What Really Happened When Facebook Bought Instagram
vanityfair.com
vanityfair.com
So I'm not contesting the truth that it sometimes has serious heavyweights writing for it, I'm just baffled by that fact. It's like if you found out Gore Vidal had been writing for Good Housekeeping.
Let's say I see a big incumbent who's UNIQUE selling point is 'we have everyone's private photos. people have to come to us if they want to see their friend's photos.'
I start threatening them.
They pay and buy us.
I get rich. The incumbent gets to keep everyone's photos.
At what point in the above do we not have a business model?
Oh, you mean it can't possibly WORK! Except that it just did.
Well, I'm sorry, but something that just worked obviously did work.
The whole point of a "model" is that it's repeatable and definable. "Getting acquired because they fear us" isn't a business model.
No, but it is one of the best reasons to be acquired, far far above 'they acquired the team for the talent, and shut down the project' and 'they acquired us to get our customers (aka buying growth)'.
The collective We have been led to believe that we must make something original to be great. Don't make another social network, too tough. Don't do what Instagram did, it's too (pick your reason) risky / saturated / lucky / etc.
The thing is, entrepreneurs have no reason not to shoot for the moon, recreate everything. Why do we resist? The big name funds probably won't invest for fear of cannibalizing their current holdings. Think about that next time you hear a VC or read their commentary (or any commentary for that matter).
It is absolutely possible to undermine the business model of a company like Facebook by winning a marginal piece of their business away from them.
Economists are so fervently engaged in trying to eliminate cash-flow/economic/business cycles because deficits have non-linear consequences when they manifest.
With that, instagram had only one possible exit strategy to execute and they did.
> Nature and capitalism share a structural characteristic: both require equilibrium or over-production to self-sustain. Any sustained deficit and the organism or economic entity suffers catastrophic failure.
What does this actually mean in the context of this discussion? What does this have to do with anything?
> It is absolutely possible to undermine the business model of a company like Facebook by winning a marginal piece of their business away from them.
Nobody is denying that Instagram were a threat to Facebook. What people are saying are that the chances of becoming a threat are incredibly small and very much based on luck. There were many other well-executed apps that did not achieve the same success. That, and combined with the absence of a genuine business model, is why people mention the similarity to a lottery ticket.
> Economists are so fervently engaged in trying to eliminate cash-flow/economic/business cycles because deficits have non-linear consequences when they manifest.
Please explain to me what this means. What does it mean for a deficit to have a non-linear consequence?
It means building a site like instagram, with zero revenue, can be very profitable if it competes with a revenue-generating site like Facebook. It is also repeatable.
Re: Lottery Ticket
Survivorship bias is not the same thing as playing the lottery even if the statistical probability of success launching a start-up or winning the lottery was identical. Instagram successfully built the technology, acquired the user base and sold to someone who found them valuable.
I don't think luck has anything to do with building a company. Bad luck is how losers explain their losses rather than learning from the loss.
Re: Non-linear consequence
You borrow $1,000 and service is $10/mo. The basic loan covenants would define a default if you can't pay all $10 in any single month according to schedule. That means $9.99 service of the debt gives the creditor legal capability to seize the entire collateral--business.
Fixed operating expenses can be viewed like debt service in that the economic entity breaksdown when all expenses can't be covered.
If the profit margin goes to zero, a company is still running, but extremely vulnerable to random economic volatility.
Out of curiosity - what percentage of real, viable business plans do you think are "easy"?
Seriously though. While not easy, it is 100% repeatable - it is one of the great ways to build a business. (Actually, regardless of whether the incumbent buys you out - their investors or those who regret being investors migth instead.)
I'd imagine they vary based on the business plan. I think what others are trying to say, but you don't seem to want to hear, is that while many business ideas are say, 20% to succeed, this particular business plan is <1% to succeed.
Being bought because you're shiny? Not a business model. To say Instagram has a business model is to insult every hacker/doer/entrepreneur who is actually trying to build a real business.
Remember that failed Terms of Service agreement as mentioned in the article; the one that allowed Instagram to own everyone's photos? (Memories.)
It went like this:
"...Some or all of the Service may be supported by advertising revenue. To help us deliver interesting paid or sponsored content or promotions, you agree that a business or other entity may pay us to display your username, likeness, photos (along with any associated metadata), and/or actions you take, in connection with paid or sponsored content or promotions, without any compensation to you...."
