This is very reminiscent of Google/YouTube circa 2006. When Google bought YT it was a small team of people and a pretty nascent product that people really loved, and the usage numbers were out of control. They left the product mostly untouched and let it grow on its own. Though there was major criticism at the time, it is one of the best tech acquisitions of the past decade.
YouTube is a content paradise though. There's tons of value there and you can sell ads against it or even charge for premium services.
Where's the money in Instagram? The content is practically worthless and their only real value is in their userbase. Even though I use the Instagram client, most of the time I see photos, they come through Twitter. So that also reinforces for me that any value is in the users and not the actual content, which is mostly crap.
I'm more convinced that we're in a 2nd bubble now more than ever.
Lots of people were saying that YouTube could be monetized, especially by Google, because Google needed content, which YouTube had, Google wanted to get into the booming video landscape and Google had massive bandwidth, which YouTube desperately needed. The only issue was how fast Google would clean up all of the copyright infringement and how it would affect YouTube.
What I was referring to with the greater fool theory is that the investors who put in ~$50 million, for a valuation of ~$500 million thought they'd find a greater fool to sell the company to, to make money off of (since I don't think Instagram could actually earn that money from its userbase), and that greater fool turned out to be Facebook.
In turn, Facebook, implicitly assumes that the greater fool from whom they will make money from this deal is the public who will buy shares when Facebook goes IPO. Because with $1 billion in profits for 2011, if the market values them at $100 billion, that will be a P/E ratio of 100. Even if they double their profit in 2012, their P/E ratio will still be 50, which is astronomical.
When people put huge money into things that have low value from a business fundamentals point of view, just because they think they can sell later on to someone else to make a huge profit, I think that's the very definition of a bubble.
What you call greater fool is just who has more value for Instagram. Instragram is worth more to Facebook than it is to Sequoia because Sequoia don't run a social network with hundreds of millions of users and aren't trying to stop Google from killing their business.
If I buy a bathtub from a bathtub warehouse at a 50% markup am I the 'greater fool' or do I just like hot baths?
> Because with $1 billion in profits for 2011, if the market values them at $100 billion, that will be a P/E ratio of 100. Even if they double their profit in 2012, their P/E ratio will still be 50, which is astronomical.
And then if it doubles again it becomes 25, and then it becomes 12, and then it becomes 6. only 4 years away to Facebook being a blue chip stock - so all that the 100 PE ratio is telling you is that they do believe that revenue and income will grow pretty quickly over the next few years.
The last bubble got messy because public markets were being used as what private equity does today. The public was shouldering the risk profile of a big VC firm that filled in all the shitty deals.
"And then if it doubles again it becomes 25, and then it becomes 12, and then it becomes 6. only 4 years away to Facebook being a blue chip stock - so all that the 100 PE ratio is telling you is that they do believe that revenue and income will grow pretty quickly over the next few years."
Those are some BIG ifs. I'm going to contrast Google and Facebook to explain why I think Facebook is overvalued.
When Google was in it's fast growth phase, it could perhaps justify a P/E like what Facebook has now - because of the way in which Google makes money. For roughly 1 out of every 14 Google searches, a user clicks a Google ad. As the amount of people on the internet grows, that means the amount of searches grow, meaning the number of ad clicks grows in tandem. Even today, with all the smartphones and tablets and people from the BRICS coming online, Google only has a P/E of 21.
Now contrast that with the way in which Facebook makes money. Targeted ads. The revenue they generate doesn't grow in tandem with Facebook's userbase. Granted, the revenue goes up as companies chase the eyeballs, but it seems to be a mixed bag of results selling ads on Facebook, so some companies aren't going to get the results they want and will quit Facebook. People there don't go there primarily to look at products (completely different to many Google searches). And of course some companies will get great results, but the overall point is that there isn't a direct correlation between user growth and revenue growth.
