
Sequoia Set to Lead $500M Valuation Round for Instagram - tilt
http://allthingsd.com/20120406/sequoia-set-to-lead-500m-valuation-round-for-instagram/
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mvkel
Who realistically sets out to create a business that needs more than 30mm
users to be plausible as a revenue generator?

This lends more to the notion that these "app builders" are falling backwards
into business opportunities with no clear idea of how to execute.

Can't great apps just exist without the expectation of 1bn valuations and
rolling them up as companies?

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pclark
No.

Running and maintaining Instagram probably comfortably costs in the six
figures range with 30mm users. Operations at scale require venture capital
funding. If Instagram were paid for, the user base would be a fraction - and
more importantly, someone would just release a clone of the app for free,
acquire millions of users, raise VC and crush you.

The opportunity cost of Instagram implementing a revenue model today is huge.

Given Instagrams popularity and influence I'd say there is no reason why it
won't be as influential as YouTube -- $500mm is almost cheap when you think
about it.

"Who realistically sets out to create a business that needs more than 30mm
users to be plausible as a revenue generator?"

Swinging for the fence entrepreneurs. We should be supporting them. Instagram
opportunities are once in a life time.

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timjahn
"Swinging for the fence entrepreneurs. We should be supporting them. Instagram
opportunities are once in a life time."

This is exactly the type of thinking I think we need less of. We shouldn't be
encouraging people to play the lottery in hopes of a big, very-rare-chance-of-
happening win.

We should be encouraging people to work hard to build real, profitable
businesses.

~~~
pclark
Instagram is a real business. There is more than one way to skin a cat.

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antr
If Sequoia goes in at a $500m valuation, few companies will be able to give
Sequoia a "decent" return/exit. Indeed this is a "frothy" valuation.

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tejaswiy
"forthy" ! What in the world can they do to make money to justify such a high
valuation? Sell filters !?

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rokhayakebe
They have to make only $100M/year to be valued at 5 times yearly revenue. It
is very likely Instagram can double its user base over the next 12 months now
that it supports android. At that point reaching $100M in revenue will be
quite easy due to the fact that mobile consumers are very likely to make sub
$2.99 purchases/upgrades.

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antr
I think Instagram is a great company but I personally see too many IFs and
moving pieces to support a $500m valuation.

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nashequilibrium
I totally agree, there are a number of copy cats out now. Flickr for android
copied instagrams product offering, therefore these copy cats should
cannabilise some sales. Instagram is very trendy right now so on brand
awareness it has a huge edge, the issue is can they sustain this edge two
years down the line when the dust settles?

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apawloski
As a programmer who is generally unfamiliar with business lingo, can someone
explain what this valuation round means? Are they saying that Instagram is
worth $500,000,000? How realistic is that number?

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sparky
Valuation is (Dollars I pay)/(Fraction of the company I buy). In this case,
they are selling 10% of the company for $50 million.

It's not exactly the same thing as saying that these investors would be
willing to buy all of Instagram for $500 million because both parties' utility
functions are seldom linear. It's the closest thing we have, though.

~~~
tlogan
And one more question from not-so-business savvy reader.

If Sequoia got this deal with 2x liquidation preference then if Instagram is
sold for $100 then Sequoia will still profit $50M. Correct?

~~~
sparky
'Liquidation preference' is a term that applies to what I think of as 3 or 4
related-but-separate concepts. In the simplest situation, with no vested
options or other complications, yes, the investor would get all $100 million,
assuming nobody else has a liquidation preference.

Vested options and other term sheet items like 'participating preferred' make
things more complicated, so you really have to read the entire term sheet to
figure out who gets what under what circumstances.

Good resources:
[http://www.burningdoor.com/askthewizard/2007/04/venture_term...](http://www.burningdoor.com/askthewizard/2007/04/venture_terms_liquidation_pref.html)
[http://www.feld.com/wp/archives/2005/01/term-sheet-
liquidati...](http://www.feld.com/wp/archives/2005/01/term-sheet-liquidation-
preference.html)

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mattparcher
Re: _"What is their business model?"_

In an interview with Sara Lacy, [1] Kevin Systrom notes that:

\- "27 million people is not too shabby, but it’s nowhere near the scale you
need to make a massively large business."

\- they plan to build a tool for advertisers, because using the iPhone app is
a "terrible experience" for them

[1] [http://windonaleaf.net/post/20464525754/instagram-perform-
ad...](http://windonaleaf.net/post/20464525754/instagram-perform-ads) (via
Shawn Blanc)

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antidaily
Ads. Great.

$2 is a fair price for the app-- too late now on that one. They could charge
for filters.

