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There is something wrong with a world that allows an investment of $250,000 to turn into $78,000,000 in such a short period. Now before you downvote me, I'm no

There is something wrong with a world that allows an investment of $250,000 to turn into $78,000,000 in such a short period. Now before you downvote me, I'm not suggesting what these guys did was wrong, or that FB's money is dirty, or even that anyone directly suffered as a result of this transaction. But capital is like a liquid, it ebbs and flows. The fact that so much of it can flow in such a small amount of time toward such a small group of people bothers me. Especially when you consider the impact that investment could have made in other places. Ok now you can downvote me.

_delirium 15y ago
I do think it's a bit strange, but I think the VC/tech world isn't that big a part of the strangeness, at least unless it gets to 1999 proportions again. Instagram is pretty much an outlier, and most of the other "big" multipliers, like Google and Apple, have huge R&D behind them. Even this post, written by a VC, considers a two-year billion-dollar exit to be an outlier that you won't see again. Finance is where the pervasive ebbs and flows are more obvious, imo. Once you have flows that are gigantic, it becomes more profitable to try to skim a little tiny percentage off the top of them than to do lots of other kinds of work. You could spend your whole life building up a $5m small business (a perfectly respectable, successful thing to do!) and make less money at it than finding a way to skim 0.001% off a $10 billion transaction a few times in your career. So if you're motivated mainly by money, rather than figuring out how to build up that business, it might be better to start boning up on how to maneuver yourself into a position to take tiny percentages from large flows. There are lots of opportunities in the dense web of management fees, M&A deals, etc.
jrockway 15y ago
Keep in mind that although $78,000,000 is 312x the investment, it's likely that more than 312 investments of $250,000 turn out making absolutely nothing. That's why the rewards are so high: the risks are even higher.
- andrewfelix 15y ago
  That is an interesting way of framing it. But are the risks that high? If you took an average sample of investments at $250k would you expect the rate of failure to be 311 for every 312 investments?
  - jemfinch 15y ago
    No, of course not. The reason VCs exist is because the expected return on investment is positive. But the reason the returns on those $250k investments is so high is because so few people have $250k to invest in something that only has, say, a 1% chance of returning 312x.
wallflower 15y ago
> There is something wrong with a world that allows an investment of $250,000 to turn into $78,000,000 in such a short period. What about a world where 30 million people can have the ability to express the mundane quotidian and interesting occasional aspects of their lives with a little bit of personal flair? For some users, Instagram is the equivalent of a Kodak(tm) moment.[1] [1] Mad Men, "The Carousel" http://www.youtube.com/watch?v=suRDUFpsHus http://www.youtube.com/watch?v=suRDUFpsHus
- andrewfelix 15y ago
  You make a good point. I agree that Instagram is a brilliant tool, and its creators should be rewarded. But my concern is the where and how the value of it is attributed. Is $78,000,000 a reasonable reflection of the value and risk of the original $250,000 investment? I think it's a complex argument, that goes to the heart of how we value things in a capitalist society.
  - OzzyB 15y ago
    Lets imagine we both have a very rich uncle that gives each of us $50m to invest in startups. We then go off and invest $250k in 200 startups each. After 12 months we find out that all my investments failed and I lost all my $50m and luckily enough for you, one of your investments succeeds giving you a ROI of $78m. Now, your fund is up $28m and you look like a titan of the industry, whereas for me, well no one knows about me because I'm the loser, and losers don't get press coverage. Is it fair to focus on the single winning investment you made and cry foul? Is it fair for me to be upset that you earned a whooping $78m from just one lowly $250k investment? I don't think so. If you look at the total of all investments that occurred, $100m, having a single return of $78m seems quite reasonable -- hell it's not really that great in this example. So now think about all the money that's invested in startups, across all the VCs, across all Angel investors, across all founders using their life savings. Isn't that a really huge number?
1123581321 15y ago
What's a reasonable return on $250,000? How will the $78,000,000 be invested? What should Facebook have bought instead with their stock? What investments should should Facebook's investors have made instead of Facebook? What investments should Facebook's investors' clients have made instead?
