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Instagram now valued at $35 billion, and Facebook must be thrilled

After Instagram decided to tell the world it has over 300 million active users last week, Citigroup has upped it's estimate of the picture company.

Published onDecember 22, 2014

instagram android apps

If money talks, and a picture is worth a thousand words, than how long of a sentence does one need to encapsulate the value in Instagram?

Facebook bought Instagram for a “mere” $730 million in 2012 (the initial deal was $1 billion, but Facebook’s falling stock meant Instagram’s investors got a smaller check by the time the deal completed.)

Last week, Instagram was valued at $35 billion by Citigroup, close to double Citi’s previous estimate of $19 billion. It seems that when Instagram declared it had over 300 million users, the powers that be (at Citi) realized the exponential growth and pushed up their price.

Wow. Citi puts a $35 billion valuation on Instagram. Zuckerberg’s steal of the century.
— Joseph Weisenthal (@TheStalwart) December 19, 2014

Instagram’s case is a particularly curious one. When the Facebook acquisition went down, many were quick to criticize the transaction largely based on the idea that the picture-sharing company had a tremendous amount of potential to achieve even greater success on its own, which would have significantly raised its value at a later sales date. Forbes in particular, published a very logical article explaining the matter in detail, and even pointing out that Instagram’s major appeal was the bridge between strangers, who can comment and share other stranger’s pictures, something that Facebook has relegated to friends-only. Marc Bodnik, the author, went on to suggest that had Instagram opted to develop its brand further, it could have potentially challenged Facebook in terms of friend-to-friend photo sharing as well.

In light of the new valuation, this questionably premature sell becomes even more relevant. If Facebook bought Instagram for $730 million, and it’s now valued at $35 billion just over two years later, there is no question Zuckerberg and Co. scored big-time in the transaction. While it’s true that the exposure and media spotlight Instagram received thanks to last year’s purchase inevitably played a part in the massive user expansion, it also speaks volumes about how much potential the company had as a brand and as a product, and therefore a lot of potential money its founders floundered. To put it differently, there is no way Facebook could have ever made such a “bargain bin” acquisition had Instagram achieved even half the current success prior to the sale. The acquisition of Whatsapp by Facebook, sealed this October for a whopping $22 billion, is further proof that Instagram was truly a steal.

Therein lies a question that is becoming more and more prevalent as the IT/software industry becomes more akin to the pharmaceutical one: with the big names seeking to acquire the “little guys” to bolster their big brands, at what point is it prudent to sell (out)? In both industry examples, there is a clear pattern of the larger entity seeking out the smaller as a means of staying competitive with other rivals, as well as removing the threat of the “prey” and subsequent work that would otherwise need to be done to create a similar product internally.

Oculus Rift CES 2014-1

Just looking at the Facebook acquisition of Oculus this year and all the controversy that entailed (not to mention the legal fallout from ZeniMax) we have another potentially explosive example of a company that arguably may have sold too early as well. Samsung has already partnered with Oculus in making its Gear VR headset. How many others would have tried to get into the virtual world business had the technology been allowed to grow and get off the ground?

samsung gear vr note 4 aa 2

While working hard and cashing out might be the ultimate dream, at what stage does the dream turn into another company’s fantasy? This pattern be indicative of a larger trend as a whole. We’re not talking about gimmicks here or one-trick ponies like say, King and Candy Crush. We’re dealing with companies with a product that has potential to become something exponentially larger than the sum of its parts, with proper management of course.

At the end of the day however, it’s just astonishing to marvel at the amount of money IT companies have, and it only goes to show how impressive engineering and good planning are when it comes to stellar software.