10 Lessons | $1 Billion Facebook & Instagram

It was the equivalent of a hurricane that hits a barn on a sunny Sunday spring morning without warning. It shook up the Startup world and has probably changed the ecosystem for years to come.

Monday night was when twitter suddenly started heating up with the news of Instagram being acquired by Facebook. The price tag was revealed shortly thereafter – $1 Billion.

Since then there has been an outpouring of disbelief, anger, frustration, befuddlement, confusion and lots of online petitions. Most people I know of are just plain angry at this development.

Its almost as if ‘yin’ and ‘yang’ decided to get together.

Facebook, the world’s largest and most profitable Social Media company, the ubiquitous factor (and sometimes determinant) in the social lives of millions of people, decided to snap up Instagram without the VC and Analyst community even getting a whiff of the deal. The deal may go down in history as one of the most secretive and probably the most expeditious for $1 Billion Dollars. The last time something like this happened was… er… never.

This deal is seen as over-priced for a startup. YouTube, Skype and a few others were and are also in the same league.

If you thought this post is going to be another digital hate rant, then I am sorry, you have come to the wrong place. I genuinely harbour no sentiments regarding this acquisition apart from abject envy for Kevin Systrom, CEO and founder of Instagram who, along with much of his 6 (or 13) member team, just became a millionaire.

And for what?

An app that turns your crappy iPhone (now android) pics into vintage hipster shots worth putting in art galleries.

I shall however try to explain, through this post, that this app is not just about crappy smartphone pics but much more. Hopefully, we lesser mortals may now learn what that ‘more’ exactly is thanks to Mark Zuckerberg spending a Billion Dollars.

 

10 Things that 1 Billion Dollars have revealed

Being Social is being Visual –This is something Facebook realised, pioneered and has possibly struggled against it since its inception. Remember how people suddenly went crazy sharing, tagging, untagging and commenting on pictures on Facebook a few years ago? The below infographic just shows how many pictures have been created, shared and finally stored thanks to FB. This underlines just how important it is ‘to be visual to be social’. Think about it. Our most social beings, in the offline world, are those who are also the most seen and most heard about. Before the internet came into being, being seen at the right places, with the right people and the right time was essential to increase your ‘Social Value’. Now transpose this concept to the ‘Online World/Social World’ and we see that similar dynamics exist. Your ability to be seen in the right way and at the right places ensures a certain ‘coolness’ to your reputation online. Suddenly when people see something they like, (a picture of a sunset, a party, a concert) they comment and this leads to a growth in Social reputation. Instagram is a mobile only social network for sharing kick-ass photos and hence increased the social reputation of users by making them seem cool. The fact that you don’t have to put actual hard work but just use simple filters helps!

What Mark Zuckerberg bought – It’s no secret that Facebook considers itself to be a ‘Design’ driven company. It is also no secret that they really suck at design. The Facebook app on my Galaxy Note sucks battery and has a number of features missing. The fact that a $135 Billion Market Cap (Some people value FB like that) social tech behemoth with thousands of employees and $4 Billion cash sitting in the bank can’t make a decent app is disturbing. It also means that while users are moving to the mobile platform for Social Networking, Facebook has stayed far behind. For that matter even LinkedIn doesn’t have a great app. But then again, most people who use LinkedIn don’t mind using it on their laptops or tablets as they see it as a business tool/network. So what exactly did Mark buy?

Largest photo sharing app in the world – 30 Million iPhone users and probably 6 million android users

Tons of Mobile buzz – 5 million android downloads in 5 days. 340,000 waiting list before it was launched.  

