Instagram: How to make $1Billion dollars without ever making a Cent?

“Mark we have a proposition for you.”

“Ok. Let me hear it.”

“Our app allows you, with only two clicks, to modify and share  your photos that you’ve taken with your iPhone. 30 million people have downloaded the app most of which are already using Facebook. We have no business model that generates revenue….Yet.”

“I’m hoping that you’ll see the enormous value in our app and give us $1 Billion – yes $1 Billion, with a B, dollars for it. It’s only $33.33 per user. What do you say? Do we have a deal?  It’ll be worth $100 Billion tomorrow – so it’s a bargain today. ”

I’m not so sure the above reenactment is an accurate representation of how the conversation went down between the Facebook and Instagram brass.  But the numbers are very accurate.

As much as I’m dumbfounded by Facebook’s extravagant purchase of Instagram, I must first give kudos to the co-founders Kevin Systrom and Mike Krieger who took their simple idea, “To change and improve the way the world communicates and shares.” and turn it into a favourite app for millions…and cash in in the process.

So what’s wrong with this business deal besides the exorbant price that Facebook is paying?

Usually when companies want to grow their business they look at whether or not growth is more attainable organically or externally through acquisition. In the software world this comes down to a develop-or-buy scenario.

In this case, with the IPO-pending Facebook anticipating a huge windfall once they open to the public, they went with the buy scenario.

I don’t have an issue with the acquisition itself. In fact I think it can be great for Facebook. Instagram is a great and simple app. I use it all the time.

The worrisome reality of this deal is that Facebook is following the same recession causing “too big to fail” philosophy that put the economy in such a mess in the first place.

Buying a business is risky to begin with let alone one without revenue.  In every M&A, VC, or pitch session that I’ve been involved with the one question that always comes up from investors is,  “what’s your revenue?”  So, in this scenario, I wonder what Zuck’s followup question was after Instagram failed to show how they made any money?

If Facebook was worried about the competition, specifically Google, who could snatch it up and make it part of the + community, surely there’s was a better way to subdue your frienemy without paying an outrageous price for a photo sharing app. And aren’t the majority of Instagram users already Facebook users? So out of that 30 million, how many new users is Facebook really getting access to?

The big picture problem with this deal is that it does nothing to change “business as usual”, as Branson says. It lends no insight to the necessary change that’s needed to guide the young generation of entrepreneurs and business owners away from the feast or famine thinking. It does nothing to spark innovative business or creative collaboration. All it does is a put a large price tag and more hype on a popular company hoping that the media will show the world that the American dream alive and spending. Ooops I mean kicking.

In the end, for whatever reasons Facebook decided to do what they did, there’s no denying the fact that Instagram somehow managed to make a billion dollars without ever making a cent.

photo courtesy ALAMY

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