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Bubbles, Instagram and Pageviews: Correlations Gone Awry

After the third time I saw Nick Bilton's weekend column fly across my tweet stream in a matter of 20 minutes, I clicked with much excitement. I've always enjoyed Nick's work, and think he's near the top of mainstream big-media writers focused on startups. By about the third paragraph, I was confused and literally scrolled up to check the byline. To me, the piece felt one-sided, starkly anti-startup and designed to maximize pageviews. My takeaway was to let it soak in a bit. But given i'm writing this post 24 hours later, I suppose it's fair to say I couldn't swallow the bitter pill. C'mon Nick, you're waaay better than that! Let me explain.


Firstly, on the topic of bubbles I'll defer to the consistently brilliant Chris Dixon whose weekend post noted the fundamentals of most of the big valuations are more sane than the late 90s. I've not lived on that side of the table, so I'll leave the nuance to those who have, but I don't think anyone would call this market anything short of frothy. From my point of view, I think Naval from AngelList nailed it in a tweet yesterday: "Current sweet spot in the venture business - being able to write a $1M+ check, and price and lead a late Seed / early A." So those with more investment cycles than me can continue to debate the bubble question, but here's my take: money is flowing quickly, and if you've got a great idea now is the time to push hard for user traction, which will lead to the funding discussion. Build a winning company, and the money will come. Start something that's a pile of dog s*%t, and your shoe will always smell.


Bottom line, Bilton's characterization of a vapor-loving VC community that actively dissuades startups from booking revenue was over the top. And lining up a bunch of quotes supporting a thesis doesn't necessarily make that thesis true. Sure, do professional money managers want to maximize returns? Of course. But it's become increasingly more difficult to be a vampire in the VC business. Companies are cheaper to build and operate, and entrepreneurs have more choice in who they align with than ever before. These shifting roles are good and bad for both entrepreneurs and investors but I think it's the new normal. I have little doubt that guys like Shervin Pishevar will win at this game, and that guys like Mike Arrington and MG Siegler will continue to provide a well-written, inside-the-beast account of VC life.


And so on to Instagram. I wish writers would stop using them as a case-in-point for a bubble — they have almost nothing to do with it. There are very few CEOs who are equal parts brilliant product visionary, competitively obsessed and still in direct control of their monstrosity of a company; Mark Zuckerberg is the apex predator example. How many CEOs would make a $1B acquisition in the middle of an IPO quiet period because he felt it was critical to the defense — and continued success — of his platform? Answer: No one else we know. It's this type of aggressive management style that will make Facebook a highly successful company — private or public.


So let's call Instagram what it was: the clear winner in a massively social app space (mobile photo sharing) that generates the *exact* type of content that Facebook has grown into a hub for sharing. Do you think it's a coincidence that demographics paralleling a use case like "grandmas-seeing-pictures-of-their-kids-and-grandkids" are exploding at Facebook? Of course not! Picture sharing drives Facebook's existence, and Zuck saw Instagram as a direct threat based on their organic growth — and as a force multiplier for another social network like Twitter to catch Facebook. And seriously, what's 1% of your post-IPO valuation to hedge that bet? Answer: a rounding error.


And while we're patting backs, let's not miss Instagram CEO Kevin Systrom. If you follow all the bouncing balls, this dude made a series of epic calls in a short period of time that propelled them straight into the Facebook acquisition at warp speed. Let's take a quick look at his five strokes of genius:


  1. Win the photo sharing app war. Done, and it didn't take $41M or have some sharing gimmick. It's just a great app based on something humans love to do.
  2. Add an Android version to the product mix at an absolutely brilliant inflection point. Guess what? Traction wins, and adding 20% to your customer base in a week seals deals.
  3. Close a $50M round a week before being acquired. It's like playing chicken, except he had all the bases covered plus super-powers! I can't imagine closing a round and negotiating with two potential suitors in parallel. Seriously, wow.
  4. Entertain talks with Twitter as a way to set your market price. Very few of us will ever know how close Twitter came to winning the prize, but they sure set the number for Zuck to obliterate. If the reports are true, it was a 2x premium made up mostly of Facebook stock — that's called compound value people!
  5. Pull the Facebook trigger when the moment was optimal. Best price, perfect timing, huge audience multiplier.

So at the end of the day, my takeaway on the Instagram deal is build something people love. And if you're a founder, be prepared to make some serious high-wire decisions under maximum pressure. Maybe you'll have an early monetization strategy — like the guys at Dropbox, who could exit for similar money — or maybe you spend a lot of investment dollars on user traction. You can even look at Pintrest as an almost-perfect in-between case — one with hyper growth and a clear e-commerce monetization strategy — even if they aren't driving any revenue. And let me be ultra-clear: there are VERY few scenarios when you can build a company to tens of millions of users without a monetization strategy. Your business probably isn't one of those — any more than my Parental Consent as a Service startup is. But just because one team did doesn't mean we need to break out the Chicken Little rhetoric.

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