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?
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.
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.
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?")
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."
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.
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.
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.
Totally agreed. Engineers at instagram worked days and nights for years for probably the same amount of money that the inside traders make overnight, literally.
You have got to imagine that the founders [who had the largest stake] made out better with this investment. It's likely the case that a smaller slice of a bigger $ pie > larger slice of smaller $ pie
The engineers would be in the same boat as the founders.
The insider VCs likely served to make the engineers richer. Facebook is likely the one who got screwed into overpaying.
Facebook only gets screwed if their own valuation doesn't increase enough to match the amount "overpaid" in response to Instagram's acute "increased valuation" ploy.
Given current market conditions, particularly in terms of fawning over Facebook, the negative effects of this ploy seem likely to be largely externalized, with the amount of burden borne by Facebook promising to be negligible. As usual in the trading game, the bulk of the burden will fall on the unanointed schmucks lacking the information to buy low and sell high.
Did you ever stop to think that insider traders may have spent endless nights building their companies, selling them for profit and are now simply taking that money to invest?
Money is simply a medium for exchange in this case.
Spending endless nights building and selling companies is laudable, and well rewarded already. "Taking that money to invest" is an entirely unrelated task and needs to be done on the same playing field the rest of the investing public has to play on.
You're saying essentially that the ethics of how you spend money change depending on how you got it. How can that logic possibly work?
If I were a facebook shareholder, I would be livid right now. This was definitely an inside deal/giveaway that resulted in facebook having to pay much more for the company than it would have.
Facebook's core feature, apart from the graph, is photo-sharing. Instagram is the only company at the moment who has any real chance at building a base to compete with Facebook on photos right now. Looking at this from a $/engineer or $/user seems misleading. I have got to imagine that managing future competition motivates this move. That being said, it seems absurdly expensive.
I'm surprised they didn't try to add photo-filters to their mobile app first. I don't think people are going to spend the next decade taking retro pictures. Just like with location - they could've added the feature to their app, people can "be part of location" without having to join a new network.
Over time, most people get bored of filtering their photos and move on. By putting that feature in mobile app, Facebook likely could've done a bit put the curb on Instagram from ever pivoting away from filters into a full fledged photo-sharing network and saved themselves a billion.
I am not arguing whether this was a good acquisition. The acquisition itself seems to make sense. But it is rather bizarre that they would allow this financing to take place which would do nothing but add to the price of acquisition.
I am a facebook shareholder, and your argument makes no sense. Zuck will do what he thinks is best for Facebook, and that doesn't include giving money away to "insiders".
My argument is this Series B deal added significantly to the cost of the purchase without adding to the value of the purchase. Since Facebook certainly knew it was happening it is hard to believe they allowed it to happen.
But I suppose if you do have trust in Zuck you do not have to look too closely at the details of deals like this. In any event, who am I to say anything, I am not in fact a facebook shareholder. I am just your average HN procrastinator. I am sure you know how to look after your own interests.
You could be right. As I mentioned at least one side of this trade gave up money so that the Series B investors could get a quick 100% profit, and I am not sure which. I assumed it was Facebook because of (1) the seemingly high purchase price (2) the way the rumored final price was a neat 2x multiple of the Series B valuation (3) the fact that Facebook by virtue of being a much larger company with much more shareholders would seem to have longer and more nebulous fiduciary duty connections than Instagram.
But I admit, all of those reasons are quite speculative. I could be wrong. It could be that the Instagram shareholders knowingly gave up some of the purchase money in order to have funding in case the deal fell through.
Obviously Facebook would have liked to pay a lower price (and I'm sure they've made previous offers which were turned down by Instagram). Raising this money strengthened Instagram's bargaining position, which is why it was a smart move for them.
What makes you think that Facebook allowed anything? What power does Facebook have to dictate anything to Instagram prior to purchase?
I think you have a misunderstanding of how deals like this take place. Facebook would have undoubtedly preferred to close the sale prior to the B round, but I am sure that whenever Facebook originally came calling, Instagram maintained that they were not interested in selling. I know this only because this is what hot target companies always say when receiving unsolicited offers. Instagram followed up by putting its money where its mouth was and closing a big round that gave it enough money to stay independent for a long time while growing the company. At that point, Facebook's only option was to go big or go home.
Facebook could have tried to preempt the B-round by raising its bid before the round closed, but it seems pretty clear that it was going to take about $1B to get Instagram off the block, whether that happened before or after the B round.
At the end of the day, the B-round does not make a huge deal to Facebook either way - to the extent that you are prepared to pay $1B for a company, you're not going to be too worried about a measly $50M going out the door.
I know who Paul is. While I certainly admire him and would like to thank him for Gmail, I hope I am still allowed to have an occasional mild argument with him.
Your comment seemed to imply that Paul had not looked closely at deals with Facebook: "But I suppose if you do have trust in Zuck you do not have to look too closely at the details of deals like this."
Exactly. They could have also demanded that the series B does not take place. And they did neither of these things. Which most likely means the people that made the decision did not have the best interests of the company in mind.
It is not that complicated. Let's say there is X amount of economic benefit from the deal. Initially (i.e. before the series B) that benefit would be shared between Facebook and the initial (i.e., before the series B) shareholders of instagram. Facebook would get the benefit of owning the company minus the purchase price and the investors would get the purchase price.
But after the series B there is another party, the new Instagram shareholders which must also share in that benefit. This means that either Facebook or the initial shareholders or both get less benefit than they would have gotten if the series B had not happened.
So who got less benefit? Well in these cases one just has to ask oneself who is likely to make a decision against their own benefit. And when you look at people making decisions against their own benefit it usually the ones with the longest and remotest chain of fiduciary duties that do it.
So I guessed that it was facebook that might have done it because it has much more and more remote shareholders, so it is more likely someone may have slipped up on their fiduciary duties.
But I do not know for sure. It could have been the instagram owners or old shareholders that got screwed. In any event, it is quite certain that one or both of them did get screwed.
I have a question: is this good or bad for the Series B investors? I'm not sure the answer is as obvious as it seems.
2X return overnight is great for angels, but is it good for VCs? From what I understand (correct me if I'm wrong), once VCs have an exit, they can't reuse the proceedings for a subsequent investment. Thus, since VCs like Sequoia are probably looking for 10X returns, they just ended up with a chunk of their fund that underperformed. True or false?
No, VCs generally don't recycle their wins. A VC fund is at it's heart a company that is expected to live for ten years; first raising capital, then investing the capital, and then spending it's final years collecting the proceeds of the exits, as the successful investments get acquired or IPO.
Note: VC firms will have many different funds, each with different origination years, so while the fund might last a very long time, the individual funds are not supposed to remain illiquid forever.
I'd think this would be great for their IRR, because this means they had a capital call a month or two ago, and will be returning double the capital very, very shortly thereafter.
If you invest $20 million and get $40 Million a week later you are extremely happy.
If you invest $15K and get $30K, meh...cause you were probably hoping for life-changing money. So context is everything. Not to mention that Instagram was more than an idea or a famous founder at the time of investment so there was less rick of losing everything.
In all seriousness: somebody explain this please.