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Does Instagram’s $1 billion sale explain the $41 million investment in Color?

40 points by eggspurt 14y ago

sparknlaunch12 14y ago
For anyone who has read Blank's The Four Steps to the Epiphany you will appreciate that money doesn't always equal success. For those looking for an introduction, the first four chapters are available online: http://www.stanford.edu/group/e145/cgi-bin/winter/drupal/upload/handouts/Four_Steps.pdf http://www.stanford.edu/group/e145/cgi-bin/winter/drupal/upl... In the early chapters where Blank argues the importance of the customer development approach to business (ie knowing your customer first before building your product) versus the traditional product development model (ie building your product first, only to find out later you have no customers). He cites furniture.com of the dot com days that raised heaps of money but failed badly. Color is probably another great example. They raised money but didn't consider the market. Is Instagram the same thing? They obviously are a popular product. However is the freemium model adequate? Do the userbase warrant that valuation? How do they generate revenue? Are they a sustainable business? This blog touches on the importance of conversation rate: http://blog.asmartbear.com/price-vs-quantity.html http://blog.asmartbear.com/price-vs-quantity.html Will Facebook generate sufficient advertising revenue from Instragram functionality? Don't know. But rather their money than ours!
- rudiger 14y ago
  Instagram definitely did not raise tons of money before figuring out their market. They brought an amazing product to the iPhone first.
  - sparknlaunch12 14y ago
    Therefore the conversion rate is the challenge. How can Facebook turn this userbase and technology into driving revenue? Most Instagram users are likely to be Facebook users. So the userbase argument is not strong (ie they are not gaining many new users). However you could argue time spent is of value. Users spending time on FB instead of instragram. The technology may encourage FB users to stay longer on FB. It may gain some new users. Is this worth $1b? FB do generate significant advertising revenue ($1.06bn last 3 months). Revenue has been dropping off. Can Instagram fill the gap?
    - soup10 14y ago
      Zuckerburg was scared that instagram would dominate photosharing on mobile. Photosharing is key to facebook's success. That's why he bought instagram. Nothing more nothing less. Monetary Value = how much someone is willing to pay. Facebook was willing to pay $1B, so yes, instagram is worth $1B. Instagram may never produce any significant revenue, it's value is that it's a strategic asset to facebook. Just like the patent purchases they recently made. I think Instagram got pretty lucky with the timing(since we are in a bubble) and the purchaser. Facebook's mobile app is not very good. Facebook should of been more aware of it's competitors and acquired them earlier on. And facebook should of negotiated better. That said if they put the instagram guys to work improving the facebook app it may well end being worth 1B$ in actual revenue. (Though this was clearly primarily strategic, not talent acquisition). Instagram seems like a company designed for acquisition, on it's own it probably could never monetize very well. But it has undeniable strategic value for a company trying to expand or maintain their social and mobile presence.
sharan 14y ago
It isn't that they raised $41 million, that was the issue. It was the fact that they raised that amount without any real metrics to back the team or the product. Someone gave me this analogy that I thought was quite well put. Michael Jordan kicked ass at basketball, but it would have been a foolish manager who gave him a $41 million contract when he decided to try baseball. Hindsight-20:20 here - Color might have been an incredible story on paper, and it might even have warranted a stratospheric valuation. But nothing besides cold, hard numbers warrants cash of $41MM for a web/app startup.
loverobots 14y ago
Instagram success involved a lot of luck, especially in choosing their pivot. *It does not diminish their incredible talent and creativity, but those could have been "wasted" on an unpopular app until the money run out. Instead they chose one that was adopted like wildfire and their talent was showcased. By next year, it may become "meh," we do not know. Bottom line: $41 million isn't going to help much with the idea and having it widely used by people so they were crazy to give them that much money right away. You either have the idea or you don't, and execution, as shown by Instagram, requires much less than $41 million.
nivertech 14y ago
TL;DR: In almost any scenario, Sequoia still ends up making a lot of money.
JVIDEL 14y ago
COLOR got $41MM for having an all-star team, not because their investors could see the future... In any case it shows that not only money isn't everything, but that whole "invest in the team" mantra is flawed as well, just look at Instagram: it was made by a guy who wasn't an engineer and learned to code in his spare time! The idea matters, the market matters, throwing money at a previously successful team isn't the be-all and end-all of startup strategy.
- TazeTSchnitzel 14y ago
  Haven't quite a lot of people here learned to code in their spare time?
  - Danieru 14y ago
    Yes but only the successful ones.
  - joeblau 14y ago
    Kevin knew how to code before he went to college. He just refreshed himself.
- feldmanr 14y ago
  Agreed the sum was largely because of the team but I think it was also because of what they were targeting and their experience in relevant areas, Bill Nguyen at Lala/Apple and Peter Pham at Photobucket.
knes 14y ago
Have you guys had a look at Colors latest android app, Exclusive to Verizon? I think their $41 millions funding and this app describe quite well what the Founders of Colors are: True Hustlers that can sell anything to anyone and are just focus on money, not on creating a useful product/service to the users.
Jabbles 14y ago
I think an analogy to "The Selfish Gene" is appropriate here. The emphasis is on "gene" as the basic unit of natural selection. Here we see (as we have always known) that the basic unit of investment success is not the team, the idea, or the company; but the portfolio. It doesn't matter that Sequoia squandered $41 million on one company if they made hundreds of millions on Instagram. Startups are high-risk, high-reward ventures, and they have always known that. As to whether the huge capital and press actually hindered Color, I'm not convinced, but it seems plausible.
saddino 14y ago
Spot on. I think Color's pitch was to stealthily suck value out of Facebook by attacking what it perceived (and Instagram proved out) as its greatest weakness: a healthy amount of user engagement on FB is around photos. If one could create the "perfect" photo sharing mobile network, FB users would start sharing photos outside of FB. As soon as a critical mass of users and photos was achieved, FB would recognize the attack and defeat it via acquisition. IMO the main difference is that Color (and their investors) had a well-defined strategy, but it was Instagram that had the perfect app.
joeblau 14y ago
When I watched the interview with Kevin Systrom by Kevin Rose, Systrom's "Grand Vision" definitely reminded me of the goal of Color. Here is a link: http://www.youtube.com/watch?feature=player_detailpage&v=IPigMKugJhY#t=2094s http://www.youtube.com/watch?feature=player_detailpage&v...

