Zuckerberg blew $1bn on Instagram 'without telling Facebook board'
No bankers or lawyers in sofa-based deal, says report
Facebook CEO Mark Zuckerberg left his board out of the loop as he personally hammered out a $1bn deal with Instagram for its colour-changing photo software in three days of negotiations in his house in Palo Alto, culminating in the deal on Sunday 8 April, a report in the Wall Street Journal claims.
Citing a person familiar with the matter, the WSJ said that the CEO of Instagram, 29-year-old Kevin Systrom, initially asked for $2bn for the company, which has 13 employees and no cash flow.
Facebook's board was only informed of the deal later that day – after it had already been agreed, the source said, stating that the board "was told, not consulted". The story broke to the media on 9 April.
Facebook COO Sheryl Sandberg only found out that Zuckerberg wanted to do that deal on the Thursday before the deal was hammered out.
If the valuation of Instagram was unorthodox, so were the negotiations. No bankers or lawyers were involved in the sitting-room deal which was thrashed out between Zuckerberg and Systrom.
Zuckerberg had expressed interest in Instagram before but, according to the WSJ, he was pushed to make the move after Instagram announced a $50m round of venture funding, valuing the company at $500m, and also saw a successful launch on Android, much to the chagrin of many an Apple fan. ®
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.
Oddly enough, I assumed that was what had happened. Having kids myself.
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.