mrkurt 15y ago
Do you feel the same way about $5 in lottery tickets turning into hundreds of millions of dollars? I suspect not, because you think of lottery winnings in terms of all the "losers". There are plenty of losing investments, firms, etc.
- andrewfelix 15y ago
  Yes I do feel the same way about lottery tickets.
  - mrkurt 15y ago
    Well I sure assumed wrong...
  - rodly 15y ago
    You clearly don't understand risk/reward then. It seems to me like you don't like the idea of people earning more than you deem they are due to earn. Investments and the like are not a statically defined 9-5 job. That's why most people don't invest and even fewer invest profitably. It requires a combination of luck, intelligence and foresight to make good investments. Just as making ~75 million on a $250k investment is absurdly high, making $0 on $250k is absurdly bad. It would take most people 4-5+ years to save that much money. That's an insane amount of money to lose on a company that lets you put a filter on your photos.
  - deleted 15y ago
    [deleted]
therealarmen 15y ago
On the contrary, I think we are very lucky to live in an era where value creation can be realized so quickly and efficiently. Most seed investments are lost entirely; Instagram rose from the ashes and captivated millions of people. Why shouldn't they be rewarded accordingly?
- creamyhorror 15y ago
  Maybe society would be better if more seed investments made modest returns and Instagram didn't make huge ones?
  - therealarmen 15y ago
    Love it or hate it, that is the venture capital business model. There are other private equity firms which invest in the more conservative manner that you suggest, although the dollar amounts are generally larger.
- corford 15y ago
  Personally, I don't think Instagram "created" $1billion worth of value. $1 billion was just the price FB had to pay to stop them raining on the parade of their own (gigantically inflated) valuation.
gojomo 15y ago
Facebook's value (cash and stock) 'flowed' to Instagram's owners because Facebook thinks Instagram will be worth even more to Facebook's owners. It's not like they bought a consumable that's used up, and thus can't buy other necessary consumables. And a lot of that Facebook value only exists because the universe of owners (and potential owners) believe that Facebook will keep preserving and growing that value by doing these sorts of things. If that same 'investment' could have had a better 'impact' for the Facebook owners elsewhere, they'd do it. If you mean some other sort of 'impact', for the good of people other than the Facebook owners, then essentially, no, that investment value can't be alternatively deployed that way. The value exists because of the faith it will be used in self-propagating ways. The equity value would simply evaporate once the confidence in it is broken: it's not transferred anywhere, it just disappears. And if you engineered a world where this sort of 'wrong' bonanza can't happen, by design, then the big stacks of value either on the Facebook side ($1B), or on the Instagram investors' side ($250K), would never have condensed in the first place. Their existence was conjured up from previous bonanzas, or the expectation of potential bonanzas. Eliminate the potential for such bonanzas and you don't free up value for impactful redeployment elsewhere: the value never even exists.
- guynamedloren 15y ago
  > Facebook's value (cash and stock) 'flowed' to Instagram's owners because Facebook thinks Instagram will be worth even more to Facebook's owners. Wrong. The Instagram acquisition was largely defensive, due to Instagram dominating a space (mobile photos) in a way that would've eventually hurt Facebook. Facebook snatched them up early to prevent a huge competitor, and $1B was the price they had to pay. Nobody can argue that the team or technology was worth $1B, and Facebook will not see a big return on their investment - at least not anytime soon. Instagram doesn't even have an established revenue model.
  - gojomo 15y ago
    The fact that they gave up $1B proves Facebook (specifically Zuckerberg) thought they'll get something more valuable to them than that $1B. Even if the purchase was 'defensive' – preventing s competitor from using Instagram to chisel away at Facebook's monopoly – they expect the result of the deal, versus the alternative, to be worth even more to them than the $1B they gave up. (This is essentially tautological, unless you think Zuckerberg is irrational.)
pg 15y ago
The something you refer to is actually two things: luck and technological leverage.
mlinsey 15y ago
Capital is just society's rough, imperfect proxy for wealth. Wealth is just things people want/ascribe value to. Wealth doesn't just flow, it can be created. Making new things that people want increases the wealth of the world. With software, wealth can be created extremely quickly. That is a good thing.
