5 ms·

Sequoia Set to Lead $500M Valuation Round for Instagram

20 points by tilt 15y ago

antr 15y ago
If Sequoia goes in at a $500m valuation, few companies will be able to give Sequoia a "decent" return/exit. Indeed this is a "frothy" valuation.
- tejaswiy 15y ago
  "forthy" ! What in the world can they do to make money to justify such a high valuation? Sell filters !?
  - methodin 15y ago
    I could see some people buying expensive filters as a status symbol
  - rokhayakebe 15y ago
    They have to make only $100M/year to be valued at 5 times yearly revenue. It is very likely Instagram can double its user base over the next 12 months now that it supports android. At that point reaching $100M in revenue will be quite easy due to the fact that mobile consumers are very likely to make sub $2.99 purchases/upgrades.
    - antr 15y ago
      I think Instagram is a great company but I personally see too many IFs and moving pieces to support a $500m valuation.
      - nashequilibrium 15y ago
        I totally agree, there are a number of copy cats out now. Flickr for android copied instagrams product offering, therefore these copy cats should cannabilise some sales. Instagram is very trendy right now so on brand awareness it has a huge edge, the issue is can they sustain this edge two years down the line when the dust settles?
      - nashequilibrium 15y ago
        I totally agree, there are a number of copy cats out now. Flickr for android copied instagrams product offering, therefore these copy cats should cannabilise some sales. Instagram is very trendy right now so on brand awareness it has a huge edge, the issue is can they sustain this edge two years down the line when the dust settles?
      - nashequilibrium 15y ago
        I totally agree, there are a number of copy cats out now. Flickr for android copied instagrams product offering, therefore these copy cats should cannabilise some sales. Instagram is very trendy right now so on brand awareness it has a huge edge, the issue is can they sustain this edge two years down the line when the dust settles?
      - nashequilibrium 15y ago
        I totally agree, there are a number of copy cats out now. Flickr for android copied instagrams product offering, therefore these copy cats should cannabilise some sales. Instagram is very trendy right now so on brand awareness it has a huge edge, the issue is can they sustain this edge two years down the line when the dust settles?
      - nashequilibrium 15y ago
        I totally agree, there are a number of copy cats out now. Flickr for android copied instagrams product offering, therefore these copy cats should cannabilise some sales. Instagram is very trendy right now so on brand awareness it has a huge edge, the issue is can they sustain this edge two years down the line when the dust settles?
- damoncali 15y ago
  That depends entirely on the terms of the deal.
  - antr 15y ago
    Do you think pre-Sequoia investors are willing to price themselves out? I think not.
    - damoncali 15y ago
      You are making a lot of assumptions. There are many ways in which the deal could make sense. Or Sequoia could be stupid. Their track record suggests that they are more often right than stupid.
      - antr 15y ago
        What assumptions?
        damoncali 15y ago
        Liquidation preferences, hurdle rates, sales between investors, and other deals with the same investors just to name a few. When you stack those up in the right way, you can make deals that look very stupid all of a sudden look very smart. Not saying that's the case here, but you can't just look at valuation and say "that's dumb".
        antr 15y ago
        Never said "that's dumb", I just believe the valuation to be "frothy". More often than not, in the current environment value has nothing to do with price.
apawloski 15y ago
As a programmer who is generally unfamiliar with business lingo, can someone explain what this valuation round means? Are they saying that Instagram is worth $500,000,000? How realistic is that number?
- sparky 15y ago
  Valuation is (Dollars I pay)/(Fraction of the company I buy). In this case, they are selling 10% of the company for $50 million. It's not exactly the same thing as saying that these investors would be willing to buy all of Instagram for $500 million because both parties' utility functions are seldom linear. It's the closest thing we have, though.
  - tlogan 15y ago
    And one more question from not-so-business savvy reader. If Sequoia got this deal with 2x liquidation preference then if Instagram is sold for $100 then Sequoia will still profit $50M. Correct?