Ah!, you say, but there are other ways for Facebook to make money (off the top of my head):
a) Premium celebrity pages (pay Facebook for a prominent page to get fans)
b) Somehow charge for user accounts, maybe for premium features
c) Selling user data to third parties
d) Zynga etc. profit sharing
Maybe they could make some revenue from premium celebrity pages, but not enough to justify a 3-figure P/E, IMO. Charging for premium features would be highly controversial, if they did this it would be a sign of desperation and a complete departure from where they began. They probably will do some form of c at some stage (don't worry, your data is completely anonymised!) but users would probably abandon ship to competitors in droves if they did. They will continue to make money from social gaming, but it's fickle and short-lived, plus Zynga is trying to wean themselves off Facebook to grow their own revenue.
Overall I think they will continue to make billions from ad impressions and social gaming profit sharing, but nowhere near enough to justify a $100bn valuation IMHO. If they bow to Wall Street pressure and really try to squeeze their userbase data for every dime (you could call this 'doing a MySpace', i.e. shooting themselves in the foot), people will leave in droves to the next social hotspot. So it will be 'interesting' to see how they will justify the lofty valuation over the coming years.
FaceBook is only worth 100b on paper. It's not worth close to that. The reason this is absolutely a bubble is because you have one paper tiger buying another paper tiger with virtual paper.
This is no different than the real estate cycle in L.A. or South Florida a few years ago, when people would buy and sell condos based on market potential multiple times before the condo was even finished. It all works until someone down the line tries to cash in. It will work for FaceBook and Goldman Sachs, but a whole lot of consumer investors are going to get AOL'd in the long run.
real estate was highly leveraged borrowing that took national household debt and repayment figures to new records. Facebook stock is being bought by institutions and funds, and those numbers still don't come close to 98/99 records despite online revenue being an order of magnitude larger today than what it was then
That's exactly what this was. That's why he bought them a day after they closed a $50 million investment Zuckerberg freaked out about Instagram's plans to become much bigger, especially now that they just launched on Android, too.
If you have billions to (over)spend, what does it say when you are terrified of tiny competitors who have shown no ability to compete with you, no revenue model and no long term ability to monetize in place?
There are a few ways to look at this. The 1% is in cash and shares and we don't know the proportion or I haven't seen that anywhere so far.
Now to put the question in context if you have a small company that is worth, say $500,000, then 1% is $5000 you might spend that much (in cash alone yearly) as "insurance", say for property/casualty or liability. And you would pay that no matter what the business climate if you perceived a risk to your business, right?
But it could indicate a bubble simply because if the market is up people are more likely to overpay for anything because they feel very upbeat and enthusiastic about the future.
So paying a large number (and 1 billion is a large number and not trivial no matter how you slice it) would be more likely to happen in a bubble.
But there are to many variables in this that are not know to draw a definitive conclusion.
That said my feeling is we are in a period of irrational exuberance.
This is an excellent and important point, maybe the most insightful I've read in this thread.
Whatever value Instagram has for Facebook, it probably has at least double that value for Google, who could buy it just as easily. By paying a premium and showing major interest first, Facebook preempted an opportunity for Google to get some traction in the social space. Very smart move.
Facebook currently has very limited editing for their pictures. By acquiring a well-known and talented company, Facebook can roll this into their current offerings. I would be very skeptical that this was a user-driven move. I can't imagine a large percentage of Instagram users who are not also Facebook users, even if people posted a lot of Instagrams to Twitter.
one, instagram has brilliant team which also include creative people and not only tech.
two, very high yet active user base.
three, which is purely on business value - the cumulative time spent in the mobile app of 30 million active instagram users, when you add up, will give more revenue in facebook ad in the following years. i would say, facebook played safe here in trying to regain the usage time.
> This is very reminiscent of Google/YouTube circa 2006.
In that it was a startup acquired by a big company? Yep.
> When Google bought YT it was a small team of people and a pretty nascent product that people really loved, and the usage numbers were out of control.
Like most startup acquisitions, the team size is relatively small and there is significant traction in the market with headroom to mature their footprint.
> They left the product mostly untouched and let it grow on its own. Though there was major criticism at the time, it is one of the best tech acquisitions of the past decade.
This is not going to be one of the best tech acquisitions of the next decade. YouTube helped to propel Google into content. It also helped to commoditise web video in a massive way: reminiscent of the way which Google commoditised search (YouTube is probably just short of being a byword for online video at this point).