jerf 15y ago
Well, then, take heart. You also live in a world where a $78,000,000 investment can, in a short time, be turned into $250,000! Feel any better?
- andrewfelix 15y ago
  Ha ha! Yes I do feel strangely better. I wonder why? Perhaps I'm just annoyed I haven't managed to make a decent financial investment...ever.
  - 3pt14159 15y ago
    I make a decent return on my investments and the biggest guide I can give you is to watch the Baby boomers and what they are going to do with their money next. That and stay away from bubbles/crashes ("don't try to catch a falling knife"). You'd think that this information would already be embedded into the market, but it really isn't.
  - nirvana 15y ago
    I think your inability to make good financial investments is directly linked to your hard leftism and your desire to punish people who do. Unfortunately, the policies you advocate are the cause of poverty in this society... and when they do something like create the housing bubble -- you turn around and blame the victims, rather than the perpetrators. (The housing bubble was created by clinton administration regulations requiring banks to loan money to people who couldn't repay- after it burst the obama administration effectively nationalized the banking system, moving the country closer to fascism.) Your "how quickly they forget" tells me that you view the world thru the lens of propaganda, not reality, and thus it was heartening to see once again that the source of this support for evil is simply jealousy.
    - icebraining 15y ago
      I may be wrong about this, but wasn't the program that effectively nationalized the banking system the TARP, which was signed by Bush before Obama was elected?
larrys 15y ago
"The fact that so much of it can flow in such a small amount of time toward such a small group of people bothers me. Especially when you consider the impact that investment could have made in other places." Well if it makes you feel any better that new wealth will end up in the hands of car dealers, real estate, all sorts of tradesman, and other places in the economy as well as I'm sure, more startups. It was a long shot hit but don't short change how something like that will help the entire startup economy. The world of news and investors want to hear about blockbusters. So there will be significant impact from the entire Instagram win.
- andrewfelix 15y ago
  >...new wealth will end up in the hands of car dealers, real estate, all sorts of tradesman... It sounds like you're referring to supply side economics, or 'trickle down' which has never had a a proven effect on wider wages.
heretohelp 15y ago
>Now before you downvote me, Uhm. >Ok now you can downvote me. Okay. I'm addressing the community at large when I say this. Stop doing this now. It's not constructive. Say your piece or don't say it. Don't couch it in these empty defensive posturings.
- andrewfelix 15y ago
  It was really just a way of saying 'Consider the basis for my opinion...' The original comment has received a ridiculous number of downvotes. I understand people having a different opinion, but shouldn't we be voting on whether a comment is constructive or properly articulated?
  - heretohelp 15y ago
    The 0-value white noise just shifts the needle further against you. Don't excuse the unpopularity of your opinions/ideas on that basis. Edit: For the record, I agree with the actual content of your post in principle, but I think realistically I'd rather the money be in the hands of Systrom and Krieger for future investment than stay with institutional investors who don't know their arses from a hole in the proverbial ground.
tucson 15y ago
I see this as a small part of a much bigger picture: that "world" you refer to is a free market with property rights which IMO gives the best possible outcome for the society as a whole (refer to the "invisible hand" theory of Adam Smith).
aneth 15y ago
On the contrary, I think there's a problem with a world where this can't happen. If it could not, there would not be incentives for shoot-for-the-moon ideas. There would not be the freedom to benefit from providing value to society. Grand innovation would be stifled in favor of "lifestyle" careers and businesses. While there is nothing wrong with most people taking smaller amounts of easy money for long term work (i.e. salary,) we all benefit from others who take large risks to improve our lives. Further, much of that $78M will be recycled through the economy, some of it re-invested in the hopes of making similar returns. The idea that because some prosper, others suffer, is a consequence of one of the most dangerous human emotions: jealousy. I agree that institutions should promote long term distribution of wealth through taxation and incentives. However windfalls for big thinkers and executers are extraordinary incentives for big thinking and executing, from which we all benefit.

