Instagram raised $50M right before acquisition
techcrunch.com
techcrunch.com
In all seriousness: somebody explain this please.
Christine Herron · Director at Intel Capital "It's common to use an impending investment valuation to drive a higher acquisition valuation. Strategic/acquisition values are typically much higher than investment values. eg, as of today, Instagram is worth more to Facebook than it is to Sequoia, because Facebook gets strategic value in addition to market value. Also note that an investor with a signed term sheet would be fully aware that acquisition discussions were taking place, as well as what valuation range they were in. I would be surprised if Sequoia did not go into this with eyes wide open. They win either way - an instant 2X multiple on investment (and a crazy high IRR), or a highly desirable company that they believe has growth potential. Call me jealous."
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.
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?")
Having 50M in the bank meant they could credibly walk away from the deal, continue operating and realistically be worth 4 or 5 times the 500M valuation the next time they raise.
In essence making the investment deal set their acquisition price.
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.
Surely there's absolutely no doubt that whoever signed this round last Thursday knew just how close to finalizing a $1bil acquisition they were?
The engineers would be in the same boat as the founders.
The insider VCs likely served to make the engineers richer. Facebook is likely the one who got screwed into overpaying.
Given current market conditions, particularly in terms of fawning over Facebook, the negative effects of this ploy seem likely to be largely externalized, with the amount of burden borne by Facebook promising to be negligible. As usual in the trading game, the bulk of the burden will fall on the unanointed schmucks lacking the information to buy low and sell high.
Money is simply a medium for exchange in this case.
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?
Drug kingpins spend considerable effort building their operations, often at considerable risk to their own safety.
Does that risk and hard work mean that we should simply accept their corrupt activity and influence?
Corruption is corruption.
It is not that complicated. Let's say there is X amount of economic benefit from the deal. Initially (i.e. before the series B) that benefit would be shared between Facebook and the initial (i.e., before the series B) shareholders of instagram. Facebook would get the benefit of owning the company minus the purchase price and the investors would get the purchase price.
But after the series B there is another party, the new Instagram shareholders which must also share in that benefit. This means that either Facebook or the initial shareholders or both get less benefit than they would have gotten if the series B had not happened.
So who got less benefit? Well in these cases one just has to ask oneself who is likely to make a decision against their own benefit. And when you look at people making decisions against their own benefit it usually the ones with the longest and remotest chain of fiduciary duties that do it.
So I guessed that it was facebook that might have done it because it has much more and more remote shareholders, so it is more likely someone may have slipped up on their fiduciary duties.
But I do not know for sure. It could have been the instagram owners or old shareholders that got screwed. In any event, it is quite certain that one or both of them did get screwed.
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.
But I suppose if you do have trust in Zuck you do not have to look too closely at the details of deals like this. In any event, who am I to say anything, I am not in fact a facebook shareholder. I am just your average HN procrastinator. I am sure you know how to look after your own interests.
But I admit, all of those reasons are quite speculative. I could be wrong. It could be that the Instagram shareholders knowingly gave up some of the purchase money in order to have funding in case the deal fell through.
I think you have a misunderstanding of how deals like this take place. Facebook would have undoubtedly preferred to close the sale prior to the B round, but I am sure that whenever Facebook originally came calling, Instagram maintained that they were not interested in selling. I know this only because this is what hot target companies always say when receiving unsolicited offers. Instagram followed up by putting its money where its mouth was and closing a big round that gave it enough money to stay independent for a long time while growing the company. At that point, Facebook's only option was to go big or go home.
Facebook could have tried to preempt the B-round by raising its bid before the round closed, but it seems pretty clear that it was going to take about $1B to get Instagram off the block, whether that happened before or after the B round.
At the end of the day, the B-round does not make a huge deal to Facebook either way - to the extent that you are prepared to pay $1B for a company, you're not going to be too worried about a measly $50M going out the door.
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?
I have trouble seeing how it'll hurt their IRR.
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.)
Note: VC firms will have many different funds, each with different origination years, so while the fund might last a very long time, the individual funds are not supposed to remain illiquid forever.
If you invest $15K and get $30K, meh...cause you were probably hoping for life-changing money. So context is everything. Not to mention that Instagram was more than an idea or a famous founder at the time of investment so there was less rick of losing everything.