Instagram is a photo service in a sea of other photo services. Photography has been around on the web in meaningful ways for a long time. Flickr lost out to Facebook in the community stakes, and Instagram is doing great in whatever-the-fuck market it's in (the share-to-my-twitter-followers market?), but this is not Google acquiring YouTube.
It isn't the photo service: Facebook. Flickr. Picasa. Imageshack. Twitpic. Imgur... To name a few.
Instagram doesn't have more users than Facebook. Hell, it doesn't even have more users than Flickr (51m) or Photobucket (50m).
Instagram is a small part of the web photo ecosystem.
It's a very peculiar play by Facebook, and not at all comparable to Google & YouTube other than the fact that Google acquired YouTube, and Facebook acquired Instagram. Instagram represents a diversification of Facebook's offering, and one which says "it's cheaper for us to spend $1bn acquiring Instagram than it is to make a compelling mobile photo app to usurp them".
It's probably too late, but if Facebook would like to hedge their bets by seeing if they could make an Instagram workalike & user traction for much much less than $1B -- for say, oh, a mere $1M up front and $9M upon delivery -- I'd be willing to take a shot. One man team. Give me say 2 months absolute tops. I deliver the mobile app, website, backend. Facebook brings the massive user base. Oh wait, again, they could already do this, without needing me. Or Instagram. So, put me down as another guy who thinks it's a misspend on Facebook's part, partly due to perhaps being drunk on their own "funny money" valuations.
The assertion is that, for a billion dollars, Facebook should be able to create a significantly better app and market it better (or 'at all') than Instagram do.
Facebook have got 721m users and all the data they need to constitute incredible market research. In twelve months if Facebook couldn't build an app which is competitive to Instagram, and get it installed with ~5.5% of their user-base, I'd be really fucking worried.
Also consider this: Twitter add "Photos" to their filtering options adjacent to "Connect" and "Discover". So you can just click a Photo button and see all your connections' photographs in a stream. Oops, they just went halfway towards creating most people's Instagram experience.
sbarre has it right. You missed this part: "Instagram is the main mobile photo app."
Damn reading comprehension. ;)
To go a step further, consider: Flickr is available on every device (computer or phone) with an internet connection . Instagram was iOS-exclusive until a week or two ago, and yet it managed to reach sixty percent of Flickr's user base size. That's astounding.
I was addressing the part where it said "it's the photo app". It isn't "the" photo app. You can make the case that it's the most widely used mobile photo app after Facebook. But that != $1bn valuation or YouTube-like status.
i hate using the metric of downloads or users.. the most important metric that we don't get from mobile app companies is daily active users. Filters on android have become commodity, and I imagine a lot of users just installed to try and see what the hype is about.
Does the 1m in one hour really mean much? We've heard about the iPhone app, not it was available for Android, so we checked it out (except not everybody did, I did not). There won't be 1m new users per hour, it was just the first hour.
It was also only really possible given the resources Google had to throw at YT. It was years before YT was profitable, and even then it was only with the introduction of intrusive ads that that was possible. A company without Google's deep pockets would likely have had a hard time giving YT the chance to grow organically, without trying to butt in and make it profitable.
Maybe YouTube could have done it on their own too, but a big reason why Google was able to keep YT afloat was its widespread peering agreements. So even though it bled cash for years, it didn't bleed near as much cash as it could have because they paid very little for their actual bandwidth.
I say follow the money. Things that don't make any sense on the surface often have simple motivations. Someone (perhaps someone affiliated with the Instagram funding round that closed days ago) needed an infusion of cash. Facebook has more cash than they know what to do with.
Google also missed buying Flickr back then. I think Instagram would've been a smart buy for them, too, at least from a social network point of view. I don't want Facebook to gobble up all rising social networks. Maybe Google was looking to buy Pinterest instead?
Have you completely forgotten about Android? Do those millions count for nothing?
To compare it with YouTube is a massive overstatement. YouTube still has ~65% market share. InstaGram didn't even have an app for Android until a week back. How is that even remotely close to YT's domination of the video space?
So, I found something very interesting in Mark Zuckerberg's post about acquiring Instagram:
> we're committed to building and growing Instagram independently. Millions of people around the world love the Instagram app and the brand associated with it, and our goal is to help spread this app and brand to even more people.
