Instant Billion! Facebook Acquires Instagram for Big Bones

Money Sign

By Matt Gallagher, Red Herring

Facebook has acquired Instagram for a jaw dropping billion dollars in cash and stock, impressive bones for a two year old startup that previously had little to no business plan.

It’s the largest acquisition in the social network’s history, and as Wired points out, a mind boggling cash windfall for Instagram’s CEO Kevin Systrom. Owning 40 percent of the company, the 2006 Stanford graduate made $400 million, or $725,000 for every day since the company’s launch on Oct. 16, 2010.

And it wasn’t supposed to be the money grabbing story of the day for the company. Just before the acquisition, Instagram closed on a $50 million Series B round from Sequoia, Thrive Capital and Benchmark at a $500 million valuation, as first reported by AllThingsD. Many of the investors knew nothing about the acquisition, but nonetheless literally doubled their money overnight. Why dilute the shares? Likely to drive up the company’s valuation during the acquisition negotiations, as Christine Heron points out.

Yet for Instagram users, the world has not changed. In a blog post explaining the deal, Systrom promised the company would maintain its independence, pledging “that Instagram is not going away. We’ll be working with Facebook to evolve Instagram and build the network. We’ll continue to add new features to the product and find new ways to create a better mobile photos experience. The Instagram app will still be the same one you know and love.”

Zuckerberg reiterated that the company would maintain a degree of independence on his Facebook page. “…We need to be mindful about keeping and building on Instagram’s strengths and features rather than just trying to integrate everything into Facebook. That’s why we’re committed to building and growing Instagram independently. Millions of people around the world love the Instagram app and the brand associated with it, and our goal is to help spread this app and brand to even more people.”

The heart of Facebook is sharing a social experience, and photos are the foundation of that experience. In preparation for its upcoming IPO, the social network disclosed to investors that mobile presents a massive risk, and that the company could suffer without continued growth in user engagement with photos. “Changes in user engagement also affect our revenue and financial performance,” Facebook warned investors in its S1.

Yet when it comes to photo sharing, Instagram is king. By buying the photo sharing startup, Facebook now owns the be-all of photosharing, nixing the competition by essentially becoming the competition and boosting the services of its core product.

Naturally, while Instagram’s services will remain independent and can continued to be used on other social networks apart from Facebook, life for Instagram will be very different, mainly in the development room. Until this week, Instagram had 13 engineers. Aside from suddenly being very rich, these engineers can now reap the talent of the Facebook team of thousands, which include some of the best hackers on the planet.

An acquisition of this size will of course bulge the bubble talk around the cocktail water cooler. The question is only if the product can deliver. At the end of the day, the world’s largest social network just nabbed a photo sharing tool that makes the online social experience as natural as a conversation. Yes, those numbers on the check are high, but so are the stakes.