It's not.

And then they excuse it by saying it's to suck up someone who might have been a competitor. But, still, that's a stupidly hefty price even for "Facebook 2", to be honest.

But in this land, the zeroes are just a number, that's all. You don't have to prove their worth, so long as you have enough zeroes of your own. There's honestly no reason to buy them at all. You could build a competing feature for a few tens of thousands that would be available on MORE platform than Instagram exists on, and do a better job. It wouldn't even take that long (probably not as long as the buyout negotiations would take).

But all these companies are valued in the billions and have almost zero income streams. Seriously. This is "dot-com bubble" all over again. Hell, you have to pay half a million to (possibly) own a single TLD for yourself and still people are doing that for little reason compared to having a bog-standard dot-com or similar.

Even Facebook - they have no income stream to justify their valuation at all. They make money, sometimes, but they don't make enough for anyone involved in their initial investment or future buyouts to actually SEE anything near the amount of money they think.

It's an "SCO damages" style financial operation. Think of a number, make it bigger and more impressive, pretend that it's justifiable.

Seriously, if you put ANY of these companies on Dragon's Den, they would be laughed out of the place based on their valuations and actual income alone (not even *projected income*).

Now Google - Google MAKES money, purely from advertising, and has almost nothing to pay back. Hell, Google could make enough money off using their ads on Facebook *to* fund Facebook if that were to ever happen. They would actually profit. But even then, to pay off the investors or live up to their mysterious valuations would be impossible in any sensible timeframe.

But Facebook / Instagram? They don't make money. The money they do make would be insufficient to base a business on. They certainly would never pay back any investments or live up to valuations if necessary. And even projecting 50 years in the future with 10's of %'s of growth each year, they'd be hard-pushed to live up to the hype.

This valuations mean nothing. If you paid even a million for Instagram, you're an idiot. And people WILL get rich off the back of things like this (of course they will). But, inevitably, one day someone will find out that the company's not worth tuppence. That may not be the same person who bought it. And, especially in social networking, trends and fashions die fast (anyone remember Geocities, MySpace, FriendsReunited?)

Like FriendsReunited: Valued at £175m at one point, changed hands a couple of times, and today is worth about £5m, if that. They once made £22m a year in profit. That's less than 7th of the "valuation" of the company at the time in one year. But it's now not worth, in total, everything together, one quarter of that year's profit. Someone made £100's of millions out of it. That money never really existed, though, and now it's worth not very much (your average private primary school is probably worth a lot more than that).

The trick is to NOT be the person holding the hot potato when things start to turn into reality.

Re: Say what you like about Zuckerberg...

I doubt Systrom is disappointed. $2 billion was probably his joke price, and when Zuck didn't immediately slam the phone down he must have though "hang on a second, there might be something in this... I'll go round for tea.

Agreed - good summary. However you missed one point:

The CEO of instragram did a fantastic job of selling his largely worthless* company for a ludicrous amount of money - we really have to give him credit for that.

*as in no income - the real value is really what somebody is willing to pay for it.

Re: Nice summary @Cliff

You and I may have; Zuckerberg wasn't in the workforce when the .com bubble collapsed.