Instant billion

For a company which has 13 staff and appears to make no money, a $1 billion price-tag is the kind of valuation dreams are made of.

Photo sharing application Instagram has only been around for two years but has become the latest tech company to be snapped up by free-spending Facebook, which expended in excess of $80 million in 2010 collecting small tech firms.

With so much cash on the books at the likes of Facebook, Google, Apple, IBM and Dell there are not many acquisition targets that are out of their reach.

Looking back at Google’s M&A timeline, for example, is akin to taking a round-the-world trip. Whilst the majority of its spending has come in the form of American deals, its acquisition activity has taken it from Germany to Canada, from Brazil to Australia and from Israel to the UK.

The true motivations behind these kinds of purchases are never easy to determine. While in theory businesses bought by such global behemoths should be complementary to their product offering, the giants may simply be nipping potential challengers in the bud.

It is hard to imagine how little old Instagram could be worth such a huge fee, especially considering more established players such as Flickr were bought for a fraction of the price.

Instagram’s fundraising history started with a seed round of $500,000 and continued with a Series A funding worth $7 million. Rather peculiarly, the smartphone app creators closed a fresh $50 million round a week before Facebook made its swoop, when seasoned campaigners including Silicon Valley-based Sequoia became involved in a deal which valued the business at $500 million. Doubling up in the space of seven days is not bad work if you can get it.

With the ink barely dried on the Instagram deal, Irish bookmaker Paddy Power is taking bets on the social media giant’s next target, with phone location service Foursquare favourite at 4/1.

Foursquare is closely followed by 9/2 offering Evernote, a note taking app, and web-based file hosting platform Dropbox at 5/1. Longer odds can be found for the better known YouTube, MySpace and Friends Reunited, possibly worth a flutter at 40/1.

Only time will tell whether this deal represents a flash in the pan or marks a resurgence in the animal spirits that marked the first dotcom boom. Either way, it will be fascinating to see whether Instagram repays the big dent it is sure to make in Facebook’s profits.

Hunter Ruthven

Hunter Ruthven

Hunter was the Editor for from 2012 to 2014, before moving on to Caspian Media Ltd to be Editor of Real Business.

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