Days after an already over-priced valuation of $500 million, Instagram has been snapped up by Facebook for $1 billion. The company’s Series B round had seen Instagram raise $50 million at a $500 million valuation only last Thursday.
The round, led by Sequoia Capital, has therefore seen Sequoia, Thrive Capital, Greylock and Benchmark double their money in less than a week. This is horrible news for the tech industry, illustrating how insular and crooked Silicon Valley is.
First off, the insane $1 billion price tag goes some way to adding more hot air to the industry’s already-expanding bubble. Such high valuations should not be thrown around so freely; the industry is not ready for them. Over-priced valuations can only cause long-term damage and hasten a bubble pop.
And let’s not mince our words here, this is a bubble. In all of 2011, there were no $1 billion acquisitions made by the venture capital industry. So far this year, and including Instagram, there have been three. (At this point in 2000, there had already been nine, so we’re not completely fucked… yet.)
Secondly, how can Instagram possibly be worth $1 billion? The answer, of course, is that it isn’t. Even viewed as a defensive move by Facebook, the numbers here are ludicrous.
We understand that most early-stage tech firms focus on building up large user bases before worrying about monetising their product, but this is just nuts. The company makes no money. It was founded 15 months ago. It was valued at just $25 million a year ago.
Oh, and all its product does is make hipster-friendly filtered pictures.
While there is no suggestion that all of the Series B investors were aware of the imminent Facebook acquisition, one thing is certain: Instagram CEO Kevin Systrom is laughing all the way to the bank.
Last week’s $500m valuation is certain to have helped Instagram’s negotiations with Facebook, giving Systrom plenty of ammunition to show Facebook just how much of a catch his profit-free business is.
Systrom selling a loss-making company for $1 billion? Investors unashamedly doubling their money in four days? This industry is in trouble.