Mobile stickiness and pics – 1 Billion uploaded pics, 5 million pics uploaded every day

Startup – 2 years old and 13 employees

Monetization Strategy – None

Cash Flows – None

Consumer Love – Lots

Stickiness IS a business model – After the 2009 slowdown, a certain amount of much needed rationalization set into the startup world with startups defining revenues models, monetization plans and related issues at inception. Unlike before when startups with ‘cool’ ideas were funded only because they may eventually have millions of followers, VCs also became aggressive in their search for startups that made business sense. On the whole this made sense and lead to a tempering of the market. But this also might have led to ‘uncoolness’ across the startup landscape. With this acquisition, Instagram has shown that startups and VCs can expect to make a pot of money and cash out if their product/service has lots of users who swear by their name. Most importantly, if the product/service shows great ‘organic’ growth with lots of passionate following and evangelists, you are assured that people will be interested in buying you out. The reason is that with our society’s short attention span, consumption and gimmick driven worldview, to have a product/service with large, genuine and engaged long term following is a great asset in itself and this means much more than just a substantial place in the ‘Goodwill’ section of a balance sheet.

Social is now Mobile – This one is a no-brainer, but since many of us are devoid of suitable grey matter, I shall spell this one out. Social Networks need to have substantial and comprehensive presence on the mobile platform to survive. Over the last year I along with tons of my tech savvy friends, have moved our primary consumption of media (primarily articles, blogs, newspapers etc) from laptops to our mobiles. The young and the social tech savvy, thanks to BBM, twitter, whatsapp and ‘hyper-sms-ities’, feel comfy with this tech and drive the demand + consumption of social apps. The fact that laptop face time is reducing in comparison to mobiles, due to their ubiquity, makes the transition a pressing matter for social networks.

Google better watch out – Instagram has 1 Billion pics. But just try and Google one and you won’t find any apart from those which have been posted or reposted on blogs and pages. Not try googling Facebook statuses, pages, notes etc. Again nothing. This may not sound like much but the creation of these ‘walled gardens’ is really something that Google is very very concerned about. Their crawlers and search capabilities are kept out of the largest repositories of user created content… forever. It means that socially relevant content for you can never be accessed by Google. It also means that Facebook has now more eyeballs looking at more things for longer and hence more ad money. Oh! And it also owns all your content, pics, videos etc.

‘Frictionlessness’ is the Secret Sauce – Over the last few years this term has really come to define the core of many super-startups. I define ‘Frictionlessness’ as “Qualities and Features in a product/service that makes it easy to use, cool to own, efficient to run and requires the skill of newbie while bringing ‘sex’ (A term used by Steve Jobs for Apple products) to the entire experience of using it”. Instagram, Flipkart, Pinterest, Zappos etc all have this sense of ‘Frictionlessness’ which make them so wildly successful.

Below is what Instragram did for a crappy office Pic I took.

Ridiculous Money Ridiculously Fast – Not many people know that Instagram closed a round of $60 Million of funding, valuing the Startup at $500 Million… just 1 week back. What does this mean? Well it means that maybe Facebook got so jittery of Instagram’s success, especially after the Android release that they put in motion probably the world’s fastest acquisition deal put together at this Billion dollar level. It also means that the VCs who participated in the last round of funding for Instagram (Sequoia Capital and Greylock Partners) just made 2 times their money in one week since the Valuation went from $0.5 Billion to $1 Billion. Considering that they had just closed the round and probably hadn’t transferred the money to Instagram’s account (This is usually done in tranches or in blocks) they might have just made $100 Million for signing a piece of paper which says ‘Yo Dawg! We will fund you for $50 Million’. I wish they start teaching “Venture Capital” as a subject in school because it’s stupid to be an engineer or lawyer or an astronaut when you can double fictional money into real money by signing an agreement. I jest of course; these guys have made this pot of gold only after carefully curating a reputation over decades. The team of Instagram, which is 6 to 13 people depending whom you talk to, has also suddenly gotten a bunch of millionaires and the CEO Kevin Systrom has attained a place in Startup History for posterity. One must note here that while $1 Billion seems like a lot of money (Its after all Rs. 5,158 Crore) it also represents less that 1% of the market cap of Facebook and it actually a cash + stock acquisition. FB has $4 Billion in cash just sitting and making piddly savings account interest so this is not a bad deal.

