Thirteen People, One Billion: Facebook Buys Instagram

On Monday, Facebook announced that it would buy Instagram for approximately one billion dollars in cash and stock, and the technology world spent the rest of the week trying to process the number. The photo-sharing app had thirteen employees, no revenue, and about thirty million users, and it had just launched on Android days earlier. The price dwarfed every comparable deal in the history of venture-backed startups, and the press called the app the most expensive in history. The announcement came from Mark Zuckerberg on his own timeline, and the message was short: Instagram would keep building independently. This is the April 2012 story, and the story is the lesson: ...

Thirteen People, One Billion is the subject of this article: the deal that made the math of the social economy visible, and the strategy that explained it. The acquisition is the anchor, the app is the prize, and the lesson is about the price of a platform's future.

1. The Announcement

The news broke on Monday, April 9, and it broke the way Facebook news often broke: in a post on Zuckerberg's own timeline, written in his own voice. The deal was a combination of cash and stock, approximately three hundred million dollars in cash and about twenty three million Facebook shares, for a total near one billion. The company being bought was Instagram, a photo-sharing app with thirteen employees, no revenue, and a valuation that had been a fraction of the price on paper a year earlier. Zuckerberg promised that Instagram would keep its identity, keep its team, and keep building independently. The post was casual. The number was not.

The technology press had covered Instagram as a rising star, a beautiful app with a devoted following, and the coverage had never suggested a billion dollar outcome. The venture capitalists who had backed the company at smaller valuations were suddenly looking at a return that made their funds look prescient. The bankers who had advised other startups were recalculating every comparable deal in their decks. The employees, all thirteen of them, were waking up as part of the largest acquisition in the history of venture-backed startups. The announcement was four days old by Thursday, and the industry was still talking about nothing else.

2. The App

Instagram was a photography app with a simple premise: take a picture, apply a filter, share it with friends. The filters were the magic. A photo of a coffee cup could be made to look like a postcard, a portrait could be made to look like a film still, and the ordinary world could be made to look like art. The square format gave the feed a visual rhythm, and the app's design was minimal, fast, and confident. The company had launched on the iPhone in October 2010, and the growth had been steady, then explosive. By April 2012, the app had roughly thirty million users, and the number was still climbing.

The community was the real product. The photos were public by default, and the publicness created a culture of sharing that felt different from the news feed. The app rewarded the best photographers with followers, and the followers created the incentive to post more. The celebrities arrived, the brands arrived, and the app became a window into a more beautiful version of the world. The filters had made the product, and the community had made the network, and the network was the asset that Facebook was buying. A billion dollars for an app with no revenue was the price of thirty million engaged users, and the users were still multiplying.

3. The Numbers

The numbers made the deal feel impossible, and the numbers were the point. Thirteen employees, no revenue, thirty million users, one billion dollars. The company had raised money at a valuation of roughly five hundred million dollars, and the acquisition price doubled the number in a few months. The founders, Kevin Systrom and Mike Krieger, had built the company from a failed location app called Burbn, and the pivot had taken them from a crowded market to the top of the App Store charts. The trajectory from two students to a billion dollar exit had taken less than two years.

The absence of revenue was the part that the skeptics could not get past. The app had no advertising, no subscriptions, no obvious way to make money, and the acquisition price implied a belief that the money would come. The users were the asset, the engagement was the evidence, and the future was the collateral. The buyers were not paying for the revenue that existed. They were paying for the revenue that the users would eventually make possible, and the price was the market's guess at the size of that future. The guess was the largest the industry had ever seen.

4. The Shock

A year earlier, Instagram had been a promising startup with a passionate following and no clear business model. The venture investors had valued the company at a few hundred million dollars, and the valuation had seemed rich. The acquisition at one billion dollars made the earlier numbers look like a rounding error, and every startup founder in the world recalculated their own chances. The phrase most expensive app in history appeared in the headlines, and the phrase was accurate. The comparison deals, the photo apps, the social networks, the mobile companies, none of them had commanded a price like this.

