for 2011.
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