Prepare for a Startup Boom! (And Bust) – This acquisition is like the gong at a gathering (or trumpet at an orgy) which sounds off the start of a great evening. Expect to see lots of first time and serial entrepreneurs rushing to make photo or social apps as targets for eventual acquisition. Also expect VCs to take the bait and deliver their freshly raised funds to the coffers of these startups. If history is anything to go by and due to reduced boom-bust cycles, I would start preparing for the bust cycle right now. For India however, I don’t expect VCs and entrepreneurs to start gunning for non-monetization business model startups. It just won’t happen. Not yet.

You don’t need to be an engineer/programmer by education– Instagram Kevin Systrom wasn’t a programmer by education but learnt it in his spare time in the evenings. This just goes on to show that you don’t need to brood if you missed the chance to go to an engineering college (I didn’t go to one and it hasn’t been a disadvantage in any way). It also shows that while there were better programmers out there, Kevin Systrom took a simple idea and made technology work for the user by making the experience ‘Frictionless’. Unfortunately most entrepreneurs are working on complex ideas which are further compounded by them expecting potential users to work for the tech they develop.

Facebook = Monster – Ok! Let’s get this clear. People hate Facebook despite using it all-the-time. Even the mighty Google is looked upon with suspicion but never hate. Apple is revered, LinkedIn is respected, Twitter is liked, 9Gag or Tumblr are heavily used and Instagram is adored. But Facebook is just hated. I have yet to come across more than 1-2 articles which rated this development as positive. And even those seemed as if they were pleading the reader to share their point of view. This is troubling for an organization which claims to want to change the world and is going in for probably the most anticipated IPO in the last 5 years. The forced ‘Timeline’ shift on profiles is the latest such change which is reviled and hated by users. Mark should do some soul searching, become a Buddhist Monk or get a new PR agency. I would probably recommend all three.

Things NEVER to Say at your VC presentation

Here is a list of things never to say during a VC Presentation

1. Everyone is our customer – This is never ever true. Figure out the Market Size and your customer demographics. Give numbers and a good idea of what your customer is like.

2. We will kill the competition – Yeah? Unless you are Rambo reincarnated as a scrappy Startup you won’t kill anybody. Facebook has taken years to ‘kill’ Myspace. Don’t say it because you can’t prove it.

3. We will win because of First Mover Advantage – It’s obvious you haven’t done your homework or been in the real world. This statement is inexcusable. Being a First Mover means you are developing the market, educating partners, customers, developing standards, making mistakes and hiring expensive manpower… all by yourself. Except for a few cases, this is not an advantage.

4. We want to grow from 1 store to 3 stores in 5 years – VC investors want you to think Big because they make money only when you grow fast and grow well. If your goals are modest, you will put them off because then even if its a sure-shot idea, it makes no financial sense to them.

5. Exit Strategy? Only IPO – A miniscule number of startups end up living through a public offering in the world. To bet that you are one of them, is going against probability. Even if in your heart you know that you will make it to an IPO (and gut instincts count for a lot) you should be able to underline viable alternatives to your prospective investors.

6. We need $10 Million…because it’s a nice round figure – Please tell them why you need the money, how much, when and what you want to do with it. Don’t just put it there because it looks good.

7. We will promote our product/Service using ‘Word-Of-mouth’ – No one has ever been able to control this force of nature called ‘word-of-mouth’. How can you claim to use it for your goals? ‘Word-of-mouth’ is the final result of your marketing/promotions, it is not a promotion activity in itself.

8. Customers will shift as soon as they see our cutting edge technology –Apple makes better laptops than most other players. So even though it is known and respected as such, you don’t see people dumping their netbooks/laptops in dustbins for the Macbook Air. It takes more than just a better mousetrap to get things going.

9. We are technical guys and we will hire people for sales after funding – If you aren’t doing selling on your own, you should plan on getting a senior guy as part of the core team to handle Business Development and Sales. However, if none of you takes ownership for sales in your startup, then investors will have a hard time figuring out how you plan to convert your product/services into hard cash.