_delirium 15y ago

I do think it's a bit strange, but I think the VC/tech world isn't that big a part of the strangeness, at least unless it gets to 1999 proportions again. Instagram is pretty much an outlier, and most of the other "big" multipliers, like Google and Apple, have huge R&D behind them. Even this post, written by a VC, considers a two-year billion-dollar exit to be an outlier that you won't see again. Finance is where the pervasive ebbs and flows are more obvious, imo. Once you have flows that are gigantic, it becomes more profitable to try to skim a little tiny percentage off the top of them than to do lots of other kinds of work. You could spend your whole life building up a $5m small business (a perfectly respectable, successful thing to do!) and make less money at it than finding a way to skim 0.001% off a $10 billion transaction a few times in your career. So if you're motivated mainly by money, rather than figuring out how to build up that business, it might be better to start boning up on how to maneuver yourself into a position to take tiny percentages from large flows. There are lots of opportunities in the dense web of management fees, M&A deals, etc.

jrockway 15y ago

Keep in mind that although $78,000,000 is 312x the investment, it's likely that more than 312 investments of $250,000 turn out making absolutely nothing. That's why the rewards are so high: the risks are even higher.

andrewfelix 15y ago
That is an interesting way of framing it. But are the risks that high? If you took an average sample of investments at $250k would you expect the rate of failure to be 311 for every 312 investments?
- jemfinch 15y ago
  No, of course not. The reason VCs exist is because the expected return on investment is positive. But the reason the returns on those $250k investments is so high is because so few people have $250k to invest in something that only has, say, a 1% chance of returning 312x.

wallflower 15y ago

> There is something wrong with a world that allows an investment of $250,000 to turn into $78,000,000 in such a short period. What about a world where 30 million people can have the ability to express the mundane quotidian and interesting occasional aspects of their lives with a little bit of personal flair? For some users, Instagram is the equivalent of a Kodak(tm) moment.[1] [1] Mad Men, "The Carousel" http://www.youtube.com/watch?v=suRDUFpsHus http://www.youtube.com/watch?v=suRDUFpsHus

andrewfelix 15y ago
You make a good point. I agree that Instagram is a brilliant tool, and its creators should be rewarded. But my concern is the where and how the value of it is attributed. Is $78,000,000 a reasonable reflection of the value and risk of the original $250,000 investment? I think it's a complex argument, that goes to the heart of how we value things in a capitalist society.
- OzzyB 15y ago
  Lets imagine we both have a very rich uncle that gives each of us $50m to invest in startups. We then go off and invest $250k in 200 startups each. After 12 months we find out that all my investments failed and I lost all my $50m and luckily enough for you, one of your investments succeeds giving you a ROI of $78m. Now, your fund is up $28m and you look like a titan of the industry, whereas for me, well no one knows about me because I'm the loser, and losers don't get press coverage. Is it fair to focus on the single winning investment you made and cry foul? Is it fair for me to be upset that you earned a whooping $78m from just one lowly $250k investment? I don't think so. If you look at the total of all investments that occurred, $100m, having a single return of $78m seems quite reasonable -- hell it's not really that great in this example. So now think about all the money that's invested in startups, across all the VCs, across all Angel investors, across all founders using their life savings. Isn't that a really huge number?

