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Don’t Try To “Pull An Instagram.” Here’s Why …

146 points by wheels 15y ago

csallen 15y ago
Charlie Munger (Warren Buffett's partner) has kept a long-running list of psychological tendencies that commonly affect people's judgment. There's one item on this list that he's termed "Availability-Misweighing Tendency." In a nutshell, it's an observation that people tend to overweigh extra-vivid evidence, which (necessarily) means under-weighing evidence that isn't so vivid. In this case, the extra-vivid evidence is the Instagram acquisition. It's been analyzed, or at least covered, by every blog and news network I can think of. I'm sure it's clogging most of our Twitter feeds. I even have friends and relatives who know nothing about tech but want to talk about it. It doesn't get much more vivid than that. And even if it wasn't receiving so much coverage, a billion dollars is enough money to be vivid in-and-of itself. The point is, if you're re-thinking your business strategy or personal goals based on this news, you should tread carefully. The remedy to overweighing extra-vivid evidence is to always make it a point to seek out other side of the story. So I agree with Mark when he encourages "all other companies to do the harder work of finding out what happens in the 99.9% case, which is what is often never written in the annals of the tech news media."
- unimpressive 15y ago
  >Charlie Munger (Warren Buffett's partner) has kept a long-running list of psychological tendencies that commonly affect people's judgment. There's one item on this list that he's termed "Availability-Misweighing Tendency." In a nutshell, it's an observation that people tend to overweigh extra-vivid evidence, which (necessarily) means under-weighing evidence that isn't so vivid. http://en.wikipedia.org/wiki/Availability_heuristic http://en.wikipedia.org/wiki/Availability_heuristic >a long-running list of psychological tendencies that commonly affect people's judgment. These are usually called cognitive biases. Wikipedia has a long list, though Charlie's may be longer. (I haven't seen it.)
  - csallen 15y ago
    Wikipedia's list (http://en.wikipedia.org/wiki/List_of_cognitive_biases http://en.wikipedia.org/wiki/List_of_cognitive_biases) is indeed longer. Charlie claims to have about 100 models that he makes use of, but he's only published the ones he finds the most useful, and only a handful of those are cognitive biases.
    - alecco 15y ago
      A great book on the subject is Thinking Fast and Slow.
- abiekatz 15y ago
  Here's the text of Munger's speech: http://www.loschmanagement.com/Market%20Comment/Client%20Letters/Client%20Letters%202003/client_letter_April_2003.htm http://www.loschmanagement.com/Market%20Comment/Client%20Let... It is well worth a read.
  - csallen 15y ago
    He actually revised the entire speech, added a few more principles, and turned it into a formal essay called "The Psychology of Human Misjudment". I'm not sure if it's online, but it appears as the last chapter in Poor Charlie's Almanack.
    - kabuks 15y ago
      Found a copy here: http://law.indiana.edu/instruction/profession/doc/16_1.pdf http://law.indiana.edu/instruction/profession/doc/16_1.pdf
cenuij 15y ago
Is this kind of behaviour fraudulent?
dmk23 15y ago
The post is missing the most important point. Instagram would not be worth $1B to Facebook if it has not raised a large round. Without the resources to fuel the expansion, build out the product, develop an application platform, invest in revenue team and so on Instagram would be in no position to threaten Facebook. As soon as the funding closed Facebook was suddenly facing a viable threat in mobile vs. just another resource-starved startup hanging onto dear life. So it is pretty questionable to assume that Instagram itself "pulled an Instagram". They raised Series B because that was the deal that could happen first. Once it happened the environment changed and Facebook saw the need to take Instagram off the table. If anything, the point is to avoid trying to pull "uncertain multi-step transactions". Use various strategic alternatives to create urgency / better terms for other alternatives, choose between the options you can get and focus on optimizing your immediate next step.
- larrys 15y ago
  "As soon as the funding closed Facebook was suddenly facing a viable threat in mobile vs. just another resource-starved startup hanging onto dear life." You are stating that like it's a fait accompli that the threat is real and a done deal as opposed to a mountain that they have to continue to climb and achieve with all sorts of things that could cause the dream (after $500m funding) to not even happen. Perhaps it's the same bias on the part of Facebook that caused them to make this acquisition and overreact (possibly - and of course we'll never know the answer) to Instagram's funding. And what about the fact that they waited until they were funded as opposed to having a system in place to identify the threat from "just another resource-starved startup hanging onto dear life" and getting involved before that?
  - jen_h 15y ago
    One thing I haven't seen anyone mention is that, depending on the stock vs. cash split (I guess we'll see in the S-1 eventually), the acquisition not only knocks out a potentual competitor/keeps bigger competitors away from Instagram, gains a talented team and a cool product, but also acts as a pre-IPO liquidation event. Instagram now has at least ~10% of Facebook's 2011 revenue banked.
- 15y ago
rokhayakebe 15y ago
My contention is Instagram already decided to sell to FB prior to the investement. However Mark, being the Zuckester he is, wanted to do the large majority of the deal using stocks only (that's gangster). Instagram raised money so the founders and team would have cash, and the investors get a chance to have more pre-IPO FB stock. Note: Maybe this is what the post is about. I have not read t yet.
- blhack 15y ago
  Totally, totally gangster. (seriously, what?)
johngalt 15y ago
A more detailed way of saying: "Taking too much VC money will close more doors than it opens, and you should know which ones are closing" I'd assign weight 0 to 'interested acquirers' opinions. Until there is a deal on the table, there is no reason to risk running out of cash and being bought at fire sale prices.
deleted 15y ago
[deleted]
deleted 15y ago
[deleted]
rikacomet 15y ago
point is that instagram cashed it, and facebook nailed a competitor. Bottom line: VC's are good for ultrapreneurs, but not for those entrepreneurs who want to take the risk of giving facebook a push from the side.
lusr 15y ago
The economics of tech startups are really puzzling to me. What is the obsession with raising all of this money? If your business is profitable then raising money shouldn't be a concern, especially if you have something just sitting in cyberspace with no real meatspace components bleeding cash. Really, what the hell is this kind of money even being spent on? Servers and staff cannot be that expensive, and few of these services I'm thinking of bother with advertising. And if your business isn't profitable then why the hell is anybody investing in you? Or is it more to do with capturing a share of the world's eyeballs and having an exit strategy of holding out for a strategic acquisition by a company unwilling to lose those eyeballs to a competitor, such that the amounts "raised" in these deals is more about establishing a stake in the final acquisition amount in exchange for giving the founders an immediate payoff?

