Instagram is a free photo sharing application that allows users to take photos, apply a filter, and share it on the service or a variety of other social networking services, including Facebook, Twitter, Foursquare, Tumblr, Flickr , Foursquare and Posterous. The simple photo sharing app that doesn’t make a single penny revenue from consumers is closed to pick up another round of funding worth about $40 million, which will value the startup at $500 million, according to sources.
Are you kidding me?
Forty million dollars funding? What they want to do with it? Build app for Android, WP7, mac, Windows 8, Black Berry OS or even on Sony Playstation Vita? Do they really need 40 million dollars for this?
Sometimes, when looking at this number, most of us will feel ridiculous, why the hell a company with 13 employees needs 40 millions to operate?
Let’s breakdown some numbers
27 million users in 2 years. What does 27 million users mean?
- 5 times of Singapore population
- all residents in Malaysia
- 1/10 US residents
- if they are able to generate $1 from each user per day, they can generate $810m revenue per month (I know it is impossible)
Some interesting factors about Instagram:
- It is only available on iPhone (why it took 2 years for them to build an app for Android)
- It acquired 1m users in 3 months
- Kevin’s girlfriend built Lovestagram for Valentine’s Day
What $40 millions mean?
On the company’s side
- Basic salary of a software engineers in SV per month = $15k USD
- 13 employees = $195k per month and $2.34M per year
- Marketing expenses
- Let’s assume $2 millions per year (which is damm a lot for a startup)
- Server cost
- It shouldn’t cost a lot with Amazon ec2 or Rackspace, but still assume $0.5m per year.
Add up all together, it will cost Instagram $4.84m a year to sustain themselves. So, a $40 millions funding will able to sustain them for at least 6 years (let’s assume they will grow with more employees).
On the investors’ side
But, some other maths we have to do here, the money is not free, they have to generate more back for the investors or VCs.
- $500,000,000: Instagram’s current valuation
- Let’s assume a 40 PE ratio, given current market conditions.
- $12,500,000: the amount of profits that Instagram would need to generate, at that generous PE ratio, yearly, to make their half billion dollar valuation make sense. It is profit, not revenue, so it has to minus out all the expenses which is about 4-6 millions per year.
But, investors are not crazy, why it really worth $500M?
Even thought the app doesn’t have an ad program, there are currently a few ways brands are tapping into the app for some ad purposes. First, brands are using it to promote their products. For example, Burberry uses Instagram to share photos from its fashion show and repost its ads with some filter effects. Besides, brands can use Instagram as live coverage and publicity, as what sundance has done. Other than that, brands can organize Instagram-specific campaigns. For instance, Tiffany asked users to share love-themes photos.
However, just another company named Virtue, popped out from the tech scene and launched an Instagram “tab module” for brands to use on their Facebook pages, using Instagram’s API to automatically import a selection of pictures based around a specific tag and create albums.
My final thoughts
Be a platform, not a product
Instagram has such a high valuation now, they cannot be just a product anymore. They need to get out of just being a product, but a platform, which many companies are depending on them. Google, Facebook, and Apple all went from single products to a platform for many other companies.
Ask Google to acquire them
Maybe another possibility to get back the money to investors are to ask Google acquire them at a price of few billion dollars. But, maybe or maybe not, no one knows what Google is planning.
“The next big opportunity in display advertising.” ~Kevin Systrom, founder of Instagram