Facebook has always integrated whatever it purchased (that I know of) very tightly into the core product, or just done an acqui-hire. Instead, they've taken what is arguably the best way to share photos and decided to keep it as a product that exists on its own.
This is a major strategy change for Facebook and speaks to something I have suspected for some time - they now understand that in order to continue spurring growth, they cannot just acquire and roll in every product. As the ecosystem starts to hit a long-term maturity cycle, other products that fulfill particular functions better will be key to maintaining dominance over the market as a whole.
Let's face it: G+ cannot topple Facebook (though it probably wasn't intended to anyway), Twitter is fairly specialized and Pinterest has come up with a new way to share that fits neatly with the other two. Instagram makes immense logic as a purchase for Facebook as they'll control one of the most important ways people share photos outside their product, neatly roping everyone that uses it right into the FB circle without feeling forced to do so.
Zuckerberg's statement that Facebook will keep Instagram alive and kicking seems likely to prove honest but disingenuous.
Instagram, in providing a photo sharing experience (at least) on par with Facebook's, spanning multiple "social platforms", facilitates user migration across these platforms. In the current context, any user migration between social platforms would (almost) inevitably dilute Facebook's share of user-time.
Thus, it seems reasonable for Facebook to acquire this possible avenue of departure and generally maintain its current state (i.e. Zuckerberg's statement is honest) while guiding future evolution of Instagram's product to subtly guide the flow of users along "Instagram Avenue" towards Facebook, rather than in its current unbiased direction (i.e. Zuckerberg's statement is disingenuous).
Though useful from a business perspective, this sort of defensive acquisition is discouraging to me. I would prefer to see the evolution of "social" in general towards an open protocol for maintaining the actual user<->user graph structure and piping of information along it, with a loose confederation of services such as Instagram providing the content hosting/delivery. This would decentralize control of people's social graphs, with control being restricted to subsets of the shared content and its flow over the graph, rather than the actual graph structure itself. I.e. market-driven services such as Instagram would compete to control portions of the infrastructure implementing this new construction, which one might call the "world wide (social) web".
TLDR: Facebook's purchase of Instagram permits them to simultaneously reduce the instantaneous rate of user migration across social platforms while preventing the emergence of a competitive open social platform/protocol, the evolution of which would be greatly facilitated by the prior existence of third-party social content infrastructure such as Instagram, which reduce the size of the "chicken and egg" problem confronting any attempt at an open platform.
They sort of did it with Beluga- it became "Facebook Messenger" but was never integrated into the main app. At the time I was confused as to why they'd do that, but if you think of it as a replacement for the stock "Messages" app, and Instagram for "Camera" then it all starts to come together.
Good point - though they did eliminate the brand with Beluga, and they probably won't with Instagram. That could change though.
Besides messaging and photos, I'm thinking that few things are left as halo products around Facebook. There's no reason for a "games" app - to me, at least - but there might be logic in acquiring something like Turntable.fm for music.
I like this thread of reasoning. Also ties into the whole "Facebook" phone. If they were to build one, it's possible it would be android based so maybe that's why they were just waiting for the android app. I was thinking Spotify for the music given all the ties to FB, but may be too big now.
Very bold + smart move on Facebook's part. Google should've taken similar step when it approached Path. Am a Google fan, but what's unfortunate is that social would be totally different by the time it successfully builds G+ to look like Facebook. This is should be the time to invite folks at Path/Pinterest to the negotiation table, if anything Wallstreet won't think it's stupid...Facebook just did it.
The total consideration for San Francisco-based Instagram is approximately $1 billion in a combination of cash and shares of Facebook. The transaction, which is subject to customary closing conditions, is expected to close later this quarter.
I think the mere fact that they just raised $50M @ $500M valuation is the reason that this price is so high.
Those investors in that round had to at least double their money...if the price was indeed $1B, that's all they did. Just 2X. Although, the argument can be made that a 2X return in 1 - 2 months isn't bad...but then again, VC funds don't have a 2 month life, so over the long-term value (i.e. 10 years most-times) of that fund I am not sure how beneficial that is.
Although, I guess they can't be too pissed because it must feel good to be able to at least return something to their LPs in such a short time frame.