146 points by wheels 15y ago

Charlie Munger (Warren Buffett's partner) has kept a long-running list of psychological tendencies that commonly affect people's judgment. There's one item on this list that he's termed "Availability-Misweighing Tendency." In a nutshell, it's an observation that people tend to overweigh extra-vivid evidence, which (necessarily) means under-weighing evidence that isn't so vivid. In this case, the extra-vivid evidence is the Instagram acquisition. It's been analyzed, or at least covered, by every blog and news network I can think of. I'm sure it's clogging most of our Twitter feeds. I even have friends and relatives who know nothing about tech but want to talk about it. It doesn't get much more vivid than that. And even if it wasn't receiving so much coverage, a billion dollars is enough money to be vivid in-and-of itself. The point is, if you're re-thinking your business strategy or personal goals based on this news, you should tread carefully. The remedy to overweighing extra-vivid evidence is to always make it a point to seek out other side of the story. So I agree with Mark when he encourages "all other companies to do the harder work of finding out what happens in the 99.9% case, which is what is often never written in the annals of the tech news media."

unimpressive 15y ago
>Charlie Munger (Warren Buffett's partner) has kept a long-running list of psychological tendencies that commonly affect people's judgment. There's one item on this list that he's termed "Availability-Misweighing Tendency." In a nutshell, it's an observation that people tend to overweigh extra-vivid evidence, which (necessarily) means under-weighing evidence that isn't so vivid. http://en.wikipedia.org/wiki/Availability_heuristic http://en.wikipedia.org/wiki/Availability_heuristic >a long-running list of psychological tendencies that commonly affect people's judgment. These are usually called cognitive biases. Wikipedia has a long list, though Charlie's may be longer. (I haven't seen it.)
- csallen 15y ago
  Wikipedia's list (http://en.wikipedia.org/wiki/List_of_cognitive_biases http://en.wikipedia.org/wiki/List_of_cognitive_biases) is indeed longer. Charlie claims to have about 100 models that he makes use of, but he's only published the ones he finds the most useful, and only a handful of those are cognitive biases.
  - alecco 15y ago
    A great book on the subject is Thinking Fast and Slow.
abiekatz 15y ago
Here's the text of Munger's speech: http://www.loschmanagement.com/Market%20Comment/Client%20Letters/Client%20Letters%202003/client_letter_April_2003.htm http://www.loschmanagement.com/Market%20Comment/Client%20Let... It is well worth a read.
- csallen 15y ago
  He actually revised the entire speech, added a few more principles, and turned it into a formal essay called "The Psychology of Human Misjudment". I'm not sure if it's online, but it appears as the last chapter in Poor Charlie's Almanack.
  - kabuks 15y ago
    Found a copy here: http://law.indiana.edu/instruction/profession/doc/16_1.pdf http://law.indiana.edu/instruction/profession/doc/16_1.pdf

