6 ms·

Instagram raised $50M right before acquisition

67 points by ryangilbert 15y ago

ryangilbert 15y ago
Investors literally doubled their money overnight. Wow.
- rhizome 15y 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.
  - ryangilbert 15y ago
    I actually agree with that. They definitely knew the FB deal was in place when they agreed to the funding.
    - EdisonW 15y ago
      Totally agreed. Engineers at instagram worked days and nights for years for probably the same amount of money that the inside traders make overnight, literally.
      - hemancuso 15y ago
        You have got to imagine that the founders [who had the largest stake] made out better with this investment. It's likely the case that a smaller slice of a bigger $ pie > larger slice of smaller $ pie The engineers would be in the same boat as the founders. The insider VCs likely served to make the engineers richer. Facebook is likely the one who got screwed into overpaying.
        psb217 15y ago
        Facebook only gets screwed if their own valuation doesn't increase enough to match the amount "overpaid" in response to Instagram's acute "increased valuation" ploy. Given current market conditions, particularly in terms of fawning over Facebook, the negative effects of this ploy seem likely to be largely externalized, with the amount of burden borne by Facebook promising to be negligible. As usual in the trading game, the bulk of the burden will fall on the unanointed schmucks lacking the information to buy low and sell high.
      - mbesto 15y ago
        Did you ever stop to think that insider traders may have spent endless nights building their companies, selling them for profit and are now simply taking that money to invest? Money is simply a medium for exchange in this case.
        rhizome 15y ago
        Is it really "investing" in this case? What was being exchanged besides pure profit?
        ajross 15y ago
        Spending endless nights building and selling companies is laudable, and well rewarded already. "Taking that money to invest" is an entirely unrelated task and needs to be done on the same playing field the rest of the investing public has to play on. You're saying essentially that the ethics of how you spend money change depending on how you got it. How can that logic possibly work?
        easp 15y ago
        And your point is? Drug kingpins spend considerable effort building their operations, often at considerable risk to their own safety. Does that risk and hard work mean that we should simply accept their corrupt activity and influence? Corruption is corruption.
    - phil 15y ago
      What makes you say that? (The article contradicts you, for what that's worth).
hemancuso 15y 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.
- hemancuso 15y 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."
- rhizome 15y ago
  It was a giveaway.
- PatrickTulskie 15y 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 15y 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.
- paul 15y ago
hristov 15y 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.
- PatrickTulskie 15y 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.
  - hristov 15y 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.
- hemancuso 15y 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.
motti_s 15y 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?
- rscale 15y 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.
- dpark 15y 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_s 15y 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).
    - joshu 15y ago
      Correct. However many funds do not distribute returns that are less than a certain amount (1.5x is typical, I think)
      - motti_s 15y ago
        So in you opinion, assuming that Sequoia had to distribute the "overnight" 2X to their LPs, was that a good investment for them?
deleted 15y ago
[deleted]
waterlesscloud 15y 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.
- bigiain 15y 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?

67 points by ryangilbert 15y ago

ryangilbert 15y ago

Investors literally doubled their money overnight. Wow.

rhizome 15y 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.
- ryangilbert 15y ago
  I actually agree with that. They definitely knew the FB deal was in place when they agreed to the funding.
  - EdisonW 15y ago
    Totally agreed. Engineers at instagram worked days and nights for years for probably the same amount of money that the inside traders make overnight, literally.
    - hemancuso 15y ago
      You have got to imagine that the founders [who had the largest stake] made out better with this investment. It's likely the case that a smaller slice of a bigger $ pie > larger slice of smaller $ pie The engineers would be in the same boat as the founders. The insider VCs likely served to make the engineers richer. Facebook is likely the one who got screwed into overpaying.
      - psb217 15y ago
        Facebook only gets screwed if their own valuation doesn't increase enough to match the amount "overpaid" in response to Instagram's acute "increased valuation" ploy. Given current market conditions, particularly in terms of fawning over Facebook, the negative effects of this ploy seem likely to be largely externalized, with the amount of burden borne by Facebook promising to be negligible. As usual in the trading game, the bulk of the burden will fall on the unanointed schmucks lacking the information to buy low and sell high.
    - mbesto 15y ago
      Did you ever stop to think that insider traders may have spent endless nights building their companies, selling them for profit and are now simply taking that money to invest? Money is simply a medium for exchange in this case.
      - rhizome 15y ago
        Is it really "investing" in this case? What was being exchanged besides pure profit?
      - ajross 15y ago
        Spending endless nights building and selling companies is laudable, and well rewarded already. "Taking that money to invest" is an entirely unrelated task and needs to be done on the same playing field the rest of the investing public has to play on. You're saying essentially that the ethics of how you spend money change depending on how you got it. How can that logic possibly work?
      - easp 15y ago
        And your point is? Drug kingpins spend considerable effort building their operations, often at considerable risk to their own safety. Does that risk and hard work mean that we should simply accept their corrupt activity and influence? Corruption is corruption.
  - phil 15y ago
    What makes you say that? (The article contradicts you, for what that's worth).

hemancuso 15y 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.

hemancuso 15y 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."
rhizome 15y ago
It was a giveaway.
PatrickTulskie 15y 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 15y 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.
paul 15y ago

hristov 15y 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.

PatrickTulskie 15y 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.
- hristov 15y 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.
hemancuso 15y 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.

motti_s 15y 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?

rscale 15y 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.
dpark 15y 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_s 15y 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).
  - joshu 15y ago
    Correct. However many funds do not distribute returns that are less than a certain amount (1.5x is typical, I think)
    - motti_s 15y ago
      So in you opinion, assuming that Sequoia had to distribute the "overnight" 2X to their LPs, was that a good investment for them?

deleted 15y ago

[deleted]

waterlesscloud 15y 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.

bigiain 15y 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?