10. We don’t have a product/service yet – Then don’t ask them for money. They want to see proof of concept. (Admittedly some angel investors and VCs might still invest)

11. We will start as soon as we get funded – An extension of the above statement. If you haven’t started then why will VCs invest on the basis of your Powerpoint Slides?

12. We have no competition – If you say this… Then you are an idiot. There is a famous example related to this statement. When the first Insurance company started working in India, they had ‘No Competition’. But then why didn’t they capture the market without any issues. Till date the Indian customer shies away from Insurance. The answer is because LIC had a big competitor. It was God. The customer’s intrinsic belief that God will look after him, negated the value of an insurance scheme. You always have competition.

13. 2 line definition for my Product? Ah… it’s a little more complicated than that – Albert Einstein answers this one – “You do not really understand something unless you can explain it to your grandmother”. VCs think of it in the same way. Customers definitely behave like Grandmothers.

14. I don’t really have a presentation ready but… So you aren’t prepared? Too bad. We may have still been interested had you just discussed the concept with us, but the fact that you aren’t prepared at all, puts us off.

15. We will keep our customer acquisition cost low by using Social Media – Social Media is a difficult to crack medium which has been capitalized by major brands like Axe, Coke, Pepsi etc who spend big dollars on creating great social media experiences. If you think its low cost, then you are going to be ineffective at best and shoddy at worst.

16. We have a better product/service because we sell it cheaper – Subhiksha sold stuff cheaper than other stores. Look what happened to them. You should be able to communicate Benefit and Value offered to your customer and to the investors. Just because you make a handbag which is cheaper than Gucci doesn’t mean it will sell better. Point – Don’t play on the price, but on the value/benefit even if it is related to the price.

17. We will outsource the (Core Part) of our Idea – That’s just dumb, you have to prove how you will own, grow and execute the core part not outsource it because it is painless. That’s like Apple deciding to outsource the development of the Mountain Lion OS to Infosys.

18. Our competition numbers aren’t relevant because we have a vastly different product – Your competition is always relevant in some way or the other. It’s only by using their numbers that you can build projections, costs, standards, salaries, market assessments. Not being intimidated is great. Not acknowledging or being aware is a sin.

19. We are infinitely scalable – Everything is infinitely scalable given the right resources. Just like how your foolishness is infinitely scalable with the right exaggerations. While your idea may be scalable because you have a web based business or a mobile app, you need to underline the related investments for that scalability.

20. Me Me Me Me Me… The best way to turn off VCs is to go on to monologue mode about yourself/your team and how you are God’s Gift to mankind. They are interested in you, but aren’t going to be partners in your endeavour to startup narcissism.

21. We don’t really understand the finances yet –Then be prepared. Don’t go in without the numbers. Hire a CA if nothing else.

22. Our Sales in year 1 will be $1 Billion. Why? Because its common sense – In the 1940s most Germans thought that they, the Aryan race, were the most developed race on earth. Why? Because it was common sense. Some things, which you may take for granted, may not make much sense to the VCs. Please backup whatever you state with plausible numbers and facts.

23. We only need your Money – That’s what Newbies do. Sure, you primarily need the money to make your Startup grow and prosper. But for VCs, many of whom expect to be in the thick of things, this is like a red flag.

24. Let me tell about how AWESOME the internet is – Don’t start off/bore them with the obvious stuff. They know that clean tech, internet, web 3.0, eCommerce, Mobile Apps, Cloud technology etc is hot and amazing. They probably know the contours better that you. Don’t waste their time or test their patience.

25. And as you can see on Slide No. 137… No point, they slept off/were brain dead by slide 15. Please follow Guy Kawasaki’s 10/20/30 rule.

26. I am sorry I am late – We are sorry we are no longer interested. (Please never ever be late, unless you lose your arm on the way)

27. This presentation will only take 10 minutes (and then go on to 90 minutes) –Be truthful in the real sense and don’t expect them to be comfortable with IST (Indian Stretchable Time).

28. I know Bill Gates very well – Don’t drop names. And if you know Bill Gates then ask him if I can get a discount on the XBOX 360. 

