Instagram raised $50M right before acquisition

http://techcrunch.com/2012/04/09/right-before-acquisition-instagram-closed-50m-at-a-500m-valuation-from-sequoia-thrive-greylock-and-benchmark/

by ryangilbert • 14 years ago

67 53 14 years ago

techcrunch.com

ryangilbert2• 14 years ago

Investors literally doubled their money overnight. Wow.

rhizome3• 14 years ago

Let's be clear here: connected people doubled their money overnight. There should be a special tax for insider-only capital gains like this.

ryangilbert2• 14 years ago

I actually agree with that. They definitely knew the FB deal was in place when they agreed to the funding.

hemancuso4• 14 years ago

I don't understand this at all. Unless FB started and finished this deal in the 24 hours following the round, why in the world would the founders let this round close?

In all seriousness: somebody explain this please.

hemancuso4• 14 years ago

From the TC thread:

Christine Herron · Director at Intel Capital "It's common to use an impending investment valuation to drive a higher acquisition valuation. Strategic/acquisition values are typically much higher than investment values. eg, as of today, Instagram is worth more to Facebook than it is to Sequoia, because Facebook gets strategic value in addition to market value. Also note that an investor with a signed term sheet would be fully aware that acquisition discussions were taking place, as well as what valuation range they were in. I would be surprised if Sequoia did not go into this with eyes wide open. They win either way - an instant 2X multiple on investment (and a crazy high IRR), or a highly desirable company that they believe has growth potential. Call me jealous."

rhizome3• 14 years ago

It was a giveaway.

PatrickTulskie2• 14 years ago

Another important point to consider is that Facebook has a pending IPO. It's very possible that they would have delayed or aborted the acquisition for some unknown reason related to the IPO. If that did happen, Instagram had the cash to keep running.

indiekid• 14 years ago

It's very simple: Instagram had a responsibility to its employees to keep the lights on. Deals don't always go through. If FB would have walked away for any reason, they'd have to start up again on raising. It's also likely that TG was able to parlay the possible acquisition as a way to significantly drive up the price of the company. Brilliant, brilliant move if you ask me.

paul5• 14 years ago

Deals fall apart. Running both deals in parallel is a smart way to hedge risk. Also, it is in fact possible to put together a deal very fast. We sold FriendFeed on a weekend.

mbesto2• 14 years ago

Curious...when you speak of a "deal" are you saying all of negotiations and paper work?

It's my assumption that many large scale deals get negotiated informally over a longer period of time and rarely is it as simple as an investor comes in on a thursday at a first introduction and a deal is signed by sunday.

dangoldin• 14 years ago

It may have also been a way to force Facebook to play it's hand. Scare Facebook into going through with the acquisition to avoid future competition.

ra• 14 years ago

What better way for Instagram to improve their negotiating position than to remove the need for cash.

Having 50M in the bank meant they could credibly walk away from the deal, continue operating and realistically be worth 4 or 5 times the 500M valuation the next time they raise.

In essence making the investment deal set their acquisition price.

hristov6• 14 years ago

If I were a facebook shareholder, I would be livid right now. This was definitely an inside deal/giveaway that resulted in facebook having to pay much more for the company than it would have.

PatrickTulskie2• 14 years ago

Why? Facebook knew about the series B that Instagram took. They could have pulled out at any point if the acquisition didn't make any sense.

hristov6• 14 years ago

Exactly. They could have also demanded that the series B does not take place. And they did neither of these things. Which most likely means the people that made the decision did not have the best interests of the company in mind.

It is not that complicated. Let's say there is X amount of economic benefit from the deal. Initially (i.e. before the series B) that benefit would be shared between Facebook and the initial (i.e., before the series B) shareholders of instagram. Facebook would get the benefit of owning the company minus the purchase price and the investors would get the purchase price.

But after the series B there is another party, the new Instagram shareholders which must also share in that benefit. This means that either Facebook or the initial shareholders or both get less benefit than they would have gotten if the series B had not happened.

So who got less benefit? Well in these cases one just has to ask oneself who is likely to make a decision against their own benefit. And when you look at people making decisions against their own benefit it usually the ones with the longest and remotest chain of fiduciary duties that do it.