1123581321 15y ago

What's a reasonable return on $250,000? How will the $78,000,000 be invested? What should Facebook have bought instead with their stock? What investments should should Facebook's investors have made instead of Facebook? What investments should Facebook's investors' clients have made instead?

mrkurt 15y ago

Do you feel the same way about $5 in lottery tickets turning into hundreds of millions of dollars? I suspect not, because you think of lottery winnings in terms of all the "losers". There are plenty of losing investments, firms, etc.

andrewfelix 15y ago
Yes I do feel the same way about lottery tickets.
- mrkurt 15y ago
  Well I sure assumed wrong...
- rodly 15y ago
  You clearly don't understand risk/reward then. It seems to me like you don't like the idea of people earning more than you deem they are due to earn. Investments and the like are not a statically defined 9-5 job. That's why most people don't invest and even fewer invest profitably. It requires a combination of luck, intelligence and foresight to make good investments. Just as making ~75 million on a $250k investment is absurdly high, making $0 on $250k is absurdly bad. It would take most people 4-5+ years to save that much money. That's an insane amount of money to lose on a company that lets you put a filter on your photos.
- deleted 15y ago
  [deleted]

therealarmen 15y ago

On the contrary, I think we are very lucky to live in an era where value creation can be realized so quickly and efficiently. Most seed investments are lost entirely; Instagram rose from the ashes and captivated millions of people. Why shouldn't they be rewarded accordingly?

creamyhorror 15y ago
Maybe society would be better if more seed investments made modest returns and Instagram didn't make huge ones?
- therealarmen 15y ago
  Love it or hate it, that is the venture capital business model. There are other private equity firms which invest in the more conservative manner that you suggest, although the dollar amounts are generally larger.
corford 15y ago
Personally, I don't think Instagram "created" $1billion worth of value. $1 billion was just the price FB had to pay to stop them raining on the parade of their own (gigantically inflated) valuation.

gojomo 15y ago

Facebook's value (cash and stock) 'flowed' to Instagram's owners because Facebook thinks Instagram will be worth even more to Facebook's owners. It's not like they bought a consumable that's used up, and thus can't buy other necessary consumables. And a lot of that Facebook value only exists because the universe of owners (and potential owners) believe that Facebook will keep preserving and growing that value by doing these sorts of things. If that same 'investment' could have had a better 'impact' for the Facebook owners elsewhere, they'd do it. If you mean some other sort of 'impact', for the good of people other than the Facebook owners, then essentially, no, that investment value can't be alternatively deployed that way. The value exists because of the faith it will be used in self-propagating ways. The equity value would simply evaporate once the confidence in it is broken: it's not transferred anywhere, it just disappears. And if you engineered a world where this sort of 'wrong' bonanza can't happen, by design, then the big stacks of value either on the Facebook side ($1B), or on the Instagram investors' side ($250K), would never have condensed in the first place. Their existence was conjured up from previous bonanzas, or the expectation of potential bonanzas. Eliminate the potential for such bonanzas and you don't free up value for impactful redeployment elsewhere: the value never even exists.

guynamedloren 15y ago
> Facebook's value (cash and stock) 'flowed' to Instagram's owners because Facebook thinks Instagram will be worth even more to Facebook's owners. Wrong. The Instagram acquisition was largely defensive, due to Instagram dominating a space (mobile photos) in a way that would've eventually hurt Facebook. Facebook snatched them up early to prevent a huge competitor, and $1B was the price they had to pay. Nobody can argue that the team or technology was worth $1B, and Facebook will not see a big return on their investment - at least not anytime soon. Instagram doesn't even have an established revenue model.
- gojomo 15y ago
  The fact that they gave up $1B proves Facebook (specifically Zuckerberg) thought they'll get something more valuable to them than that $1B. Even if the purchase was 'defensive' – preventing s competitor from using Instagram to chisel away at Facebook's monopoly – they expect the result of the deal, versus the alternative, to be worth even more to them than the $1B they gave up. (This is essentially tautological, unless you think Zuckerberg is irrational.)

pg 15y ago

The something you refer to is actually two things: luck and technological leverage.

mlinsey 15y ago

Capital is just society's rough, imperfect proxy for wealth. Wealth is just things people want/ascribe value to. Wealth doesn't just flow, it can be created. Making new things that people want increases the wealth of the world. With software, wealth can be created extremely quickly. That is a good thing.

