Is Instagram’s $1bn valuation evidence of a new tech bubble?

Posted by on May 2, 2012 @ 8:50 am

Is Instagram’s $1bn valuation evidence of a new tech bubble?

That’s the question that was on everybody’s lips last month: $1bn for 12
engineers and 30m unique users? You must be joking! Clearly the bubble is back!

As Facebook signals it intends to “own” Social, Instagram is worth 1% dilution

It seems that Facebook’s founder took the view that Instagram was worth a 1%
dilution, currently worth $1bn and likely to grow as Facebook’s value grow
further. With the Instagram acquisition, Facebook is betting that the future of the
web is social, mobile, and about “user engagement” with photography sharing at
his heart.

Facebook has the best dataset to understand how mobile is the new growth
driver and how pictures engage people like no other content. Instagram does this
very well, having kept its app extremely simple with a very lean team (4
employees to 4m users, 12 to get to 30m), unlike Facebook's clunky and over-
featured mobile app  As the web goes mobile, this bet makes total sense in view
of the ambition, scale and financial resources of Facebook, who signals that it will
move aggressively to acquire new social platforms that might threaten its
dominant position.

The world is going Social, and investors are buying into it, selectively

We are only at the beginning of the social media revolution, and the imminent
Facebook IPO will be an extraordinary milestone. Facebook’s usage and financial
data will become public, showing the world its massive scale and exciting future
prospects.  But its purchase of Instagram, which has yet to turn a profit, has
correctly prompted much talk about a new technology bubble, reinforced by
Facebook’s current extraordinary valuation.

There are few companies in the Social space that are building high-growth,
highly differentiated businesses and that are currently similarly “pricey”. These
are typically “winner-take-all” players, with strong underlying businesses. Some
of them went public very successfully over the past few months. In absence of
profits, we look at their current revenue multiples: consumer Social companies
such as LinkedIn and Yelp trade at 14x, and Enterprise Social companies like
BazaarVoice at 10x and Jive at 16x, with billion Dollars valuations. While these
valuations are rich, even on a growth-adjusted basis, they reflect the fact that
each is a clear leader in its large market and accordingly deserves a premium
valuation. In parallel to this, there is ample evidence that the market is not
awarding extraordinary valuations to anything “technology”. Large Internet caps
(Google, eBay, etc.) are trading below 9x 2013 EBITDA for instance. While
healthy, these multiples are not extravagant and we are very far from the IPO
bubble of the late nineties where anything vaguely “.com” was valued

Get ready for more, Social and Mobile are amazing platforms to build
businesses, faster than ever before

The acquisition of Instagram reflect the fact that Facebook is an extraordinary
company, changing the way we live, building a phenomenal online advertising
powerhouse and offering a new platform for others to leverage. We have
embraced Social as an investment theme at Advent Ventures, with great success.
Across our portfolio, we see how Dailymotion has grown tremendously on
Facebook adding 30m users thanks to their Facebook App within weeks, how
Zong has built a mobile payments business via powering “Facebook Credits” or
how Vitrue enables global brands to leverage Facebook as a key marketing
channel. The future is Social, the future is Mobile, and we see Instagram and
Facebook as early pioneers of the networked revolution. Much remains to be
created and we would expect many more billions Dollars Social companies to be
invented, built and sold, faster than ever before, more capital-efficiently than
ever before. Stay tuned.

Frederic Court is a General Partner at

He can be followed on @fcourt

This article was written for Private Equity International – May 2012