Instagram Won the Lottery
For every Instagram that sells for a billion dollars, an entire tech news industry exists to filter out the noise from hundreds of imitators trying and failing to do the same thing. It’s a sad story, actually. Well-connected companies can convince tech giants to salvage a losing operation. See: Google acq-hires half of Milk. The rest die trying.
As App Cubby founder David Barnard says, “the average tech entrepreneur doesn’t have VCs working backroom deals to get a potential loss acquired by a profitable company.” Instagram may have planned this exit from day one (after pivoting away from Burbn, anyway), but the argument stands. Building free apps with no revenue in crowded categories is a luxury for developers playing with other people’s money. In successful cases, users still stand to lose by having a beloved service sold out from under them, and most of the time, investors stand to lose much more than that.
@drance A friend once told me as soon as you have $1 in revenue someone can calculate a value. At $0 the value is unlimited. 1/0 = infinity.
— Mike Rundle (@flyosity) April 10, 2012
Here’s the latest example: There’s a new app that provides “a special place for you to be the real you.” It’s for sharing with trusted people, instead of sharing everything with everyone. You can share different things with your family, your coworkers and your friends, “like you do in real life, in intimate Circles.” No, not Google+. It’s Everyme, another app joining the gold rush.
Mobile-first social networking apps are selling for about a billion dollars to the likes of Facebook these days. The social network landscape is more or less cemented in place, but that’s exactly the problem for the dominant players.
Quick little startups like Instagram are beating Facebook and Google at their own game. It’s starting billion-dollar bidding wars just so Facebook can keep one upstart out of Google’s hands or vice versa. After all, despite throwing countless engineers and dollars at the problem, neither of them can build a compelling mobile client of its own.
So Facebook decided to buy the leader for more money than Instagram could ever have spent building itself. Gosh, do you think Everyme with it’s “Circles,” just like “real life,” might get Google’s attention?
Playing The Lottery
The common thread between all these trendy mobile-first social networks – Instagram, Path and Everyme – is that they’re free and have no meaningful revenue stream. Instagram’s investors made a pretty good bet that it would someday turn a profit by becoming a Facebook feature. But building an app is an awfully expensive lottery ticket.
This approach is anathema to app developers who just want to build their own businesses $0.69, $2.09 or $3.49 at a time. News like Instagram’s $1 billion payday always meets with incredulity among developers. “Sure, people also win the lottery,” said Barnard yesterday. “Build a profitable business, not a lottery ticket.”
The Valley & the Real World
“Building a business to be profitable is a different path than building to be acquired,” Barnard says. “Instagram may have never been profitable.” Self-sustaining businesses don’t have the luxury of burning cash to gather users and figure out a plan later.
“Building to be acquired might make sense in the [Silicon] Valley bubble, while playing with other people’s money,” Barnard says, “but I’d never risk my own blood, sweat and tears on something so risky.”
“I think that trying to emulate Instagram will lead plenty of potentially good businesses astray,” Barnard says. “In the real world, a profitable business is more attractive for acquisition, anyway.”
Lead image courtesy of Shutterstock, before being ruined in Instagram
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