Facebook has just announced that it has acquired Instagram for approximately $1 billion in cash and Facebook stock. This was fairly shocking news to the industry as Instagram had just raised $50 million at a valuation of $500 million, which means the venture capital investors instantly doubled their money. The investment seems to have been aimed at driving up Facebook's valuation of Instagram. But is that valuation justified?
Instagram is the popular photo sharing app with 30 million iOS users, that was just released on Android, picking up another 1 million users on launch day. Looking at this trajectory, Instagram is well on its way to a 50+ million user base.
The Argument against Instagram
But even looking at these numbers, $1 billion is a lot to pay for a company with practically no revenues. And since there are no revenues, we cannot justify the valuation in terms of financial multiples. Even with a user base of nearly 30 million, the valuation comes out to nearly $33 per user, which seems like an awful lot.
In addition to the high valuation, some users seem to be alienated by the move and have started deleting their accounts. Granted, this is probably a very small proportion of Instagram's user base, but since the user base is all it has, it's worth mentioning.
The Rationale for the Deal
Even with these downsides, this deal holds significant strategic value for Facebook.