cenuij 15y ago

Is this kind of behaviour fraudulent?

dmk23 15y ago

The post is missing the most important point. Instagram would not be worth $1B to Facebook if it has not raised a large round. Without the resources to fuel the expansion, build out the product, develop an application platform, invest in revenue team and so on Instagram would be in no position to threaten Facebook. As soon as the funding closed Facebook was suddenly facing a viable threat in mobile vs. just another resource-starved startup hanging onto dear life. So it is pretty questionable to assume that Instagram itself "pulled an Instagram". They raised Series B because that was the deal that could happen first. Once it happened the environment changed and Facebook saw the need to take Instagram off the table. If anything, the point is to avoid trying to pull "uncertain multi-step transactions". Use various strategic alternatives to create urgency / better terms for other alternatives, choose between the options you can get and focus on optimizing your immediate next step.

larrys 15y ago
"As soon as the funding closed Facebook was suddenly facing a viable threat in mobile vs. just another resource-starved startup hanging onto dear life." You are stating that like it's a fait accompli that the threat is real and a done deal as opposed to a mountain that they have to continue to climb and achieve with all sorts of things that could cause the dream (after $500m funding) to not even happen. Perhaps it's the same bias on the part of Facebook that caused them to make this acquisition and overreact (possibly - and of course we'll never know the answer) to Instagram's funding. And what about the fact that they waited until they were funded as opposed to having a system in place to identify the threat from "just another resource-starved startup hanging onto dear life" and getting involved before that?
- jen_h 15y ago
  One thing I haven't seen anyone mention is that, depending on the stock vs. cash split (I guess we'll see in the S-1 eventually), the acquisition not only knocks out a potentual competitor/keeps bigger competitors away from Instagram, gains a talented team and a cool product, but also acts as a pre-IPO liquidation event. Instagram now has at least ~10% of Facebook's 2011 revenue banked.
15y ago

rokhayakebe 15y ago

My contention is Instagram already decided to sell to FB prior to the investement. However Mark, being the Zuckester he is, wanted to do the large majority of the deal using stocks only (that's gangster). Instagram raised money so the founders and team would have cash, and the investors get a chance to have more pre-IPO FB stock. Note: Maybe this is what the post is about. I have not read t yet.

blhack 15y ago
Totally, totally gangster. (seriously, what?)

johngalt 15y ago

A more detailed way of saying: "Taking too much VC money will close more doors than it opens, and you should know which ones are closing" I'd assign weight 0 to 'interested acquirers' opinions. Until there is a deal on the table, there is no reason to risk running out of cash and being bought at fire sale prices.

deleted 15y ago

[deleted]

deleted 15y ago

[deleted]

rikacomet 15y ago

point is that instagram cashed it, and facebook nailed a competitor. Bottom line: VC's are good for ultrapreneurs, but not for those entrepreneurs who want to take the risk of giving facebook a push from the side.

lusr 15y ago

The economics of tech startups are really puzzling to me. What is the obsession with raising all of this money? If your business is profitable then raising money shouldn't be a concern, especially if you have something just sitting in cyberspace with no real meatspace components bleeding cash. Really, what the hell is this kind of money even being spent on? Servers and staff cannot be that expensive, and few of these services I'm thinking of bother with advertising. And if your business isn't profitable then why the hell is anybody investing in you? Or is it more to do with capturing a share of the world's eyeballs and having an exit strategy of holding out for a strategic acquisition by a company unwilling to lose those eyeballs to a competitor, such that the amounts "raised" in these deals is more about establishing a stake in the final acquisition amount in exchange for giving the founders an immediate payoff?