The sale of Instagram to Facebook
Instagram is an amazing story of how to value a business. It shows how the value of a business should NEVER be based on annual profit.
Business sale price example that ignores the profit
The founders of Instagram, Kevin Systrom and Mike Krieger, started a new business together in 2010 specialising in an app to help iPhone users share their mobile photos on social media sites. You probably know the App – Instagram became very popular, very quickly.
Instagram achieved fast growth but the App was free to download and generated no sales revenue and no profits. The development costs and continuing overheads meant that Instagram made continuous losses. Kevin Systrom and Mike Krieger, the owners of the company, needed backing from equity investors to keep going. By early 2012 they had secured fresh funding from investors who were prepared to value the business based on its future potential, not on its profit.
The founders of Instagram were building their business concentrating on the factors that Facebook would care about. That was their rare and unusual success. Most business owners don’t think about who their potential buyer might be as they grow.
Real example of business valuation price success
In April 2012, Kevin Systrom and Mike Krieger received an offer to buy their business from Mark Zuckerberg at Facebook. Instagram was just two years old and had made losses since it started. Incredibly, the real business valuation of Instagram was $1 billion. For an astute buyer like Zuckerberg the value of the business of Instagram was not a related to its profit.
Facebook was looking at the future business value of the company.
So how can you create a business worth $1 billion in just 18 months? The owners of Instagram concentrated on the key business valuation factors that Facebook cared about – and this allowed them to sell their company for its maximum value, and then some……!
Instagram is a lesson for all business owners on how to value a business at its maximum potential.
How to avoid buyers who calculate the value a business on profit?
Return on investment is the measure most buyers and their accountants use to value a business and it is the measure that most business owners choose to accept. They don’t have to!
The founders of Instagram created a compelling vision. Facebook was motivated by a strategic purchase of a ‘must-have’ business and valued Instagram as if it was buying the blueprint for its own future.
Create a future growth vision
Facebook valued three things particularly highly in Instagram: Firstly, big growth, with even bigger growth potential; Secondly, a way to stop Instagram from falling into the hands of a rival (Google); Thirdly, a gateway to enter the world of mobile phones.
Facebook valued Instagram as if it was buying the blueprint for its own future.
Avoid selling to a buyer who calculates the value a business based on profit.
Every real example of business sale price success is built on the same factors. It is absolutely vital to think like a strategic buyer. How does your business fit with their strategic goals? What makes your business a ‘must-have’ business?