You are just seeing the good cases here. A 10X return on any one investment pays for all the bad investments. If I remember correctly, the return that Sequoia got on their YouTube investment paid for the entire portfolio many times over.
But more importantly than that, I think it was one of a very few that were good in that fund. I believe that particular fund was particularly bad because it contained remnants of the dot com bust - so only 1 - 3 of their investments in that fund were profitable, and only 1 was enough to pay for the entire fund.
I am not remembering EXACTLY so my numbers may be a bit off...but you can just imagine how annoying it must have been to be a partner in a fund and be telling your LPs that you have essentially lost all their money - and thinking about this for the entire 10 year life of that fund.
Just for at the last minute, almost literally, all of that changes.
People don't think about it, but it's not easy to be a VC.
In many (pretty much all) funds, you can't re-invest capital earned from the fund.
I recommend checking out the book 'Venture Deals' by Brad Feld and Jason Mendelson. They explain the various structures of funds, why they're structured that way, and how it influences the decisions the investors make.
You could have said the same about Yahoo acquiring Facebook itself for $1 billion, if that deal had happened. It's clear now who would have got the better deal there.
Certainly that doesn't mean every large acquisition is justified (e.g. Bebo) but it also means you can't just automatically apply the "company X has no clear business model today and so shouldn't have been bought for Y" argument to every such acquisition either.
I'm not convinced Yahoo buying Facebook for $1 billion would have been a good deal for Yahoo. Yahoo never would have been able to make Facebook nearly as successful as it is today. I have my doubts Facebook would be worth even a $1 billion today. Yahoo has an awful track record of making the worst out of their acquisitions and I don't see how this would have been any different.
I am actually wondering if the value was too low. They are crossing the chasm so to speak and moving toward mainstream very quickly. I don't know where they would have ended up, but if they could have negotiated an upround with the founders and VCs taking some cash off the table it may have been a better move.
I fully understand that if I had a $1B offer for a company that I would literally be sick turning them down, but the potential was there for something really big. If I could keep going with $10m in the bank, I would like to think I would try.
Google bought YouTube for $1.65B when YouTube didn't have business model. It was critiqued a lot because of this, but it established Google as a dominant player in video space and it's ripest fruits might be seen in coming years when media consumption moves more and more to mobile.
I grant that $1B sounds a lot for Instagram and it is harder to see similar commercial value in photos than in videos.
My personal take is that in addition to friend connections, already posted photos could be the strongest lock-in for users that Facebook has against future competitors.
Trust me, Youtube is very profitable. Major multi-national brands have to pay $100,000's in Google Adword purchases to have their own branded channel. And if you want to change the look of your channel? Pony up another $100K.
yeah, and Yahoo bought Flickr for hundreds of millions. And Flickr never became a profit center for yahoo. Now, Yahoo is laying off thousands of workers, and is close to dead poool, because of all its malinvestment in web1.5 (flicker, geocities, delicious, etc).
Video has a higher value proposition than photos. Look @ how hard flickr has struggled turning photos into a sustainable business model.
I'm comparing apples to apples. You're comparing apples to oranges.
100% return in 3 months (it won't close to the end of the quarter) is an annualized 400% return. If you're a VC you took $50M out of a fund put back $100M, now you can make 2 bets at $50M when before you only had one. I don't see any way that this isn't a great deal for the VCs.
That being said, this wasn't part of the S-1 and Facebook really has to tell potential investors how this will affect the financials, so presumably there is a revised prospectus or perhaps S-1 in the works.
Well...if I am not mistaken, the way VC investing works is once an investment return is made - they have to distribute it back to the LPs immediately. They can't just "re-invest it" into other companies.
Unless those economics have changed, but I don't think they have.
It is in that light why I say, it seems a bit precarious. Essentially what would have happened is, these VCs would have contacted their limited partners and said, we have an investment we want to make - send us the money now (this is after the limited partners already committed to giving them that money). The LPs then wire the VC fund the money. The VCs then wire that money to Instagram.
3 months later, Instagram wires the money (assuming it was all cash, which we know it wasn't) back to those investors, which then have to wire the money back to their LPs. So technically, it doesn't REALLY help their portfolio as much as if they got a 10X return in a few years because the money was put to work for a shorter period of time.
