Facebook buys two-year old photo app Instagram for $US1 billion – five things you need to know

Facebook has purchased the two-year old photo sharing app Instagram for $US1 billion, in a move that confirms ultra-high valuations of companies without any profit in the tech industry are still in vogue.

The acquisition has been confirmed by both companies, with Instagram founders Kevin Systrom and Mike Krieger writing on Instagram’s website that the service will remain independent, with both iOS and Android apps to remain the same.

“The Instagram app will still be the same one you know and love. You’ll still have all the same people you follow and that follow you. You’ll still be able to share to other social networks. And you’ll still have all the other features that make the app so fun and unique,” Systrom, who is also chief executive, said in a statement.

Buying Instagram is a huge move for Facebook.  It takes up one-quarter of the company’s cash on-hand, and comes just weeks before its initial public offering.

The purchase also underlines Facebook’s focus on networks and reach rather than revenue.  Instagram was becoming a force to be reckoned with, with 30 million users on iOS alone, and one million signups on Android just last week. Users would share photos on the app itself, becoming its own social network.

Facebook’s latest acquisition indicates massive valuations of tech companies are far from over.

So with another start-up acquired by one of the major tech companies, here are five key things you should know about Instagram.

1. Investors got their money back very quickly

Private investors usually have to wait a while before they get any sort of return on their investment. But not this time – Instagram actually finalised another round of funding just last week that gave the company a $US500 million valuation.

According to various reports, Instagram finalised a $US50 million Series B round from Sequoia capital, along with Thrive Capital, Greylock Partners and Benchmark at a $US500 million valuation. According to All Things Digital, the round was led by Sequoia.

What’s even more amazing about all this is that according to TechCrunch, many of these investors didn’t even know about the Facebook acquisition. They’ve doubled their investment within just a few days.

It’s a sneaky move on Instagram’s part, as the publication points out, as the company may have been chasing an A-list investment in order to drive up the valuation. But in the end, everyone walks away happy.

This isn’t the only investment Instagram has received, either. Last year it took $US7 million from angel investors including Twitter co-founder Jack Dorsey, and Benchmark Capital. Before that, Andreessen Horowitz and Steve Anderson invested $500,000.

Many of these companies have close ties to Facebook.

Benchmark Capital reportedly owns 18% of Instagram, winning $US180 million, while Andreessen Horowitz and Baseline Ventures each own 10%, with $US100 million a piece.

2. Founders are multi-millionaires

Kevin Systrom and Mike Krieger are now rich. Very rich.

According to Wired, the $US1 billion is being paid out with a mixture of cash and stock. Systrom owns 40%, giving him $US400 million, while Krieger holds 10%, with a $US100 million windfall.

Not bad for a two-year old company.

3. Employees are now very, very rich

It’s not often that an acquired company will give money to employees. But seeing as Instagram only has 13 full-time employees, they look set to get quite a bit of cash.

In fact, Wired reports that a $US100 million pool of money will be split between all of them, each receiving a bonus in proportion to the amount of time they’ve spent at the company.

4. Surprise, surprise – it’s not profitable and doesn’t even make money

It’s almost become a joke at this point to say that any young, up and coming technology company doesn’t actually make any money. Instagram is no different.

Only two years old, Instagram has received around $US60 million in funding and has not only failed to turn a profit – it doesn’t even make any money. The company basically has no revenue model to speak of, only a huge user base and a growing social network.

Clearly, Facebook has absolutely no intention of making this app turn a profit. What it represents, however, is a massive social network with millions of users that Facebook currently isn’t tapping into. It’s a fully prepared user base, ripe for advertising, networking and any other features Facebook wants along the way.

And with the acquisition taking up a quarter of Facebook’s cash on hand, it’s clear Zuckerberg doesn’t want any other photo service taking over.

5. The app will remain independent – but for how long?

The Instagram acquisition differs from Facebook’s current model of acqui-hiring, where it will buy a company, take the talent and then distribute them to other places.

Zuckerberg makes it clear in his statement the app will run separately, as an independent entity.

“We think the fact that Instagram is connected to other services beyond Facebook is an important part of the experience. We plan on keeping features like the ability to post to other social networks, the ability to not share your Instagrams on Facebook if you want, and the ability to have followers and follow people separately from your friends on Facebook.”

However, how long can that actually last? Sharing photographs is one of the most important aspects of Facebook, and it’s constantly changing the way users view photos in order to make it as quick as possible.

So Instagram will stay independent – for now – but it probably won’t be long before the app’s features start trickling over.

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