29. You Guys? No I don’t know what you (The VCs) are all about – Insulting. But more than that it shows you just aren’t aware enough or care enough to google them.

30. There are really no major risks here –Bullshit! In that case Banks should be running after you to offer loans. There are always risks and you should be honest enough to acknowledge them. The investors will find it difficult to trust you and your intelligence if you don’t.

31. As you can see on this slide… no… sorry it’s the other slide… – Major turn off. You aren’t prepared well enough.

32. Knock Knock…who’s there… – While a little humor is a great thing, especially for ‘bored-out-of-their wits’ investors/VCs, no one wants to invest in a Joker.

33. Excuse Me. I need to go pee – You will pay for breaking the momentum. VCs, due to their profile and time constraints have major ADD (Attention Deficit Disorder) issues.

34. Today we are here… to Blow your mind! – Even if you have that one Idea which will change the world, this statement ensures that VCs will no longer be surprised. So unless you have suddenly invented time travel, conducting safe nuclear fusion in your bathtub or have figured out what women really want, stay away from it.

35. Let us begin with the Definition of Marketing – No, this is not college, you don’t get marks for the definition. You get funding for changing the world. Keep it nice and meaty.

The Billion $ Startup Club

A lot of people keep asking me to put up a list of 1 Billion $ valuation startups.

I kept it pending for one of those days when I felt really lazy or had nothing interesting to write about.

Today I meet both conditions.

But I will still leave you with what it means to be ‘Worth’ 1 Billion Dollars!

 

A little Calculation

$1 Billion = Rs. 5000 Crores or Rs. 50,00,00,00,000

 

Valuation? 

Is nothing but the notional ‘lifetime value‘ of your startup, that the market/investors arrives at, based on various methods, at a particular time.

So the Valuation of a startup means ‘What is a startup worth?’

Basically if a company has $1 Billion valuation then it means that over the life of the company (based on present realities), investors and markets expect the company to generate $1 Billion of money for all its investors/shareholders in total. 

This theory fails in overheated or skewed public markets as there is a fair amount of speculation which pushes/pulls share prices and hence valuations are based on market sentiments and the need to make short term profits among other variables.

What does $1 Billion Valuation look like?

+

+

+

+

+

= $1 Billion in Collective Valuation

 

Below is a list of Startups which are worth a Billion Dollars (more or less, since relevant real time valuations are hard to come by) … and what they do. 

I have not added the usual suspects… Facebook, Twitter, Groupon, Linkedin etc. I think it is time we stopped thinking of them as ‘Startups’.

[Note -Business Valuation is considered by many as more art than science. This is especially true for Pvt. Ltd companies. For startups, despite what anyone might tell you, no rule of thumb exists and definitely no formulas. If valuations were art on canvas then startup valuations are most definitely done by Salvador Dali.]

 

Yelp is a user generated local reviews website which is hitting the market with its IPO in march with a $100 Million offering giving it a $778 Million Valuation. The site boasts more than 22 million reviews, 61 million monthly unique visitors and 529,000 business pages. The site has helped many small businesses gain traction online, but Yelp largely makes it money by selling ads to these local businesses.

 

AirBnb is an online service that offers people seeking rooms, lodging, vacation rentals and other short-term accommodations and matches it with rooms on rent, owned by people who generally aren’t professional hoteliers. The business really took off during the recession, as people started looking at renting out rooms in their homes, for extra income and travellers shopped for inexpensive accommodation. With 110,000 unique listings available in more than 13,000 cities and 181 countries, Airbnb offers the widest variety of unique spaces for everyone, at any price point around the globe. A great disrupter of the hotel industry, this one is poised to become a multi-billion dollar startup soon.

 

The guys who really popularized the concept of ‘checking-in’ and hence interacting with the environment using your smart phone. Facebook has since followed suit and this has led to considerable competition. It uses gamification heavily, by rewarding users with badges and mayorships for checking in at certain places. Places which partner with Foursquare offer users special offers and discounts. On June 24, 2011 foursquare raised $50 million on a $600 million valuation.