Although, if you are 'annualizing' the return properly and assuming a 33% return each month, then the yearly return is actually 29X (compounded), but we digress.
Usually, that's not how it works (VC's don't reinvest) but I will have to admit I'm fascinated by the story behind a large round so quickly followed by an acquisition. Too bad we'll likely not hear it.
At the standard 2 and 20 it's a really great deal. Assuming this was a one time sort of fund from the LPs as other posters have suggested. The VCs are looking at putting $12 million in their bank accounts in 2 months.
I would like someone to sit me down, and explain the economics of why accept a buyout immediately after raising. And NOT the part of accepting $1 Billon. But why they closed a round with a buyout just around the corner.
a) You don't know if the acquisition will actually happen. Therefore if it doesn't, you aren't left with nothing.
b) It gives you a stronger bargaining chip to increase the price of the acquisition because you literally have a strong alternative. Instagram could tell FB to screw off, they are already getting $50M.
They may have brokered the deal, and at least gave credibility to the investment to make it easier for Facebook to pay the price. Beautiful result for the portfolio - we are in a bubble and flipping this so quickly means that they have $ return in the bank way before the more speculative investments.
Raising a round SETS the pre-money and post-money valuations of a company. I've known companies that have taken a measly $8M round when they are already independently profitable.
It's basically a bargaining chip. Let's look at two different scenarios:
1. Your last round of financing was two years ago and you raised $2M at a post-money valuation of $8M. Two years pass and you're hot, what is you company worth? Look at some comparables (which the acquirer will try and rip apart). Do a multiple of your revenue (which the acquirer will try and rip apart).
2. Now you're hot and you think you might be acquired (or maybe not!), you raise $5M at a $50M post-money valuation. Now when you sit down at the bargaining table, you can say "Well that VC over there thinks we're worth $50M, what do you think we're worth?"
In option 2, you've got a lot more bargaining power.
Are you joking? You don't think a 100% gain is good for a 1-2 month timeframe? The most successful hedge funds in the world have money thrown at them if they can average 50% gains over the course of a year. And that is an outstanding year!
I realize the economics of hedge funds and VC funds are different in that VC's take a shotgun approach and hope that one out of ten investments makes up for all the losers, but on any single investment a 2x return is outstanding. On the surface it looks like the founders got screwed nicely on this one.
> if they can average 50% gains over the course of a year
That's the point, this isn't what happened. Given the choice between 2x return in 2 months or 10x return in 120 months, there's no contest at all. That initial investment that returned 2x is now out of play for the life of the fund. If the fund's life is 10 years, the return is 1.1x, not 2x.
Okay, you go ahead and bet on the companies that will pay you a 10x return in ten years and I'll take the 2x return in two months. Will Instagram even exist in 10 years? Who knows? I wouldn't bet on it.
BTW, you're absolutely right. The 2x return extrapolates to a return of trillions of dollars over ten years, so there really is no contest at all.
It doesn't matter if you run a hedge fund, a VC fund, or a trust fund. A 2x return is a 2x return, and anybody would take it any day. Anybody who wouldn't has no business working in finance. Just because you assign a ten-year time frame to your portfolio does not diminish the return on that investment, so the return on your $50mm is 2x, not 1.1x.
If you guide your investment strategy based only upon what you hope will happen in the best-case scenario and look down upon investments that double your investment, you're making a mistake. The only reason they need a 10x return on their winners is because at least nine other bets are going to lose. Any win adds value to the fund. As a fund manager would you rather the $50 million have been plowed into a business that returned 0% which is what you expect to have happen ~90% of the time? Do you understand why criticizing this investment makes no sense? You're comparing a great investment to the few investments that turn out to be astronomically fantastic instead of the vast majority that lose money.
> It doesn't matter if you run a hedge fund, a VC fund, or a trust fund. A 2x return is a 2x return, and anybody would take it any day. Anybody who wouldn't has no business working in finance. Just because you assign a ten-year time frame to your portfolio does not diminish the return on that investment, so the return on your $50mm is 2x, not 1.1x.