So I guessed that it was facebook that might have done it because it has much more and more remote shareholders, so it is more likely someone may have slipped up on their fiduciary duties.

But I do not know for sure. It could have been the instagram owners or old shareholders that got screwed. In any event, it is quite certain that one or both of them did get screwed.

hemancuso4• 14 years ago

Facebook's core feature, apart from the graph, is photo-sharing. Instagram is the only company at the moment who has any real chance at building a base to compete with Facebook on photos right now. Looking at this from a $/engineer or $/user seems misleading. I have got to imagine that managing future competition motivates this move. That being said, it seems absurdly expensive.

I'm surprised they didn't try to add photo-filters to their mobile app first. I don't think people are going to spend the next decade taking retro pictures. Just like with location - they could've added the feature to their app, people can "be part of location" without having to join a new network.

Over time, most people get bored of filtering their photos and move on. By putting that feature in mobile app, Facebook likely could've done a bit put the curb on Instagram from ever pivoting away from filters into a full fledged photo-sharing network and saved themselves a billion.

hristov6• 14 years ago

I am not arguing whether this was a good acquisition. The acquisition itself seems to make sense. But it is rather bizarre that they would allow this financing to take place which would do nothing but add to the price of acquisition.

paul5• 14 years ago

I am a facebook shareholder, and your argument makes no sense. Zuck will do what he thinks is best for Facebook, and that doesn't include giving money away to "insiders".

hristov6• 14 years ago

My argument is this Series B deal added significantly to the cost of the purchase without adding to the value of the purchase. Since Facebook certainly knew it was happening it is hard to believe they allowed it to happen.

But I suppose if you do have trust in Zuck you do not have to look too closely at the details of deals like this. In any event, who am I to say anything, I am not in fact a facebook shareholder. I am just your average HN procrastinator. I am sure you know how to look after your own interests.

motti_s3• 14 years ago

I have a question: is this good or bad for the Series B investors? I'm not sure the answer is as obvious as it seems.

2X return overnight is great for angels, but is it good for VCs? From what I understand (correct me if I'm wrong), once VCs have an exit, they can't reuse the proceedings for a subsequent investment. Thus, since VCs like Sequoia are probably looking for 10X returns, they just ended up with a chunk of their fund that underperformed. True or false?

rscale3• 14 years ago

I'd think this would be great for their IRR, because this means they had a capital call a month or two ago, and will be returning double the capital very, very shortly thereafter.

I have trouble seeing how it'll hurt their IRR.

dpark2• 14 years ago

> From what I understand (correct me if I'm wrong), once VCs have an exit, they can't reuse the proceedings for a subsequent investment.

Why wouldn't they be able to use the funds for a later investment? Isn't that what VCs do in general? (Genuine question; not being snarky.)

motti_s3• 14 years ago

I believe that most funds are structured in a way that the VCs have to pass the proceedings (minus their cut of course) to their LPs (investors).

rscale3• 14 years ago

No, VCs generally don't recycle their wins. A VC fund is at it's heart a company that is expected to live for ten years; first raising capital, then investing the capital, and then spending it's final years collecting the proceeds of the exits, as the successful investments get acquired or IPO.

Note: VC firms will have many different funds, each with different origination years, so while the fund might last a very long time, the individual funds are not supposed to remain illiquid forever.

loverobots• 14 years ago

If you invest $20 million and get $40 Million a week later you are extremely happy.

If you invest $15K and get $30K, meh...cause you were probably hoping for life-changing money. So context is everything. Not to mention that Instagram was more than an idea or a famous founder at the time of investment so there was less rick of losing everything.

waterlesscloud• 14 years ago

What did they even raise the $50M for? They have 13 employees and run a couple hundred AWS instances from all accounts...

They had previously raised $7M a little over a year ago. Surely much of that was still around.

Was this primarily to raise their valuation? Is that how it's done?

Genuinely curious, I don't know how these things work.

bigiain2• 14 years ago

Cynical-me says "To provide 100% returns worth $50mil over a weekend for some friends of theirs"…

Surely there's absolutely no doubt that whoever signed this round last Thursday knew just how close to finalizing a $1bil acquisition they were?

Instagram raised $50M right before acquisition

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