Instagram - the business with no revenues, worth $1bn

Simply stunning. There’s no other way to describe the takeover by Facebook of Instagram…for a cool $1bn. This takeover has really made the technology market sit up and notice.

So, what does Facebook get for its $1bn takeover of Instagram? Can the price be justified? Well, $1bn buys Facebook…

- A hugely popular app on the IOS platform, with users having doubled to 27million in recent months (that growth may accelerate as Istagram has just launched the app on the Android platform too)

- A business with just 11 employees (so not many cost synergies)

- A business with no revenues! (the app is free). I bet the assumptions about future revenue synergies are pretty significant…

- A business that was formed just two years ago (or more precisely 551 days ago)

- An established and high quality mobile photo sharing app - which was a competitor to a service which Facebook initially planned on developing internally (and example of external growth providing a transformational effect compared with slower organic growth).

...and perhaps most importantly

- a potentially significant competitor to Facebook. After all, photo sharing and tagging are arguably what made Facebook so popular in the first place.

The fascinating thing is that the value of Instagram appears to have doubled in literally just a day or two. Techcrunch have reported how Instagram had only just complete a further round of equity finance-raising which effectively valued the business at around $500m. A few hours later, the price was $1bn. What an amazing return on investment for those who decided to invest last week.

Lots of coverage already in the media about the deal and you can expect much more. I suspect the focus of the media will be on the price tag & the fact that Instagram is still “pre-revenue”. in the longer-term, however, I suspect the strategic value of the deal will become clearer. And don’t forget that the price is being paid using combination of both cash (real money) and Facebook shares.

It’s worth showing students the two official announcements:

The news was broken to Facebook’s hundreds of millions of users by Mark Zuckerberg himself - with a blog post on his Facebook page. Here it is:

https://www.facebook.com/zuck/posts/10100318398827991

Kevin Systrom, the CEO of Instragram has also blogged about the deal:

http://blog.instagram.com/post/20785013897/instagram-facebook