This is your key misunderstanding. When the fund starts, you lock up the money for a specific amount of time (say, 10 years), and once the money's been in, it can't go in a second time. So if you're near the beginning or middle of the fund, and the fund was < $500MM or so you probably wouldn't take 2x on $50MM today, because that $50M will be out of play for the next (say) 9 years.
In other words, it does diminish the return on that investment, because that $50MM is now out of play. Every dollar gets one shot of multiplying, and when it's done it's done, as far as the fund is concerned.
If the fund is near the end of its life and for some odd reason they still have $50MM sitting in it, then yeah, it'd be a great move.
Also, if every dollar has one chance to multiply and you take one tenth of the fund and immediately double it at the beginning of its lifetime, that is an outstanding outcome. Just because you can't reinvest the money in that fund does not mean it is lost, it is simply paid out to investors right away.
Anybody who has taken a finance course knows the simple principle that a dollar today is worth more than a dollar tomorrow. It is NEVER better to make a return of equal percentage later in a fund than early. Instead of having $50 million to invest in the original fund in the same companies as before, you now have $100 million to invest in the same companies as before. The fallacy in your logic is that you are hung up on the required return for that single fund.
The only way what you are saying is valid is if by investing that $50 million in Instagram, they missed out on the opportunity to invest in another company that at some point in the future would have returned more. In a window of about two months, I highly doubt that's the case. Again, once you have doubled your money and gotten it back, you can invest it anywhere you like, including the same companies you may have before. But now you have twice as much money. There is nothing magical about that fund that makes its investments more special than another.
Exactly. The money is gone "as far as the fund is concerned." But that money is no more gone than it is when I sell stock and convert it to cash. A fund not recognizing money does not mean that that money ceases to exist.
I fully understand that. What I am explaining to you is that the idea of a VC fund is to create a return by investing money in a portfolio of companies which overall, should create a positive return. There is absolutely no way of knowing going in what the fund will return. If I figure that out of ten investments one will create a positive return great enough to pay for nine others, that does not mean that I am hoping or expecting that each of the ten will return me 10x. Keep in mind that those nine losers are completely independent of each other. If five win and five lose, all the better. If five win and three break even and two lose, that's even better.
If I invest $100 into 10 different stocks, and I figure that nine of the ten are going to be losses, then I hope that one of the ten will return me at least $1000, or 10x my original investment. That's very different than saying that any of the ten that returns me less than 10x is a disappointment. On the contrary, if one happens to return me 10x over the lifetime of my portfolio and another returns me 2x, then I am even better off than I anticipated.
Angel / Series A investors are shooting for 10X. VCs hope that investments in more mature companies with users, revenue, etc. get 2-3X. I don't think any of the VCs that invested last week are bummed on 2X in 5 days.
I think something like that had to have happened for the valuation to get so high. Apple may have been in the hunt as well, given their propensity for acquiring popular iOS apps and rolling the functionality into vanilla iOS.
The valuation wasn't all that high. It was just twice that of the last round. In order for the investors that just came in to get any sufficient return on their investment, they had to at least double their money. Ignore, for a second, that it was just 1 month (or 1 night as Techcrunch suggests) - it doesn't matter.
The purchase price is usually determined based on the latest round of financing.
The $500m-valuation round happened so close to the buyout, though, that it's quite possible the investors in that round knew of pending offers, which then increased the valuation. So if that round's valuation itself then increased the buyout's valuation, that's a neat bit of circularity.
It's interesting that alot of people are concerned with FB vs Google. My initial thought when hearing about this deal was that FB could be more worried about Twitter. In my personal experience, many people will share instagram photos on twitter rather than Facebook as it comes across as less "spammy" to share photos frequently. Certainly, IMO, the subscribe feature that FB introduced last year was a reaction to the celebrity cult on Twitter. Granted, Mark claims that the acquisition of instagram will not affect the ability to share to other social networks, but I'm sure they will try to make FB the preferred platform to post photos as a daily update. It will be interesting to see if Twitter suffers a drop in photo sharing as a result.
I don't know, but I wouldn't jump to that conclusion. The Instagram team was still growing its user base by leaps and bounds. I would guess they're in no hurry to sell. FB's "competition" for the deal could've just been Instagram's continued organic growth.