Given the revenue mentioned in the article, it's obvious that many were willing to justify paying $1.99 for Hipstamatic, and then more for additional filters. Frankly, it's rather nice to see a company better value their work and become a strong success. I hope that happens more often.

Based on what I read in that article, I consider their failure to be that they neglected a successful, revenue generating product and instead joined the race for the bottom. $10MM/yr is fantastic revenue stream, and they were willing to throw it away on a whim… yes, a $1B acquisition is cooler than $10MM in yearly revenue, but $1B acqs are incredibly rare and at least Hipstamatic can claim they made money, a goal that Instagram can't claim to have reached. And making money doesn't rule out a fantastically large acquisition; just look at Yammer.

Hipstamatic could have intelligently reinvested their revenue in enhancements to Hipstamatic, built out other products and services alongside the cash cow, and might have scored their $1B++ exit later. And even if that acq never came, at least they'd still have a successful business doing tens of millions in revenue.