Do you realize the "stock-photo" potential Facebook would have had by selling limited rights to say a photo of Johnny Depp smoking a Gauloise cigarette, or Gwen Stefani in high school drinking a diet coke?
Maybe that was the "instagram" business model as seen by Facebook?
In fact, most musicians that I know are rightly insistent on being paid for their performances and are suspicious of promoters and agents who are eager for them to gain exposure by playing for free.
Edit: Essentially there is a continuum of risk/reward between
* Consulting or creating a small and stable business (or, say, playing as a session musician)
* Buying lottery tickets.
I just don't think that people are always aware of where they are on that scale and it doesn't seem right to give people false impressions of where they and their ideas stand. Yeah I do sound like a grumpy sod :)
Similarly with startups, if someone is only motivated by a huge exit then they won’t last through the years of low-success and failure that precede building a moderately successful business. Individual who succeed in these careers get some satisfaction out of the process and the small successes along the way (e.g. performing before ten people in a bar or having one potential customer get excited about your new product).
My story is the total opposite... Where giants squash and step on the little guy innovator.
See thread I posted below https://news.ycombinator.com/item?id=5661273
Lets look at the investor list: Seed was Baseline Ventures and Andreessen Horowitz. A-round was Adam D'Angelo, Jack Dorsey, Chris Sacca, Baseline Ventures, and Benchmark Capital. Then there was Joshua Kushner, and John Lilly.
Wait, who?
Adam D'Angelo - Quora founder. More importantly, "He was chief technology officer of Facebook, and also served as its vice president of engineering" . Top 25 TopCoder participant, respect.
Jack Dorsey - Twitter and Square founder
Joshua Kushner - son of the real estate mogul Charles B. Kushner and brother of Jared Kushner, owner of The New York Observer
We already know one of the founders went to school with Zuck. Cant find citations now, but it was in an online interview.
So it sure helps to be school buddies with Zuck, have ex-Facebook CTO and Zuck friends as investor, and new media (twitter) and old media (kushner famliy) owners as well.
There are no superhuman heroics involved here nor supersecret backroom deals. This is really just a simple story of good luck and timing, a spot on pivot and execution, and honestly brokered business relationships.
You can't duplicate the Instagram strategy because there was no strategy. These guys didn't build an app to flip. They built an app that was cool: to them, their friends, their investors, their users, and ultimately their suitors and acquirer.
Kudos to them.
I beg to differ, I yawned on the first page, on the second page, and got somewhere else. Information density is very low. It looks like this journalist, as many other, is paid by the line, and adds too much water in the soup.
It's also fairly thin on new insights into the history and acquisition.
Wake me up when VCs choose to fund companies that seek something other than validation and profit.
In fact, every VC is different, every VC has their own ideas of what companies are good to fund and which they'd rather pass on.
So, right now there are VCs that will not fund companies that do not have a clear idea of how they're going to become profitable.
Terrible but true. You will literally see vc look at the other VC and do exactly what they're doing.
You can literally create your own VC market by making VC A think that VC B is interested, which is true, because VC B is interested in anything that VC A is interested in.
Do you run your own company?
Do you have employees?
Co-founders?
Have you ever received funding from a VC?
Have you ever solicited funding?
Were you accepted?
Rejected?
going through this process now - and I can tell you, if I fucked up with one VC I would fuck up with them all. everyone talks.
On the flip side, when you're hot everyone wants you, you don't have enough equity to sell to everyone!
And on another note, ask a VC if they reject you why they reject you, there really is a huge difference in the spectrum of available parties to work with, from assholes to fantastic people to work with and everything in between, make sure you partner with a group that feels right rather than just looking at the terms sheet. That's where the action is of course but sometimes it is better not to have a deal than to have a deal with the wrong party.
The question is, how can someone who moves there from, say, New York, actually make those connections?
That said, getting to know the up-and-coming Valley entrepreneurs should be doable. It is not as easy as getting to know them while you are in college but go to conventions, go to coffee shops, bars. If that is not your thing, start conversations on HN, Twitter, professional communities etc. One important thing to remember, people love to talk about themselves and their business. Especially entrepreneurs.