40 points by eggspurt 14y ago

For anyone who has read Blank's The Four Steps to the Epiphany you will appreciate that money doesn't always equal success. For those looking for an introduction, the first four chapters are available online: http://www.stanford.edu/group/e145/cgi-bin/winter/drupal/upload/handouts/Four_Steps.pdf http://www.stanford.edu/group/e145/cgi-bin/winter/drupal/upl... In the early chapters where Blank argues the importance of the customer development approach to business (ie knowing your customer first before building your product) versus the traditional product development model (ie building your product first, only to find out later you have no customers). He cites furniture.com of the dot com days that raised heaps of money but failed badly. Color is probably another great example. They raised money but didn't consider the market. Is Instagram the same thing? They obviously are a popular product. However is the freemium model adequate? Do the userbase warrant that valuation? How do they generate revenue? Are they a sustainable business? This blog touches on the importance of conversation rate: http://blog.asmartbear.com/price-vs-quantity.html http://blog.asmartbear.com/price-vs-quantity.html Will Facebook generate sufficient advertising revenue from Instragram functionality? Don't know. But rather their money than ours!

rudiger 14y ago
Instagram definitely did not raise tons of money before figuring out their market. They brought an amazing product to the iPhone first.
- sparknlaunch12 14y ago
  Therefore the conversion rate is the challenge. How can Facebook turn this userbase and technology into driving revenue? Most Instagram users are likely to be Facebook users. So the userbase argument is not strong (ie they are not gaining many new users). However you could argue time spent is of value. Users spending time on FB instead of instragram. The technology may encourage FB users to stay longer on FB. It may gain some new users. Is this worth $1b? FB do generate significant advertising revenue ($1.06bn last 3 months). Revenue has been dropping off. Can Instagram fill the gap?
  - soup10 14y ago
    Zuckerburg was scared that instagram would dominate photosharing on mobile. Photosharing is key to facebook's success. That's why he bought instagram. Nothing more nothing less. Monetary Value = how much someone is willing to pay. Facebook was willing to pay $1B, so yes, instagram is worth $1B. Instagram may never produce any significant revenue, it's value is that it's a strategic asset to facebook. Just like the patent purchases they recently made. I think Instagram got pretty lucky with the timing(since we are in a bubble) and the purchaser. Facebook's mobile app is not very good. Facebook should of been more aware of it's competitors and acquired them earlier on. And facebook should of negotiated better. That said if they put the instagram guys to work improving the facebook app it may well end being worth 1B$ in actual revenue. (Though this was clearly primarily strategic, not talent acquisition). Instagram seems like a company designed for acquisition, on it's own it probably could never monetize very well. But it has undeniable strategic value for a company trying to expand or maintain their social and mobile presence.

