Since Facebook announced that they’ll be buying Instagram - the photosharing service of only one and half years of age - for roughly $1Billion in April the Berlin Startup scene is in a deuce of a stir. You won’t believe how often I heard “but you never know, this could be the next Instagram” the last few month. Then my honest answer is “No. It is not and it won’t be”. The reason lies in two important aspects only very few people seem to understand: What Facebook actually bought and Why they paid that a price for it. So let me explain those two to you and why I indeed do think you have to think about those and what that actually means. Because this indeed is caesura in why and how companies are acquired.
What Facebook bought
Was not just a photo sharing tool. There are plenty of those out there. What Facebook bought was a team of high-skilled and high-talented engineering people, who were able to build and run a whole operation of serving 20 million Users. A team of four people - LET ME REPEAT THIS TO YOU: 4 - in the beginning that even when growing to 40 Million Users just needed 13 people to run their operation - THIRTEEN. And now with the Android Version they’ll closing up to the 100 Million soonish without actually needed many more people. That means this team is serving 7.69 Million Users per employee. Now that is impressive.
And it was only possible because they founding team was consisting out of high skilled techies and engineers, with the experience to a) build such an amazing platform and b) have the reputation to attract those alike. What Facebook bought was an amazing tech team. It was a hiring deal.
So if you are a startup of three business guys buying in some crappy software development from nearshore-land and think you can get anything close to making such a deal: forget it. Why would Facebook ever want to hire you? Then why would they buy you and your company then?
Why Facebook bought
Now the second thing to argue about is why Facebook bought it and why for such a huge amount of money. That is indeed very unexpected high amount for a hiring acquisition. Especially considering that Facebook already has a photo-sharing system integrated that is not going to bad and the announcement stated that though they’ll integrate further Instagram will keep running as an independent company. The reason again is the amazing Team of Founders.
Taking a step back and thinking a bit more about the context and the latest ongoings you’ll find that twitter is buying the ecosystem of interesting companies around them one after the other lately. One thing they were missing for a while is a photo sharing service to integrate into their product. And considering that one of the Founders is a former intern of the company that twitter got spinned out of makes answering the question whether they were negotiating with them a no-brainer.
So, now put yourself in the position of Facebook: there is twitter, who is buying away all these great services to become a real competition platform in terms of services offered and who go for the same advertising market. On the other side you have a team of highly skilled an amazing engineer founders who could really make an impact in that company. And you know they are negotiating. As Facebook there is exactly one thing I’d be doing: “Make them an offer they can’t refuse” - and one twitter is unlikely to trump.
Chapeau, Instagram - Well played!
And that is exactly what they did - $1 Billion is an offer twitter really can’t afford to trump at the moment. And with that strategic acquisition on their portfolio, it is totally fine that Instagram is run independently as long as they are not under the control of Twitter. So on one side it was about hiring a group of incredible engineers and on the other it was about hurting a competitor really badly. And twitter will have a hard time now, trying to match up for that service won’t be easy. And let’s not forget that the bigger part of that money is actually transferred as shares so the Instagram employees really have a higher interest in making Facebook successful.
With all that in mind the price - 200Million for the high skilled, dedicated employees, plus a 300 Million to hurt twitter and then double the price so that twitter can’t trump it - starts to look like a cheap acquisition.