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The Instagram Deal and the Delicate Question of When to Sell
By MICHAEL J. DE LA MERCED
New York Times
April 10, 2012, 6:16 pm
It is a question that every successful start-up faces: When to cash out?
For Instagram, the answer came fairly quickly, when the photo-sharing site sold itself to Facebook for $1 billion roughly two years after its founding.
Other technology companies made the more difficult decision of waiting, betting that their growth prospects were even brighter down the road. It is a sometimes painful position, balancing the uncertainty of the future versus the fear of getting out of a good thing too early.
Instagram appears to have decided very quickly. It was only last week that it raised roughly $50 million from investors at a $500 million valuation. The company would hardly have conducted that fund-raising round, its second, if it knew that Facebook had a firm $1 billion on the table.
For some companies, cashing out has worked out well. YouTube sold itself to Google for $1.65 billion in 2006, a little over a year after its founding by three former PayPal workers. By that point, the company had collected more than $11 million from two rounds of fund-raising.
Since then, YouTube has become a behemoth of Internet video and a shorthand for online clips. It still may not contribute meaningfully to its parent’s bottom line, but the site remains one of Google’s most prominent beach heads on the Web. (Having an enormous war chest as support has also arguably helped YouTube in its defense against numerous lawsuits by media companies.)
Or consider Google itself. Founded in 1996 by two doctoral candidates at Stanford, the search engine operator didn’t even collect equity from venture capitalists until 1999, pulling in $25 million.
Four years later, Microsoft sounded out Google executives about a potential deal (or at least a partnership), in what could have fundamentally altered the trajectory of the modern Web as we know it.
It appears that the talks didn’t advance very far, according to The New York Times, and Google appeared even then to be far more interested in remaining independent. The company, of course, eventually raised $1.67 billion in its initial public offering and grew into an ad-driven Internet colossus.
Or take Facebook. Born in 2004 amid the clutter of a Harvard dorm room, the social network fielded multiple takeover offers in its nascency. In hindsight, the series of leaps in valuation are so enormous as to be comical: a $75 million buyout offer from Viacom in 2005, followed an $800 million bid by the media conglomerate the next year. Then came a $1 billion bid by Yahoo.
According to David Kirkpatrick’s “The Facebook Effect,” feelings within the social network were mixed. Favoring a sale were the likes of Accel Partners’ James W. Breyer and Matt Cohler, the latter of whom apparently believed that the Yahoo bid was the best the team would ever see.
Less enamored of a cash-out were Facebook co-founders Mark Zuckerberg and Dustin Moskovitz and influential adviser Sean Parker, all of whom believed that selling at that moment would have stunted the company at precisely the wrong time. On deck at the company was a new feature called News Feed, which the trio believed could dramatically expand their social network’s usefulness.
Eating away at them was the prospect that being taken over by a big company would erase their hard work, given the eventual dissolution of the start-up Dodgeball after its takeover by Google. The chances of Yahoo understanding how to manage a potentially revolutionary company like Facebook appeared much greater.
“Google was the mecca of start-ups,” Mr. Moskovitz told Mr. Kirkpatrick. “If an acquisition there was going to fail, I didn’t feel great about going to a company that was known for being kind of behind the times.”
The decision ultimately became much easier to make, as “The Facebook Effect” points out. Yahoo suffered from terrible earnings in the middle of 2006, and subsequently knocked down its offer to $850 million. Here’s how Mr. Kirkpatrick describes the resolution:
“As soon as he got off the phone, a grinning Zuckerberg strode over to Moskovitz’s desk a few feet away and gave a big high-five. In a ten-minute conference call, Facebook’s board rejected the offer. Even Breyer was comfortable with the decision.”
For others, however, selling out hasn’t been a panacea, at least business-wise. The graveyard of start-ups that withered after their acquisitions is vast, as corporate buyers sap focus or change strategic direction for the worse. Myspace, Dodgeball, Delicious and Bebo are only four of the many companies whose stars were extinguished after their purchases by bigger companies.
And while Flickr is still operating, many pundits argue that the photo-sharing site has missed too many opportunities since its acquisition by Yahoo. Among them: mobile picture sharing on smartphones, a field now dominated by — that’s right — Instagram.