    - sparky 15y ago
      'Liquidation preference' is a term that applies to what I think of as 3 or 4 related-but-separate concepts. In the simplest situation, with no vested options or other complications, yes, the investor would get all $100 million, assuming nobody else has a liquidation preference. Vested options and other term sheet items like 'participating preferred' make things more complicated, so you really have to read the entire term sheet to figure out who gets what under what circumstances. Good resources: http://www.burningdoor.com/askthewizard/2007/04/venture_terms_liquidation_pref.html http://www.burningdoor.com/askthewizard/2007/04/venture_term... http://www.feld.com/wp/archives/2005/01/term-sheet-liquidation-preference.html http://www.feld.com/wp/archives/2005/01/term-sheet-liquidati...
- damoncali 15y ago
  It is an implied valuation, not a real valuation. The implication being if you payed $50 for 50% of the stock, then the company value (100%) is $100. But, and its a huge "but", VC investments are almost always (especially series B like this one) preferred stock. This preferred stock gets (you guessed it) preferential treatment when compared to common stock, which is usually what founders have. Those preferences are numerous, arcane, and very significant. For example, suppose an investor wants to invest $10M in a company for 50% of the stock. The entrepreneurs say, "no, we'll give you 30%. The investor says, "Fine. But I want a 3x liquidation preference. They do the deal. Later, the company is sold for $50M. In this case, the investor gets $30M (3x their investment, or 60% of the company) and everyone else gets $20M. So what was the real value the investor paid for? It's tough to tell because it depends on what happens next. Now go an pile up several other terms like that and you can see how hard it is to truly imply the total value of the company from the price paid for preferred stock. In fact, it's impossible unless you know the terms (which are rarely public), and even then you're guessing.
mattparcher 15y ago
Re: "What is their business model?" In an interview with Sara Lacy, [1] Kevin Systrom notes that: - "27 million people is not too shabby, but it’s nowhere near the scale you need to make a massively large business." - they plan to build a tool for advertisers, because using the iPhone app is a "terrible experience" for them [1] http://windonaleaf.net/post/20464525754/instagram-perform-ads http://windonaleaf.net/post/20464525754/instagram-perform-ad... (via Shawn Blanc)
- antidaily 15y ago
  Ads. Great. $2 is a fair price for the app-- too late now on that one. They could charge for filters.
mvkel 15y ago
Who realistically sets out to create a business that needs more than 30mm users to be plausible as a revenue generator? This lends more to the notion that these "app builders" are falling backwards into business opportunities with no clear idea of how to execute. Can't great apps just exist without the expectation of 1bn valuations and rolling them up as companies?
- pclark 15y ago
  No. Running and maintaining Instagram probably comfortably costs in the six figures range with 30mm users. Operations at scale require venture capital funding. If Instagram were paid for, the user base would be a fraction - and more importantly, someone would just release a clone of the app for free, acquire millions of users, raise VC and crush you. The opportunity cost of Instagram implementing a revenue model today is huge. Given Instagrams popularity and influence I'd say there is no reason why it won't be as influential as YouTube -- $500mm is almost cheap when you think about it. "Who realistically sets out to create a business that needs more than 30mm users to be plausible as a revenue generator?" Swinging for the fence entrepreneurs. We should be supporting them. Instagram opportunities are once in a life time.
  - timjahn 15y ago
    "Swinging for the fence entrepreneurs. We should be supporting them. Instagram opportunities are once in a life time." This is exactly the type of thinking I think we need less of. We shouldn't be encouraging people to play the lottery in hopes of a big, very-rare-chance-of-happening win. We should be encouraging people to work hard to build real, profitable businesses.
    - pclark 15y ago
      Instagram is a real business. There is more than one way to skin a cat.
  - mvkel 15y ago
    YouTube. The second most visited website on the Web that has yet to generate a profit. A cost center for Google. Also, I hear rumors FB is acquiring Instagram for $1bn, which would be interesting for Sequoia.

