

Instagram raised $50M right before acquisition - ryangilbert
http://techcrunch.com/2012/04/09/right-before-acquisition-instagram-closed-50m-at-a-500m-valuation-from-sequoia-thrive-greylock-and-benchmark/

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hemancuso
I don't understand this at all. Unless FB started and finished this deal in
the 24 hours following the round, why in the world would the founders let this
round close?

In all seriousness: somebody explain this please.

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paul
Deals fall apart. Running both deals in parallel is a smart way to hedge risk.
Also, it is in fact possible to put together a deal very fast. We sold
FriendFeed on a weekend.

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mbesto
Curious...when you speak of a "deal" are you saying all of negotiations and
paper work?

It's my assumption that many large scale deals get negotiated informally over
a longer period of time and rarely is it as simple as an investor comes in on
a thursday at a first introduction and a deal is signed by sunday.

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paul
I negotiated terms Friday evening, we signed docs Sunday night, and announced
Monday morning.

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bigdubs
not that it's apples and oranges either (50mm vs. 1bn) you'd think diligence
takes time (i.e. longer than a weekend).

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bigiain
Yeah, but that diligence is surely all in FB's court?

If my startup was valued at 500m last week (I wish!), and someone offered me
1b for it today, I'd consider the extent of due diligence required on my part
would be checking to see if the cheque cleared...

(Having said that, presumably FB _did_ due diligence - before Thursday's 50m
on 500m round - I'd love to have been a fly on the wall when Instagram
explained that in the final few days of the sale… "Oh, BTW, we sold 10% to
Sequoia et al on Thursday - that doesn't change anything here, right?")

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waterlesscloud
What did they even raise the $50M for? They have 13 employees and run a couple
hundred AWS instances from all accounts...

They had previously raised $7M a little over a year ago. Surely much of that
was still around.

Was this primarily to raise their valuation? Is that how it's done?

Genuinely curious, I don't know how these things work.

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bigiain
Cynical-me says "To provide 100% returns worth $50mil over a weekend for some
friends of theirs"…

Surely there's absolutely no doubt that whoever signed this round last
Thursday knew just how close to finalizing a $1bil acquisition they were?

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ryangilbert
Investors literally doubled their money overnight. Wow.

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rhizome
Let's be clear here: _connected people_ doubled their money overnight. There
should be a special tax for insider-only capital gains like this.

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ryangilbert
I actually agree with that. They definitely knew the FB deal was in place when
they agreed to the funding.

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EdisonW
Totally agreed. Engineers at instagram worked days and nights for years for
probably the same amount of money that the inside traders make overnight,
literally.

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mbesto
Did you ever stop to think that insider traders may have spent endless nights
building their companies, selling them for profit and are now simply taking
that money to invest?

Money is simply a medium for exchange in this case.

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ajross
Spending endless nights building and selling companies is laudable, and well
rewarded already. "Taking that money to invest" is an entirely unrelated task
and needs to be done on the same playing field the rest of the investing
public has to play on.

You're saying essentially that the ethics of how you spend money change
depending on how you got it. How can that logic possibly work?

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hristov
If I were a facebook shareholder, I would be livid right now. This was
definitely an inside deal/giveaway that resulted in facebook having to pay
much more for the company than it would have.

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hemancuso
Facebook's core feature, apart from the graph, is photo-sharing. Instagram is
the only company at the moment who has any real chance at building a base to
compete with Facebook on photos right now. Looking at this from a $/engineer
or $/user seems misleading. I have got to imagine that managing future
competition motivates this move. That being said, it seems absurdly expensive.

I'm surprised they didn't try to add photo-filters to their mobile app first.
I don't think people are going to spend the next decade taking retro pictures.
Just like with location - they could've added the feature to their app, people
can "be part of location" without having to join a new network.

Over time, most people get bored of filtering their photos and move on. By
putting that feature in mobile app, Facebook likely could've done a bit put
the curb on Instagram from ever pivoting away from filters into a full fledged
photo-sharing network and saved themselves a billion.

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hristov
I am not arguing whether this was a good acquisition. The acquisition itself
seems to make sense. But it is rather bizarre that they would allow this
financing to take place which would do nothing but add to the price of
acquisition.

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motti_s
I have a question: is this good or bad for the Series B investors? I'm not
sure the answer is as obvious as it seems.

2X return overnight is great for angels, but is it good for VCs? From what I
understand (correct me if I'm wrong), once VCs have an exit, they can't reuse
the proceedings for a subsequent investment. Thus, since VCs like Sequoia are
probably looking for 10X returns, they just ended up with a chunk of their
fund that underperformed. True or false?

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dpark
> _From what I understand (correct me if I'm wrong), once VCs have an exit,
> they can't reuse the proceedings for a subsequent investment._

Why wouldn't they be able to use the funds for a later investment? Isn't that
what VCs do in general? (Genuine question; not being snarky.)

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motti_s
I believe that most funds are structured in a way that the VCs have to pass
the proceedings (minus their cut of course) to their LPs (investors).

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joshu
Correct. However many funds do not distribute returns that are less than a
certain amount (1.5x is typical, I think)

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motti_s
So in you opinion, assuming that Sequoia had to distribute the "overnight" 2X
to their LPs, was that a good investment for them?

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joshu
I think VCs are looking to provide bigger returns than this.