sharan 14y ago

It isn't that they raised $41 million, that was the issue. It was the fact that they raised that amount without any real metrics to back the team or the product. Someone gave me this analogy that I thought was quite well put. Michael Jordan kicked ass at basketball, but it would have been a foolish manager who gave him a $41 million contract when he decided to try baseball. Hindsight-20:20 here - Color might have been an incredible story on paper, and it might even have warranted a stratospheric valuation. But nothing besides cold, hard numbers warrants cash of $41MM for a web/app startup.

loverobots 14y ago

Instagram success involved a lot of luck, especially in choosing their pivot. *It does not diminish their incredible talent and creativity, but those could have been "wasted" on an unpopular app until the money run out. Instead they chose one that was adopted like wildfire and their talent was showcased. By next year, it may become "meh," we do not know. Bottom line: $41 million isn't going to help much with the idea and having it widely used by people so they were crazy to give them that much money right away. You either have the idea or you don't, and execution, as shown by Instagram, requires much less than $41 million.

nivertech 14y ago

TL;DR: In almost any scenario, Sequoia still ends up making a lot of money.

JVIDEL 14y ago

COLOR got $41MM for having an all-star team, not because their investors could see the future... In any case it shows that not only money isn't everything, but that whole "invest in the team" mantra is flawed as well, just look at Instagram: it was made by a guy who wasn't an engineer and learned to code in his spare time! The idea matters, the market matters, throwing money at a previously successful team isn't the be-all and end-all of startup strategy.

TazeTSchnitzel 14y ago
Haven't quite a lot of people here learned to code in their spare time?
- Danieru 14y ago
  Yes but only the successful ones.
- joeblau 14y ago
  Kevin knew how to code before he went to college. He just refreshed himself.
feldmanr 14y ago
Agreed the sum was largely because of the team but I think it was also because of what they were targeting and their experience in relevant areas, Bill Nguyen at Lala/Apple and Peter Pham at Photobucket.

knes 14y ago

Have you guys had a look at Colors latest android app, Exclusive to Verizon? I think their $41 millions funding and this app describe quite well what the Founders of Colors are: True Hustlers that can sell anything to anyone and are just focus on money, not on creating a useful product/service to the users.

Jabbles 14y ago

I think an analogy to "The Selfish Gene" is appropriate here. The emphasis is on "gene" as the basic unit of natural selection. Here we see (as we have always known) that the basic unit of investment success is not the team, the idea, or the company; but the portfolio. It doesn't matter that Sequoia squandered $41 million on one company if they made hundreds of millions on Instagram. Startups are high-risk, high-reward ventures, and they have always known that. As to whether the huge capital and press actually hindered Color, I'm not convinced, but it seems plausible.

saddino 14y ago

Spot on. I think Color's pitch was to stealthily suck value out of Facebook by attacking what it perceived (and Instagram proved out) as its greatest weakness: a healthy amount of user engagement on FB is around photos. If one could create the "perfect" photo sharing mobile network, FB users would start sharing photos outside of FB. As soon as a critical mass of users and photos was achieved, FB would recognize the attack and defeat it via acquisition. IMO the main difference is that Color (and their investors) had a well-defined strategy, but it was Instagram that had the perfect app.

joeblau 14y ago

When I watched the interview with Kevin Systrom by Kevin Rose, Systrom's "Grand Vision" definitely reminded me of the goal of Color. Here is a link: http://www.youtube.com/watch?feature=player_detailpage&v=IPigMKugJhY#t=2094s http://www.youtube.com/watch?feature=player_detailpage&v...