

Ask HN: Why did Instagram need to raise $57M? - courtneypowell

I'm having trouble getting a <i>good</i> answer as to why Instagram found it necessary to raise $57M? Please enlighten me.
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staunch
It's the VCs that make the decision to pump that money into a company like
Instagram. They do it for only two big reasons:

1\. Align the interests of the founders with that of the VCs.

How else are you going to convince the founders to "swing for the fences"
(read: IPO or $1B+ exit) except to let them take a large chunk of money "off
the table" now?

Any company as hot as Instagram is getting offers for $100M+ acquisitions on a
regular basis. That would likely mean $10M+ for the founders. It's just not
rational to pass up a personal windfall like that unless you're already very
very wealthy.

The neat thing is that VCs have solved this problem. In the past few years
it's become common to let founders sell some of their equity for $N millions
when they've reached a certain level of success.

Once the founders have banked millions of dollars they start seeing things
from the same perspective as VCs. It's completely rational for them to attempt
world domination. Instagram would have eventually tried to threaten Facebook's
position. Had they succeeded they might have ended up with $20 billion (like
Zuck). They also might have ended up with nothing.

2\. To fund expansion.

You can't plan world domination if you don't have the servers and manpower to
attempt it. Servers and datacenter space are expensive. Employees are even
more expensive.

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balajiviswanath
To prove their valuation and get a stronger hander at the negotiation table.
Many companies raise money not for capital investments, but for:

a) create news and get free PR (press loves such eye-popping numbers)

b) get higher valuation numbers that will motivate the employees more (they
have the stock options after all)

c) get more powerful/influential shareholders who will help clear the hurdles
in the company's way

This is not exactly how capitalism is supposed to work - capital has to be
used judiciously to build future growth.

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msencenb
It's likely that they were already in the process of closing the round (i.e.
had signed some term sheets) prior to having the acquisition conversation with
facebook. At that point they probably were legally bound to close the round
prior to the acquisition (and is likely a reason the company went for such a
high price... the investors wanted to at least double their money).

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andrewstuart
To build a perception of value. An investment of $57M allows an argument to be
put forward that the company value is $1B.

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leoalmighty
mark suster wrote a good post on this:
[http://www.bothsidesofthetable.com/2012/04/14/dont-try-to-
pu...](http://www.bothsidesofthetable.com/2012/04/14/dont-try-to-pull-an-
instagram-heres-why/)