jerf 15y ago

Well, then, take heart. You also live in a world where a $78,000,000 investment can, in a short time, be turned into $250,000! Feel any better?

andrewfelix 15y ago
Ha ha! Yes I do feel strangely better. I wonder why? Perhaps I'm just annoyed I haven't managed to make a decent financial investment...ever.
- 3pt14159 15y ago
  I make a decent return on my investments and the biggest guide I can give you is to watch the Baby boomers and what they are going to do with their money next. That and stay away from bubbles/crashes ("don't try to catch a falling knife"). You'd think that this information would already be embedded into the market, but it really isn't.
- nirvana 15y ago
  I think your inability to make good financial investments is directly linked to your hard leftism and your desire to punish people who do. Unfortunately, the policies you advocate are the cause of poverty in this society... and when they do something like create the housing bubble -- you turn around and blame the victims, rather than the perpetrators. (The housing bubble was created by clinton administration regulations requiring banks to loan money to people who couldn't repay- after it burst the obama administration effectively nationalized the banking system, moving the country closer to fascism.) Your "how quickly they forget" tells me that you view the world thru the lens of propaganda, not reality, and thus it was heartening to see once again that the source of this support for evil is simply jealousy.
  - icebraining 15y ago
    I may be wrong about this, but wasn't the program that effectively nationalized the banking system the TARP, which was signed by Bush before Obama was elected?

larrys 15y ago

"The fact that so much of it can flow in such a small amount of time toward such a small group of people bothers me. Especially when you consider the impact that investment could have made in other places." Well if it makes you feel any better that new wealth will end up in the hands of car dealers, real estate, all sorts of tradesman, and other places in the economy as well as I'm sure, more startups. It was a long shot hit but don't short change how something like that will help the entire startup economy. The world of news and investors want to hear about blockbusters. So there will be significant impact from the entire Instagram win.

andrewfelix 15y ago
>...new wealth will end up in the hands of car dealers, real estate, all sorts of tradesman... It sounds like you're referring to supply side economics, or 'trickle down' which has never had a a proven effect on wider wages.

heretohelp 15y ago

>Now before you downvote me, Uhm. >Ok now you can downvote me. Okay. I'm addressing the community at large when I say this. Stop doing this now. It's not constructive. Say your piece or don't say it. Don't couch it in these empty defensive posturings.

andrewfelix 15y ago
It was really just a way of saying 'Consider the basis for my opinion...' The original comment has received a ridiculous number of downvotes. I understand people having a different opinion, but shouldn't we be voting on whether a comment is constructive or properly articulated?
- heretohelp 15y ago
  The 0-value white noise just shifts the needle further against you. Don't excuse the unpopularity of your opinions/ideas on that basis. Edit: For the record, I agree with the actual content of your post in principle, but I think realistically I'd rather the money be in the hands of Systrom and Krieger for future investment than stay with institutional investors who don't know their arses from a hole in the proverbial ground.

tucson 15y ago

I see this as a small part of a much bigger picture: that "world" you refer to is a free market with property rights which IMO gives the best possible outcome for the society as a whole (refer to the "invisible hand" theory of Adam Smith).

aneth 15y ago

On the contrary, I think there's a problem with a world where this can't happen. If it could not, there would not be incentives for shoot-for-the-moon ideas. There would not be the freedom to benefit from providing value to society. Grand innovation would be stifled in favor of "lifestyle" careers and businesses. While there is nothing wrong with most people taking smaller amounts of easy money for long term work (i.e. salary,) we all benefit from others who take large risks to improve our lives. Further, much of that $78M will be recycled through the economy, some of it re-invested in the hopes of making similar returns. The idea that because some prosper, others suffer, is a consequence of one of the most dangerous human emotions: jealousy. I agree that institutions should promote long term distribution of wealth through taxation and incentives. However windfalls for big thinkers and executers are extraordinary incentives for big thinking and executing, from which we all benefit.