The founders seemed as surprised as anyone. The reports of the weekend negotiations described a deal that came together quickly, after a weekend of conversations between Zuckerberg, Systrom, and the investors. The founders had not been looking to sell, and the price was not one they had demanded. The reports of their reaction described people who had built a product they loved and were now watching it become a symbol of something much larger than they had intended. The press wanted a story of brilliant negotiation, and the story they got was simpler: the biggest company in social media had decided that the fastest growing photo network was worth more than anyone imagined.

5. The Strategy

Facebook had filed for its initial public offering in February, and the filing had named mobile as the company's biggest disclosed risk. The social network had hundreds of millions of mobile users, but its mobile experience was weak, its mobile advertising did not exist, and the future of the company depended on solving the problem. Instagram was the fastest growing mobile photo network in the world, a direct threat to the time people spent on their phones, and a threat that could have become a competitor in the social graph itself. The acquisition removed the threat and added the credibility in one stroke.

The logic was classic platform defense, and the logic was also a confession. The biggest company in social media was paying a billion dollars to buy a thirteen person startup because the startup had done what the giant could not: it had built a mobile product that people loved. The acquisition was a way of buying the future that Facebook could not build itself, and the price was the cost of being late. The analysts praised the deal as the smartest move Facebook had made, and the same analysts noted that the need for the move was a sign of weakness.

6. The Timeline

Kevin Systrom and Mike Krieger met at Stanford, and the idea that became Instagram started as Burbn, a location app that let people check in, plan outings, and share photos. The app was crowded, the features were many, and the founders decided to strip it down to the one thing people loved: the photos. The pivot was brutal, the code was rewritten, and Instagram launched in October 2010 with filters, a square frame, and a clean feed. The response was immediate, and the growth was organic. The app hit a million users in months, ten million within a year, and thirty million by the spring of 2012.

The Android launch on April 3 was the final piece of the puzzle. The app had been iPhone only, and the Android version opened the floodgates to the largest mobile platform in the world. The growth curve bent upward, the press coverage intensified, and the weekend of April 7 and 8 became the weekend of the deal. The story of the timeline was the story of the modern startup: a small team, a clear idea, a fast market, and a giant that arrived at the door with a check. The fable was unusual only in the size of the check.

7. The Reaction

The Instagram community had built its identity on the app, and the identity was now owned by the biggest company in the internet, the company whose news feed had become the definition of social media. The users feared the worst: the filters would change, the feed would fill with ads, the simplicity would be buried under features. The founders promised that nothing would change, and the users mostly believed them, because the founders had earned the trust. The competing apps, the clones that had copied the filters and the square frames, saw the deal as their moment. The giant was now distracted, and the niche was open.

The industry reaction was a mix of awe and arithmetic. The investors who had missed the deal explained why the price was too high, and the investors who had made the deal explained why it was cheap. The analysts who covered Facebook noted that the acquisition was larger than the company's entire advertising revenue in some quarters, and the comparison became another headline. The competitors, from Twitter to Google, were asked what they would do, and they said nothing. The deal was a statement, and the statement was about the future of mobile, the future of photography, and the price of the social graph.

8. The Lesson

The lesson of the Instagram week is that the price of the future is set by the people who need it most. Facebook needed mobile, Instagram was mobile, and the one billion dollars was the price of the gap between the giant and the future. The thirteen employees and the missing revenue were not the point. The point was the network, the growth, and the threat, and the point was the price of the platform's peace of mind. The acquisition was a purchase of time, of talent, and of the permission to keep growing without a competitor at the door.

The company was worth a billion dollars because thirty million people loved a thing, and the love was the asset. The revenue would come later, or it would not, and the bet was the bet that the whole industry was making. The creators, the community, and the craft had built the value, and the value had been realized in a weekend of negotiation. The story of Instagram was the story of the app economy: the small team, the fast market, the giant's check. Thirteen People, One Billion is the April 2012 story, and the story is the lesson: the network is the value, and the value sets the price.

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