Two weeks ago, Facebook acquired the photo-sharing service Instagam for $1 billion. After the initial exclamations of "wow" and "that's incredible", one could sense a palatable undercurrent of huge resentment in the air. Two more snot-nosed 20-somethings are now worth hundreds of millions of dollars for a business that's less than 2 years old, has 12 employees and produces absolutely zero revenue. For many of us, that's just plain wrong on so many levels, and it's worth taking a look why.
First of all, there's the whole "no revenue" thing. This company has absolutely no money coming in from its business -- that's nada -- niento -- nothing -- not a penny. To put it in perspective, Little Suzie's lemonade stand at the end of driveway selling a tasty beverage at 25 cents a cup is bringing in more money than Instagram, pigtails and all. Our whole capitalist system is built on the simple concept that you get money when you make money. Now there's all sorts of ways to make money -- some honorable (e.g., working manual labor), some fairly deplorable (did you see the last Transformers movie?) -- but regardless, there's something inherently fair about the idea that you have to generate money to get some back. Businesses that don't typically go bankrupt -- not win the $1 billion lottery.
Next, there's the issue of Instagram's actual product. The FAQ section of their website touts that they've invented a single app of "awesome looking filters" that can transform your photos to "professional-looking snapshots" which you can share "instantly" ("insta", get it) on multiple platforms and avoid "clumsy" uploading experiences (don't get me started on those clumsy uploading experiences). In summary, Instagram has basically taken technology that's been around for years -- photos, the internet, sharing -- and added some cool new functions. While I enjoy filtering my photos just as much as the next guy (and they are in fact "awesome looking"), it's not exactly ground breaking stuff -- like say Edison inventing electricity or Jobs the personal computer or Al Gore the internet. I mean take the venerable product Pop Rocks -- you put a bunch of tiny pebble-like substances into your mouth, add saliva and they make a crackling noise somewhat akin to the snap, crackle, pop of Rice Krispies. Now that person (or perhaps persons, it may have taken a team) seem a hell of a lot more inventive than the Instagram gang.
The fact that Instagram doesn't actually take in any money and doesn't quite deliver a "must have" product leads us to another annoying piece of information about this company -- how Instagram got its cash for its operations (certainly we're all painfully aware that "awesome looking filters" don't exactly grow on trees). The explanation can be easily found in the handy FAQ section of the Instagram website under "Who are your investors?". Apparently, Instagram raised $500,000 of "seed money" and then another $7 million of "Series A" from venture capitalist and "angel investors". A war chest of $7.5 million certainly seems more than sufficient to build "anti-clumsy" uploading devices and "awesome looking filters", not to mention maintain the members of this 12-person conglomerate in the life style they're accustomed (i.e., living in college dorms). In fact, it seems sort of irresponsible -- downright indulgent if you will -- given that their answer to the question of how they will make money is the financially tantalizing "we plan to experiment with different models". When people get a lot of money with so little substance, that kind of pisses us off. I guess that's why they call the financiers who give them the money "angel investors". [Zuzu Bailey: Daddy, teacher says, every time a bell rings an angel gets his wings (and Series A money)" Jimmy Stewart: "Attaboy, Clarence"].
Part of the reason we cringe at the windfall of the Instagram gang is certainly due to their young age. For people in their 40s and 50s who have been busting their butt for the last quarter century, it doesn't quite sit right when the sum total of work experience of Instagram's CEO consists of 2 years at Google plus an internship ("who ordered the tuna on whole wheat?"). That's not exactly paying your dues. The fact is that we expect people to do a little work before they make huge paydays. Now there are actually plenty of young people in their 20s and 30s who make a ton of money that we don't resent (I'm not referring to hedge fund managers, we totally resent them). Take young athletes, for instance. We don't bitch when they make millions for shooting a basketball, hitting a baseball or passing a football. In fact, we often revere their athletic prowess and marvel at their accomplishments. We know how difficult it is to be that good and these athletes have been working hard and making sacrifices their whole (albeit young) lives. By comparison, going to college and then stumbling upon internet riches a couple years later with a middling product just doesn't feel quite earned.
That said, there are people in life who get a huge windfall by shear luck that we don't resent. For example, we don't hate the people who win the mega millions lotteries. In fact, we love it when the group of schoolteachers or guys working together on the assembly line strike it rich. We feel they deserve it -- not because they produced something that merited the wealth -- but because they've previously paid their dues through their everyday jobs. We can rejoice in it for the simple reason that we too have been paying our dues year in and year out and feel that old fashion effort deserves a little miracle once in awhile (even if we know that odds are they will blow all their money by buying shit they don't need, lending to "long lost" friends and making really stupid investments). By contrast, the Instagram guys' shear luck doesn't feel deserved. They've won the lottery among thousands of internet startups who throw products against the wall to see what sticks but they haven't been at it long enough (18 months), paid their dues through a series of prior failures (it's their first start up) or been in the work force for any real amount of time (just a few years) for us to cheer their victory.
To top it all off, look at the recent capital raising history of Instagram. One week before its sale to Facebook, some venture capitalists invested additional money in the company based on a valuation of $500 million. Given that Instagram has a product that's less than revolutionary (that's being generous) and no revenue (and no idea how they will make revenue), it's tough to imagine what realm of reality that number was based on but certainly the deal involved a good dose of optimism (Instagram has 5 million daily users, maybe it grows to 25 million), fear (what if another venture capitalist makes the investment and they miss out on the next Amazon, YouTube or Facebook) and lack of real risk (it's not exactly their own money they're investing ). Astoundingly, less than one week after the venture capitalists' investment, Facebook decided that these guys were totally wrong and Instagram was in fact worth double -- not $500 million but $1 billion -- despite the fact that nothing earth-shattering developed over at Instragram during that one week period (like they discovered a cure for cancer or they replaced their "awesome looking filters" with some "really awesome looking filters"). Again, there's no doubt that factors at play were optimism (Instagram's audience could grow to 50 million daily users), fear (what if Google buys them first, overtakes us and makes us look like fools) and lack of any real risk (Facebook is about to go public so they could use lots of other people's money).
It's all quite astounding and it's the reason we look at the Instagram gang not as mavericks of business who have justifiably made a big score but as a bunch of kids who fell into a shitload of money and don't deserve it -- a group of Insta Punks if you will. Of course, just because we might rightfully resent their dumb luck doesn't mean the company won't turnout to be a huge success. They've already built a sizeable number of users and now that they're aligned with Faceboook and it's mega audience, their popularity and product will no doubt expand exponentially. If you've seen The Social Network, you know well enough that you don't bet against Mark Zuckerberg (notwithstanding his unique social graces). Still, we do have the right to hate it when the rules of success and riches are totally rewritten. That said, give the older generations a little time to adjust (or perhaps some friends and family stock in Facebook's new IPO) and I guess we'll get over it.
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