On a personal level, I am finishing up my Masters (in Amsterdam - so no where close to 'The Valley') and I really feel that I should have done more networking. It is not that hard to get to know people if you make an effort but I have been way too comfortable with my group(s)of friends.
Am I the only one who cringes when reading stories like this about the Valley? I do not want to be in a bubble. I do not want to take part in gossip or the popularity contest. I would much rather stay under the radar, out of the sights of competition, in an underserved market.
We do miss out a lot of startup action but there are still large startups in Europe, and I assume Singapore. I do think making connections via HN/Twitter etc can mitigate some of the issues caused by geography but not entirely.
Talking to people in your industry (especially if your speciality is quite niche) goes a fairly long way. Perhaps someone in your niche went to your alma mater, or lived in Singapore - that is something in common that can spark a conversation.
I would say a better question is, how does someone who grows up poor do this? And/or someone with parents who do not give them access to excellent schooling. And/or currently feels excluded from the industry despite being talented.
Not that it isn't a story, it sure ain't Horatio Alger, though.
I am afraid that the logical end of this race to the bottom in terms of technology is the end of the Silicon Valley (perhaps something like Hollywood for "new media" replacing technology)
There are tons of core technology startups in Silicon Valley - we just don't talk about them on YCombinator very much. I find the software defined datacenter space really interesting. Check out Nutanix: A startup that aims to redefine enterprise datacenter architecture. Or how about the recent acquisition of Nicira (a software defined networking company) by VMware. Just look at Khosla Ventures product portfolio: http://www.khoslaventures.com/information-technology.html. Food science startups, semiconductor, enterprise hardware/software, AND social media. The whole gamut.
If I could build Instagram and sell it for $1b I sure as hell would. Might not be saving the world but people appear enjoy using it so who cares. They did manage to sell a company for $1b, a feat which practically all of us never will achieve.
That said, they probably should try to get some cash flow some time soon.
Sometimes there are no "lessons that can be learned from success stories like this". Believe it or not, for every Instagram, there's a hundred startups with founders that are just as smart and try just as hard, but don't make the cut. Do the founders of Instagram deserve their success? Sure! Should we pat them on the back and "celebrate the entrepreneurial spirit"? Absolutely. But let's not fall over ourselves praying to the success gods while we forget to work on our own products.
> If I could build Instagram and sell it for $1b I sure as hell would
Bullshit. Maybe you could! All you need is hard work, the skills to get there, and yes, a good amount of luck. But let's not pretend you, or the founders of Instagram, are destined for success because you're special or you "knew" your ideas would kick off. Look up hindsight bias in the dictionary.
>> I sure as hell would
> Bullshit. Maybe you could!
You need to read up on how the word "if" works.
no! good for them - but I don't see any way they 'deserved' it
That said, you are very right: Most startups fail, or barely break even. But without the inspirational properties of the likes of Instagram, would SV be the same? Would so many flock to Silicon Valley to try their luck? Probably not.
There are many many hard working entrepreneurs who never make it, that is fact. I do not, at least not yet, count myself among the hard working entrepreneurs. I am under no illusion that I will succeed in my future ventures nor that I am special and will automatically succeed where others have failed.
Of course there is always hindsight bias and the iOS market is more unreliable than the bitcoin price. My comment regarding building Instagram is meant as: If I had the right circumstances to take advantage of my 'unfair' advantage as a white, privileged male I would. The Instagram founders did and got lucky.
Lastly, I hope that your own startup venture is successful in the future. You seem to have done more good for the world, via volunteer work, than I ever have. I hope that you are not too disillusioned by the future to stop being an entrepreneur. Sometimes we just get that bit of extra luck that we need and hopefully that will turn out true for you as well as for me. (My apologies for kinda stalking you, I could not resist checking out your profile)
That's not what the other poster said at all. They were making a remark about their potential attitude towards "cashing out", not about their perceived likelihood of being offered $1bn.
I think the wording you are looking for is "I did not find this interesting or worthy of my time", which is fine, but I wish people would let other members of the community decide if they think a link is vote-worthy or not rather than arguing the merits of an upvote in the comments.
Though does anyone tell the stories where the little guy is invited out there by big influentials only to be baited into giving away their secret algorithm and then being stomped on?
