

With Instagram Deal, Facebook Shows Its Worth - tilt
http://dealbook.nytimes.com/2012/04/18/with-instagram-deal-facebook-shows-its-worth/

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ChuckMcM
I find tech people arguing about the valuation somewhat curious. Instagram has
a lot of traction, eyeballs and users. More importantly it has those users in
the place where everyone wants to be, mobile phones.

So sometimes you hear complaints from technologists like this "Hey I could
write that app in a weekend, throw some EC-2 at it and blam, done. So WTF is
up with that valuation?" And that sounds a bit like saying that the New York
times is just some typeset ink and pictures. Which technically is not hard to
produce, but their reach in terms of audience is actually quite large. So
their value is in their reach, not their technology.

So wired wrote [1] that Instagram has 40 million users. Lets look at them from
a 'customer acquisition cost' story. Paying out 300M in cash for 40M customers
is $7.50 per customer. What is the lifetime value of a Facebook customer? How
about a Facebook customer on Mobile? Good question, but if you already have a
kick ass display ad business (which Facebook does) and you add 40M daily
users, and you tweak the product so it goes through a way that you can
usefully display them an ad? Can you make that into a billion dollar a year
business in 1 year? 2 years? 5 years?

If engineers have a blind side it's 'suits', which is to say great engineers
not only have skills but they also have the intuition to know the value of the
product delivered. But products only have value if people know they exist, and
the cost of acquiring customers for your killer product, well it can kill your
product.

So rather than say 'this is a stupid valuation for a nothing of a company!',
lets assume that the folks at Facebook aren't complete idiots, or scheming
some back room buddy deal to put one over on shareholders (which one blogger
suggested), ask yourself honestly, "A smart person looked at this deal and
agreed it was worth $1B, 30% cash and 70% stock, since that makes no sense to
me I need to figure out what they know that I don't know."

I personally think they are interested in the customer acquisition in the
mobile space (obviously :-)) but I also recognize that having been through
these things in the past there is a ton of stuff that doesn't make the press,
like process innovations, or specific people skills, or partnerships, etc etc.

The cool thing about this story is that it seems like the founders will get a
bit of money 'up front' which can be re-assuring to a founder / employee.
Since there are no guarantees that the stock you got is worth anything when it
'unlocks.' [2]

[1]
[http://www.wired.com/gadgetlab/2012/04/instagram-40-million-...](http://www.wired.com/gadgetlab/2012/04/instagram-40-million-
users/)

[2] Speaking from personal experience of getting MANY shares of restricted
stock valued at > $50/share when granted and then being worth $0.83 when
'unlocked', yes you read that correctly, 98.4% decline in value. Wouldn't
cover tax, much less leave anything for me to write home about. But there are
many such stories from the '90s, go use the wayback machine and price TUTS at
December 1999 and 18 months later in June of 2001.

~~~
stuff4ben
It sounds like you're assuming that those 40 million users weren't already
Facebook users which I highly doubt. I could be wrong though, but really, what
are the chances of that? It sounds more like they wanted to keep Google from
getting Instagram which would have made sense for them to get those 40 million
users on G+.

~~~
bad_user
In my experience as a user of Facebook on mobile phones, mobile Facebook
sucks.

From a technical perspective, the UI of their native app suffers from lag,
making it unusable for me, which is why I prefer opening Facebook in my mobile
browser. The web experience is much better and doesn't bother me much, except
when I want to upload photos.

Also, the whole Facebook experience sucks on mobiles phones because Facebook
was designed for desktop browsers and there are no easy ways out. The
difference on mobile phones is that because of the small screen size the
consumption of content has to be linear and the Facebook stream is anything
but (unline Twitter or your SMS Inbox). To add salt to the injury, a big part
of what forms the Facebook experience is made of Flash-powered games and
shitty apps that weren't designed for small touch-screens.

Basically Facebook has gotten too big to turn around fast and redesign their
experience around mobile phones. They may be able to pull it off, but I
suspect that their strategy is to break Facebook on mobile phones in multiple
apps.

A really big and important part of Facebook is sharing and seeing photos of
other people. Google saw that and one thing that Google+ does well is the
sharing of photos. Google Picasa was integrated with G+, so this means cheap
storage for full-resolution pictures and a kickass desktop tool for managing
big photo collections. Android also comes with Google Picasa integration by
default, so whatever you upload on Picassa it ends up synchronized to your
mobile phone (or vice-versa). Then the G+ interface is really slick; the
mobile app is not too shabby and the web browsing experience is good (or was,
there's something off about their redesign).

The bottom line is this ... those 40 million users may already be Facebook
users, but I bet they aren't mobile Facebook users ;-)

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ajross
I'll corroborate the mobile facebook software problems. Even on a good wifi
connection (i.e. I'm browsing happily on the very same device) it routinely
takes 4-10 seconds for anything to show up.

I'm not sure I buy the "Facebook experience is anything but [linear]" point
though. Certainly the web UI _is_ broadly linear, and presented in the same
order as the mobile app. The ability to "drill down" into comments is poorly
implemented in mobile (especially when compared with G+, which has a _great_
mobile app). But really, I think Facebook could improve this greatly with just
some tuning.

I think the bigger problem, and one mentioned frequently elsewhere, is that
the mobile app doesn't have the same ability to push revenue-producing content
at the users. An ad or game or "suggestion" or whatnot in the sidebar is
benign on the desktop. On mobile it's an annoyance.

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padobson
You can definitely see why this deal got done. Instagram was maybe 3 or 4
years away from any chance of their own IPO, and probably a year away from a
serious $2B aquisition.

Even if the sale price of the company was really $2B, they were able to take
Facebook stock that is on the verge of an IPO for 75% of what it will IPO at.
If Facebook hits a market cap of $150B in the next 12 months, that would put
the value of the Instagram stake at $1.4B a year from now, plus the $300mm in
cash that Facebook chipped in.

Looking at the deal that way, it made a lot of sense to do it now if Instagram
was shooting for a $2B exit.

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dmishe
Ok seriously, why BB?

~~~
padobson
I don't know, probably a bad habit extending from the mm. Don't have a good
reason.

Edit: Changed it to single, capital B's now.

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heifetz
oh right, I'm sure Kevin Systrom had a hard time deciding on taking the offer
because of the price. Considering that he just had valuation of 500mm, and no
current revenues. It's hard to see how anyone can justify a high probable
scenario where they will do an IPO in the future for much higher valuation
than what they just got.

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padobson
Venture Capital is a game shooting for the 10x. To get the 500mm valuation,
Instagram had to convince its investors that a $5B exit was a possibility.

So a lot of smart people were able to justify a higher valuation than what
they just got.

