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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

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
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.
- mbesto 15y 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.
  - paul 15y ago
    I negotiated terms Friday evening, we signed docs Sunday night, and announced Monday morning.
    - bigdubs 15y ago
      not that it's apples and oranges either (50mm vs. 1bn) you'd think diligence takes time (i.e. longer than a weekend).
      - bigiain 15y ago
        Yeah, but that diligence is surely all in FB's court? If my startup was valued at 500m last week (I wish!), and someone offered me 1b for it today, I'd consider the extent of due diligence required on my part would be checking to see if the cheque cleared... (Having said that, presumably FB _did_ due diligence - before Thursday's 50m on 500m round - I'd love to have been a fly on the wall when Instagram explained that in the final few days of the sale… "Oh, BTW, we sold 10% to Sequoia et al on Thursday - that doesn't change anything here, right?")
      - easp 15y ago
        It seems likely that a lot of the information Facebook would want for its due diligence would already have been pulled together for the funding deal.
dangoldin 15y 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 15y 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.

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

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.

mbesto 15y 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.
- paul 15y ago
  I negotiated terms Friday evening, we signed docs Sunday night, and announced Monday morning.
  - bigdubs 15y ago
    not that it's apples and oranges either (50mm vs. 1bn) you'd think diligence takes time (i.e. longer than a weekend).
    - bigiain 15y ago
      Yeah, but that diligence is surely all in FB's court? If my startup was valued at 500m last week (I wish!), and someone offered me 1b for it today, I'd consider the extent of due diligence required on my part would be checking to see if the cheque cleared... (Having said that, presumably FB _did_ due diligence - before Thursday's 50m on 500m round - I'd love to have been a fly on the wall when Instagram explained that in the final few days of the sale… "Oh, BTW, we sold 10% to Sequoia et al on Thursday - that doesn't change anything here, right?")
    - easp 15y ago
      It seems likely that a lot of the information Facebook would want for its due diligence would already have been pulled together for the funding deal.

dangoldin 15y 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 15y 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.