20 points by tilt 15y ago

antr 15y ago

If Sequoia goes in at a $500m valuation, few companies will be able to give Sequoia a "decent" return/exit. Indeed this is a "frothy" valuation.

tejaswiy 15y ago
"forthy" ! What in the world can they do to make money to justify such a high valuation? Sell filters !?
- methodin 15y ago
  I could see some people buying expensive filters as a status symbol
- rokhayakebe 15y ago
  They have to make only $100M/year to be valued at 5 times yearly revenue. It is very likely Instagram can double its user base over the next 12 months now that it supports android. At that point reaching $100M in revenue will be quite easy due to the fact that mobile consumers are very likely to make sub $2.99 purchases/upgrades.
  - antr 15y ago
    I think Instagram is a great company but I personally see too many IFs and moving pieces to support a $500m valuation.
    - nashequilibrium 15y ago
      I totally agree, there are a number of copy cats out now. Flickr for android copied instagrams product offering, therefore these copy cats should cannabilise some sales. Instagram is very trendy right now so on brand awareness it has a huge edge, the issue is can they sustain this edge two years down the line when the dust settles?
    - nashequilibrium 15y ago
      I totally agree, there are a number of copy cats out now. Flickr for android copied instagrams product offering, therefore these copy cats should cannabilise some sales. Instagram is very trendy right now so on brand awareness it has a huge edge, the issue is can they sustain this edge two years down the line when the dust settles?
    - nashequilibrium 15y ago
      I totally agree, there are a number of copy cats out now. Flickr for android copied instagrams product offering, therefore these copy cats should cannabilise some sales. Instagram is very trendy right now so on brand awareness it has a huge edge, the issue is can they sustain this edge two years down the line when the dust settles?
    - nashequilibrium 15y ago
      I totally agree, there are a number of copy cats out now. Flickr for android copied instagrams product offering, therefore these copy cats should cannabilise some sales. Instagram is very trendy right now so on brand awareness it has a huge edge, the issue is can they sustain this edge two years down the line when the dust settles?
    - nashequilibrium 15y ago
      I totally agree, there are a number of copy cats out now. Flickr for android copied instagrams product offering, therefore these copy cats should cannabilise some sales. Instagram is very trendy right now so on brand awareness it has a huge edge, the issue is can they sustain this edge two years down the line when the dust settles?
damoncali 15y ago
That depends entirely on the terms of the deal.
- antr 15y ago
  Do you think pre-Sequoia investors are willing to price themselves out? I think not.
  - damoncali 15y ago
    You are making a lot of assumptions. There are many ways in which the deal could make sense. Or Sequoia could be stupid. Their track record suggests that they are more often right than stupid.
    - antr 15y ago
      What assumptions?
      - damoncali 15y ago
        Liquidation preferences, hurdle rates, sales between investors, and other deals with the same investors just to name a few. When you stack those up in the right way, you can make deals that look very stupid all of a sudden look very smart. Not saying that's the case here, but you can't just look at valuation and say "that's dumb".
        antr 15y ago
        Never said "that's dumb", I just believe the valuation to be "frothy". More often than not, in the current environment value has nothing to do with price.

apawloski 15y ago

As a programmer who is generally unfamiliar with business lingo, can someone explain what this valuation round means? Are they saying that Instagram is worth $500,000,000? How realistic is that number?