 

ZocDoc offers a convenient, free way to find a doctor and book an appointment instantly online. ZocDoc’s mission is to improve access to healthcare. The service currently offers patients the ability to book appointments with doctors and medical specialist in the US. Its website is attracting doctor-seeking browsers at the rate of 800,000 a month. The company has raised $95 million and has been invested in by some of the biggest names in the VC industry.

 

Spotify offers streaming music from major and independent record labels including Sony, EMI, Warner Music Group, and Universal. Users download Spotify and then log onto their service enabling the on-demand streaming of music. Its deal with Facebook has helped this Swedish startup take the music world by storm. Facebook integration is now compulsory for new accounts. Users can register either for free accounts supported by visual and radio-style advertising or for paid subscriptions without ads. It now has about 2 million subscribers and 10 million users and makes an estimated $100 Million +.

 

Storm 8 is the creator of role-playing games on iPhone, iPod Touch and Android. The company has more than four million daily active users and those 200 million downloads have are on over 58 million unique devices. It boasts of a number of top mobile game titles and one of the highest valuations in its segment. But what impressed me most was the fact that until recently THEY HAD NEVER RAISED ANY EXTERNAL FUNDING. It is now looking at raising $300 Million.

 

Square  is a startup service that enables anyone to accept credit cards anywhere. Square offers an easy to use, free credit card reader that plugs into a phone or iPad. It is on track to process $2 billion worth of transactions on an annual basis and regularly records over $ 10 Million of transactions over weekends. It now has over 8,00,000 merchants who use its service.

 

Gilt Group is a privately held company dedicated to providing its members with access to coveted fashion and luxury lifestyle brands at sample sale prices. Each Gilt Groupe Shopping Event is designer-specific and held over a one day period. The production team creates a short video reel to introduce each designer and brand to its membership. Membership is by invitation only. With revenues of $500 Million and a reach of over 90 countries, this is one of those startups which is bordering on becoming a behemoth. 

 

Dropbox is one of the super-startups of the Cloud Storage market. A simple, easy to use application for individuals like you and me, who want to have a folder which they can share with anyone, anywhere and at anytime. Used extensively in colleges, communities for sharing, editing and creating content with the simplicity of drag and drop function into the folder of your choice. Though valued at around $1 Billion many respected sources have speculated that the true valuation could be around the $5 – $10 Billion mark. It is estimated to have hit $240 Million in revenues in 2011.

 

Similar to Dropbox but meant for large organizations and companies. Box.net defines itself as a cloud storage and collaboration solution for enterprises. Just like Dropbox, it is based on a freemium model. Though it recently turned down an offer for acquisition which valued the company at $550 Million, most people feel that $1 Billion is a better estimate of what they are worth. Box.net currently has 6 million users and some 60,000 businesses employ its cloud-storage software, including 73 percent of Fortune 500 companies. To give you an idea of their ambitions, Box.net has openly been challenging Microsoft for domination of the Cloud Storage Market with a number of high profile deals.

 

Rovio is the company which made Angry Birds, also known as, the only reason why most would use a tablet.  Apart from the fact that it is one of the most paid for games on mobile app stores, it has had more than 500 million downloads till date, is now part of a Hollywood Script, has seen partnerships with Samsung and just turned down an offer from Zynga for $2. 5 Billion. That’s a lot of numbers for a company that makes games about birds with anger issues and green pigs who like eggs.

 

India’s most successful eCommerce startup. Though rumours of it being valued at $1 Billion have surfaced from time to time, most people agree that it still has a few more months of explosive growth to get there. Though by factoring in PPP (Purchasing Power Parity) it probably has hit the $1 Billion mark.

I don’t think I need to say more.

Klarna is one of Europe’s leading providers of payment solutions for e-commerce. It lets people pay for stuff they have bought online after receiving it from merchants and helps create a much more trustworthy environment for transactions. It already has 600 employees and clears $2.5 billion worth of payments from 6 million consumers across 14,000 merchants and has recently raise $115 Million in its pre-IPO round.