On January 9, 2007, Steve Jobs unveiled the first iPhone. Before this, computing had evolved over a century from massive mainframes to desktop computers and laptops, faithfully obeying Moore’s law. Mobile unlocked email-on-the-go, location, photography and tons of other inputs.
But the iPhone was a paradigm shift. It had the App Store, a marketplace where independent developers could develop and list their apps. It brought together consumer demand, developer ingenuity and a safe environment for them to transact.
The creativity and value creation that followed was unimaginable.
In this fertile ground, Kevin Systrom and Mike Krieger closed a seed round of $500,000 from Venture Capital funds Baseline Ventures and Andreesen Horowitz in March 2010. Their idea? Burbn- a check-in app. It would be a social media app that would allow people to “check-in” to cool places for their friends to see, accompanied by a picture.
They tested Burbn among a limited set of users who were invited to try it out. (This is called being in stealth mode). Problem was, Foursquare, the check-in app, had already beaten them to market by a few months. And in social media, first mover advantage is a HUGE deal.
They noticed something unexpected though. Since people suddenly had powerful cameras with them all the time, they were taking a lot more pictures. And many Burbn users were showing the same pattern: taking photos on the app and sharing them on their socials (Twitter, Facebook, Foursquare, etc.).
The game changer was photo filters. These filters allowed people to quickly edit their photos on the phone, changing the light and color gradients. Instagram photos had a distinct feel and coolness to them, with 11 unique filters – 4 of which were paid!
And yet, it was still just the two of them. So monetization wasn’t on their radar yet. They planned to stretch that $500k a long way.
In fairness though, there were other photo editing apps already. Filters, too, weren’t an Instagram innovation. But Instagram did one thing very well. They had a seamless user experience, from taking the picture to editing to sharing.
The iOS app was officially released on October 6, 2010.
In early 2011, the company raised another $7m at a $20m valuation. In April 2012, it raised another $50m at a $500m valuation. That’s a journey from 0-500m in 2 years flat. (That $500m number will show up again shortly.)
In April 2012, Instagram finally launched their Android app and added a million users on day one, taking the total to about 30 million users. All this, with just a 13-person team. That’s 2.3 million users per employee.
Something else was brewing around this time.
Facebook had filed for an IPO on Jan 1,2012 at a $104b valuation. Mark Zuckerberg was tech’s golden boy, and had bent Wall Street to his will. While he would own less than 20% of Facebook after the listing, his shares had over 50% of the voting rights- something called a dual class structure. So while the Street could profit from him, Zuckerberg was still Lord and Emperor at Facebook.
But the crown was heavy and full of thorns. Facebook was built for desktop. The sudden shift to mobile had caught him off guard. The Facebook mobile experience was buggy and unintuitive. Zuckerberg knew what had happened to social networks like Orkut and Friendster before him. Obsolescence was always just one tech shift away.
With this context, and to our unbelievable luck, the US House of Representatives antitrust subcommittee made public the emails around the time of the acquisition. The exchanges between Zuckerberg and Krieger offer a fascinating glimpse into their respective mindsets, particularly Zuckerberg’s.
The two companies were collaborating on a project called Open Graph (OG). Remember, Instagram depended on Facebook access to allow users to cross post pics.
Mark opens with honey and a carrot – if you join us, you’d be the Photos guy at Facebook. And of course we’ll leave your precious baby alone. And a gentle reminder, we’re fucking Facebook. We have a lot of firepower.
A master tactician, Mark had a plan B: if Instagram doesn’t want to get acquired, maybe I can just suck away its magic sauce – the content.
Systrom parried quite well, I think:
With this, you see Zuckerberg’s tone shift. He gets cold. He’s probably never had anyone at Facebook or his VC’s talk to him like that in years, if ever.
He finally brings up the number, and is hostile and stand-offish.
This prompts Systrom to go on the back foot. He tries to be conciliatory in the subsequent exchanges. Mark knows he’s got the upper hand now:
We get to haggling stage where, in street markets, the buyer pretends to walk off, forcing the seller to chase after them. My mother would approve.
In the back and forth that follows, Zuckerberg seems to get everything he was looking for.
The deal was announced, and stunned the world. A billion dollars for a two year old company with just 13 employees. Crazy.
Crazy it was. Zuckerberg got a great bargain.
2023 estimates:
Instagram generated an estimated $60.3 billion revenue in 2023, accounting for almost 44% of Facebook’s total revenue
Over two billion people use Instagram once a month, making it the fourth most popular social app worldwide
Instagram’s biggest market in terms of users is India, with over 400 million active users
Over 70% of Instagram users are under 35 years old
To be fair, a lot of this value was added by Instagram being on the Facebook platform. And to his credit, Zuckerberg resisted the urge to merge Instagram and Whatsapp into Facebook to create a super app. Zuck is smart like that – he just presented a unified experience to his actual customers- advertisers.
The emails provide a rare window into the minds of two smart people locking horns, and how coldly Zuck played his cards. It’s no surprise that the Instagram founders left Facebook abruptly a few years later- they were reportedly frustrated at Zuckerberg taking too much control.
(I’ve cherry picked parts of the memo, but you really should read the whole thing. The subtext and commentary, of course, is mine. Maybe you reach a different conclusion!)
This post is for information purposes only, and should not be interpreted as investing advice. The author may hold positions in the securities discussed.
I hope this style of storytelling/narration catches up like the irritating style of inserting .gif style has caught up. This is one of the best things I have read on the gram/fb story and before you take the credit, I would like to draw your attention to the fact that I used 'gram'. I am so 'with it' that it scares me.
This was a good good gooooood post. More to come, I hope.
Thank you NJ