Beware innovators/entrepreneurs sharks abound, especially for the little guy. They'll sell you on your dreams only to get what they want from you then kick you and your dreams to the curb.
Signed a lost and now destitute innovator/entrepreneur
That's interesting, because most of the technical focus is on scalability, and this "Silicon Valley dream" is so very much not scalable.
The "American dream" had more scalability potential, don't you think so?
Yes, there are predators and thieves everywhere. It's amazing how quickly an IP can be unwittingly pried out of a creators hands. Never underestimate that.
And to anyone who will listen: never never never do a deal without having a lawyer go through it, no matter how smart you think you are or how straight-toward the deal seems.
It's a great story to read (and maybe Ashton Kutcher can play Systrom as well, or at least Nicholas Hoult... Hunter Parish to play Krieger and it's time that Michael Cera debuts at Zuckerberg) but I can't help but think it would've been so much better for us, users, that Twitter bought them.
I see it as a perfect social network - Vine for video sharing, Instagram for photo sharing, Twitter as a connecting platform with numerous additions - Radio, ...
I just don't get Facebook anymore. Sure, a few years ago we were mad about it, spending days on it but I sense that hype is gone. Honestly I don't know why I'm still on it - stories from liked pages are the same as on my Twitter feed, I use Instagram to share my photos. Surely if you're serious about keeping in touch with people from the past, you already have their email or phone number.
Seriously, boarding schools are choc full of uber achievers; the notion that wealthy kids are lazy is a myth (assuming trust-afarians are taken out of the equation).
That's a provocative statement, here's the justification:
Instagram had "only" 18 employees. Wherever you are, will1000, hiring 18 employees of the caliber who built Instagram for 18 months would cost you $2M. Instagram was able to pay for them with equity, instesad of starting with $2M in the bank.
The direct reason that this doesn't work outside silicon valley is that outside silicon valley you, will1000, will not work for me for equity instead of a market salary. That is only possible in Silicon Valley.
In other words, you don't want to believe that a % is worth anything, and that's why you won't accept equity based compensation (outside silicon vallye).
look in your heart and you know it's true. what's the lowest salary + equity compensation you would accept?
Could instagram have afforded you?
Right, because only in Silicon Valley will people work for equity and no salary. They live off the air.
Explain to me how talented coder 'x' (whoever, maybe will1000) will be able to live without any compensation whatsoever during 18 months.
Even in SV that's an exception, not a rule, and even in SV people need to eat. So the more commonly employed scenario is that there is a bit of funding which is made to stretch as far as it will go by compensating key employees with equity rather than salary for some portion of their total package.
0 salary and just equity is an exception.
Read http://www.dailymail.co.uk/news/article-2127882/Meet-OTHER-n... and it becomes clear that the 18 employees were recruited mostly with equity.
Hiring the quality of talent that we're talking about, in will1000's market, just doesn't happen using the kind of equity (e.g. 10% pool) that instagram was using, without enough cash in the bank to pay a large base salary to each of those extremely talented people.
Outside silicon valley that's what you would need to do something like this: a whole ton of cash, or lower your standard of employee. Only in Silicon Valley can equity be used for this kind of bargaining power, to retain 18 people who are of such a quality that they are able 36-handedly to build a company in 18 months that is worth $1Billion.
As a simple example: I could never get you to work for me part-time for $0 and 30% equity in our company: except in silicon valley, where I could do so extremely easily, just by showing a product that is near completion.
It's your fault. You're the one who doesn't want the riches and results. You're the one who doesn't want to change the future, by working for next to free for it, and having just equity.
There's a reason a couple of kids in silicon valley can build multibillion dollar companies while on a ramen diet, and you can't.
you (and the market you're in) just doesn't want to.
You're currently running a company with in excess of 18 talented engineers without a viable income stream?
And your payroll is 'pocket change'?
> Hiring the quality of talent that we're talking about, in will1000's market, just doesn't happen with the kind of equity (e.g. 10% pool) that instagram was using - outside of silicon valley that is.
Of course it does.
You make some outrageous statement, then fail to back it up, next you make a new outrageous statement which is even further from the truth.
There's nothing to "back up" - I said that the most talented employees in the world, who can build a $1B company up in 18 months, will not do so outside Silicon Valley in exchange for a 10% employee equity pool, and a low base salary.
