With Instagram Deal, Facebook Shows Its Worth | Hacker News Reader

With Instagram Deal, Facebook Shows Its Worth

dealbook.nytimes.com

27 pointstilt16 comments

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-...

[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.

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+.

I really doubt they were users of Facebook's mobile photo sharing feature...

I find the 'keep them off Google+' another credible line of reasoning on the valuation as well. If Google could monetize them at a $10 CPM and a 75% daily engagement (30M views a day) that is 100M/yr in revenue. So 1B is a 10x multiplier on revenue.

One thing is clear, a year from now some will say 'see I told you' and some will say 'wow I didn't expect that' and a few will be able to decide if its a net positive or not on their resume :-)

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 ;-)

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.

"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."

This sort of attitude probably didn't work out so well for the average investor during the dot com bubble.

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.

Ok seriously, why BB?

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.

Do you know any companies whose main product is primarily an app (and just an iPhone app at that until recently) that is in the public market?

Zynga, Groupon, LinkedIn, and Pandora all come to mind off the top of my head.

I'm using your definition of app in that the app can be hooked up to a very large social network and thus employ network effects.

I meant a mobile app. Web apps are a different beast, and already have a well established monetization ecosystem.

In this particular instance we are talking about a mobile app hooked to web services, so it's in essence a web app with a mobile UI that was designed for mobile phones from the beginning.

Also, the ecosystem for mobile apps is very young, so the comparison is a little unfair. To the contrary, useful mobile apps have a lot of potential because these new generation smartphones are going to be in everybody's pocket in 1 or 2 years, permanently connected to the Internet, no matter if you're on your daily commute, drinking a coffee at Starbucks or visiting your parents.

To be fair, I wouldn't have paid 1 billion for Instagram, but then again I'm not rich yet.

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.

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.

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