Speculating on a tech bubble is a bit like shooting craps: Just because the odds are there, doesn’t mean you’ll be right. As the economist John Maynard Keynes famously put it, “The market can stay irrational longer than you can stay solvent.” Which is why we won’t just come out and say there is a tech bubble; however, the recent sale of Instagram to Facebook for a cool $1 billion certainly portends an era of magical thinking — the popular photo taking and sharing app was around for just shy of two years before it got gobbled up by the monolithic social network, despite currently generating exactly no money. We know that Zuckerberg and Co. paid top-dollar for Instagram’s cultishly devoted user base, which is just waiting to be monetized, as well as to quell a fast growing would-be competitor — in other words, out of fear. But to truly get a scope of the size of the deal, one must look no further than to one of the first venture capital firms that put up seed money for Instagram: VC firm Andreesen Horowitz’s original $250,000 investment is now worth $78,000,000. Yes, that is 78 followed by six zeroes, or 312 times its initial investment.
The news comes by way of Andreesen Horowitz general partner Ben Horowitz, who was criticized in The New York Times last week for failing to double-down on his firm’s initial investment in Instagram — a decision that left gains in the order of hundreds of millions of dollars hanging in the air. As competing firm Baseline Ventures upped its $250,000 seed investment to more than $5 million by the time Instagram was bought, historically aggressive Andreesen Horowitz — early backers of silicon valley blockbusters such as LinkedIn, Skype, and Twitter — instead opted to hold back. Baseline’s cut of the deal is now estimated at over $300 million.
You see, in the majestic land of the tech startup, VC’s lavish absurd amounts of money on skilled programmers based on little more than interesting ideas and casual conversation. In fact, one VC gave up that first $250,000 to Instagram even though the company “hardly had a product, let alone a PowerPoint presentation,” according to The New York Times. Indeed, when the first round of investments went out, including Andreesen’s investment of a quarter million, Instagram was actually known as Burbn, and it was a glorified Foursquare knockoff. But Instagram founder Kevin Systrom pivoted midway through development after taking on co-founder Mike Krieger — as startups are wont to do — and quickly reshaped the company as a photo sharing app, the aspect of Burbn that seemed to be attracting the most avid users.
The problem was that Andreesen had already made a rather large investment in a competing photo sharing app, called Picplz, and the conflict of interest caused the firm to sidestep any further investment in Instagram. As The New York Times writes, “It was a calculated bet against Instagram and it left Mr. Systrom livid.” The important point to note, however, is that the decision to forego further investment in Instagram was in fact a moral one. Andreesen actually gave back rights to purchase more stake in Systrom’s company, and completely free of charge — even though it had no legal obligation to do so. It simply felt that funding two competing companies was a disservice to both parties (because really, startups are a zero sum game when they really become successful) and it had already committed to Picplz. History, of course, has shown that Andreesen indeed backed the wrong horse: Picplz struggled to amass 100,000 users in its first 6 months. Instagram, on the other hand, currently boasts more than 30 million users; the app added 100,000 users in its first week. But calling a $77,750,000 profit a mistake just shows how completely wild the VC business has become — that’s a mistake we’d be happy to make.
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