sparky 15y ago
Valuation is (Dollars I pay)/(Fraction of the company I buy). In this case, they are selling 10% of the company for $50 million. It's not exactly the same thing as saying that these investors would be willing to buy all of Instagram for $500 million because both parties' utility functions are seldom linear. It's the closest thing we have, though.
- tlogan 15y ago
  And one more question from not-so-business savvy reader. If Sequoia got this deal with 2x liquidation preference then if Instagram is sold for $100 then Sequoia will still profit $50M. Correct?
  - sparky 15y ago
    'Liquidation preference' is a term that applies to what I think of as 3 or 4 related-but-separate concepts. In the simplest situation, with no vested options or other complications, yes, the investor would get all $100 million, assuming nobody else has a liquidation preference. Vested options and other term sheet items like 'participating preferred' make things more complicated, so you really have to read the entire term sheet to figure out who gets what under what circumstances. Good resources: http://www.burningdoor.com/askthewizard/2007/04/venture_terms_liquidation_pref.html http://www.burningdoor.com/askthewizard/2007/04/venture_term... http://www.feld.com/wp/archives/2005/01/term-sheet-liquidation-preference.html http://www.feld.com/wp/archives/2005/01/term-sheet-liquidati...
damoncali 15y ago
It is an implied valuation, not a real valuation. The implication being if you payed $50 for 50% of the stock, then the company value (100%) is $100. But, and its a huge "but", VC investments are almost always (especially series B like this one) preferred stock. This preferred stock gets (you guessed it) preferential treatment when compared to common stock, which is usually what founders have. Those preferences are numerous, arcane, and very significant. For example, suppose an investor wants to invest $10M in a company for 50% of the stock. The entrepreneurs say, "no, we'll give you 30%. The investor says, "Fine. But I want a 3x liquidation preference. They do the deal. Later, the company is sold for $50M. In this case, the investor gets $30M (3x their investment, or 60% of the company) and everyone else gets $20M. So what was the real value the investor paid for? It's tough to tell because it depends on what happens next. Now go an pile up several other terms like that and you can see how hard it is to truly imply the total value of the company from the price paid for preferred stock. In fact, it's impossible unless you know the terms (which are rarely public), and even then you're guessing.

mattparcher 15y ago

Re: "What is their business model?" In an interview with Sara Lacy, [1] Kevin Systrom notes that: - "27 million people is not too shabby, but it’s nowhere near the scale you need to make a massively large business." - they plan to build a tool for advertisers, because using the iPhone app is a "terrible experience" for them [1] http://windonaleaf.net/post/20464525754/instagram-perform-ads http://windonaleaf.net/post/20464525754/instagram-perform-ad... (via Shawn Blanc)

antidaily 15y ago
Ads. Great. $2 is a fair price for the app-- too late now on that one. They could charge for filters.

mvkel 15y ago

Who realistically sets out to create a business that needs more than 30mm users to be plausible as a revenue generator? This lends more to the notion that these "app builders" are falling backwards into business opportunities with no clear idea of how to execute. Can't great apps just exist without the expectation of 1bn valuations and rolling them up as companies?

pclark 15y ago
No. Running and maintaining Instagram probably comfortably costs in the six figures range with 30mm users. Operations at scale require venture capital funding. If Instagram were paid for, the user base would be a fraction - and more importantly, someone would just release a clone of the app for free, acquire millions of users, raise VC and crush you. The opportunity cost of Instagram implementing a revenue model today is huge. Given Instagrams popularity and influence I'd say there is no reason why it won't be as influential as YouTube -- $500mm is almost cheap when you think about it. "Who realistically sets out to create a business that needs more than 30mm users to be plausible as a revenue generator?" Swinging for the fence entrepreneurs. We should be supporting them. Instagram opportunities are once in a life time.
- timjahn 15y ago
  "Swinging for the fence entrepreneurs. We should be supporting them. Instagram opportunities are once in a life time." This is exactly the type of thinking I think we need less of. We shouldn't be encouraging people to play the lottery in hopes of a big, very-rare-chance-of-happening win. We should be encouraging people to work hard to build real, profitable businesses.
  - pclark 15y ago
    Instagram is a real business. There is more than one way to skin a cat.
- mvkel 15y ago
  YouTube. The second most visited website on the Web that has yet to generate a profit. A cost center for Google. Also, I hear rumors FB is acquiring Instagram for $1bn, which would be interesting for Sequoia.