Outside Silicon Valley they would only do so for a very high base salary.
In the valley, this is easy. You do have to give up equity though.
In London, the above will get you shown the door, with a grin. Haha, good luck.
Explain to me how talented coder 'x' (whoever, maybe
will1000) will be able to live without any compensation
whatsoever during 18 months.
That is one of the biggest things about the valley.
Read http://www.dailymail.co.uk/news/article-2127882/Meet-OTHER-n.... and it becomes clear that the 18 employees were recruited mostly with equity. Hiring the quality of talent that we're talking about, in will1000's market, just doesn't happen with the kind of equity (e.g. 10% pool) that instagram was using - outside of silicon valley that is.
So there must have been some "we know people at $comp and they will buy us out"-talk to convince people to work for free.
Obviously with the trajectory Instagram was on it was much easier to hire with equity. I don't know what you mean about the "level of talent" though. There are hundreds of small teams with the talent level of Instagram both in and out of the valley, but talent does not guarantee traction. What makes Instagram extraordinary is a confluence of factors, not just an amazing team.
I just don't see it happening. one thing is you are right, I don't have detailed payroll figures. I was going on the prevailing wind and the fact that the employees were 20-somethigns.
The probability is low because guys outside of bay area don't build app to dent anything. They don't aim to build an app that is cool: to them, their friends, their investors, their users, and ultimately their suitors and acquirer.
They build it to mint money, which is why this story inspires them too.
The think that most impacts me of this article is how they get 25000 users the first day. How do you do that?. Is due to having a huge net of early adopters as friends?
Edit: twitter spelling!(tweeter...)
It's partially a gamble, and magazines write articles only about the winners.
I know that SV is not the golden city that this articles paint, but it is way ahead when we speak of entrepreneurship and startups.
It's the same in Germany. If you fail with a business you are on the same level of a criminal to many people. I don't care about being jobless (because I know how to scrub together at least 1000 Euros every month). But the "failed business" stigma is really what inhibits entrepreneurship here.
You're living in a bubble, if you can't see that.
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In short, the American Dream is a fraud. Capitalism means a huge chunk of people literally have to be poor, other wise costs rise, inflation goes mental and capitalism fails. Dunno if any one has noticed, but, er recession? People wanted the trappings of the American Dream, they couldn't afford it so they borrowed, couldn't pay it back and the whole thing came crashing down, and the only people bailed out were... guess who..... yeah, the get rich quick paddlers of the American Dream.
This is why we get boom and bust cycles. It happens when poor people trying to pretend to be rich begin to struggle to pay debt, and stop spending elsewhere. Its quite simple.
Not to slag off the US, the whole of western capitalism did this. The only difference is that the US lie of the American Dream is engrained in to American culture, so much that Americans, well, none Americans too, really believe it to be true. Its not, and never will be, because it actually makes no sense. You cant be right with out poor people to make it happen. Most of us will struggle for literally nothing more than mere survival, then die.
The real kick in the guts is that there is no known better system. Might be able to manage it better, but in the end, the masses will remain pretty poor, while the very few will be able to be filthy rich. I see no way out.
> Capitalism means a huge chunk of people literally have to be poor, other wise costs rise, inflation goes mental and capitalism fails.
Of course "poor" is a relative term and the standard of living for the poor continues to rise as new innovations, efficiencies, and wealth enter the market. A poor person can walk into any supermarket and buy food that would have been considered and absurd and extravagant luxury 100 years ago. They can buy cell phones that let them communicate with anybody in the world instantly. But yes, there will always be someone who has less than somebody else, but what does it really matter if everyone's standard of living is rising?
Though, I haven't read it, I would assume that "Fooled by Randomness" would explain the wealth of the individuals from "Millionare" as more to do with luck than anything else, and that it's not repeatable. And that fulfilling the "American Dream" has more to do with being lucky than with hard work.
I haven't read TMND so I can't say if that's true, but your post doesn't refute his point.
So you are saying it is a zero-sum game? There is no rising tide lifting all boats?
I'm not sure if i believe this. I don't think the tide rises boats as high as people dream about, but to say that more people wouldn't be poor if we were in pre-capitalism days is ridiculous.