Kevin Systrom: Having His Cake and Eating It Too?

By Sarah Lacy , written on April 9, 2012

From The News Desk

In case you haven't seen the news, Facebook has bought Instagram for $1 billion.

Today is clearly a good day to be Kevin Systrom, the people who chose to back Kevin Systrom, and the people who chose to work with Kevin Systrom. It is one of those days when you get the payback of all the doubt and sleepless nights of being an entrepreneur, when you get to reward people handsomely for believing in your vision and know that the people who hated on you regret it.

But no doubt the last few months of Systrom's entrepreneurial journey were some of the hardest.

We heard from a good source that around the time of South by Southwest, Systrom was agonizing about whether or not he should sell to Facebook or raise a round of capital. He was, no doubt, getting heavy lobbying from powerful forces on both sides. Few apps ever take off the way Instagram has. All of Sand Hill Road's investors, save those already in the company, would have wanted him to go for it and grab their own piece of the ride. On Facebook's part, one of the reasons that Facebook tends to win a lot of acquisitions -- money aside -- is that Mark Zuckerberg personally takes time to sell the deal to them. If he does this on a measly acqui-hire, think of the lobbying guns that were rolled out to get Instagram.

A lot is being made of the price, but the issue wouldn't have been how much money was going into Systrom's pocket. Instagram is a hot enough company that investors would have been willing to give him and his small team any sort of liquidation he wanted, while still hanging on to his shares and letting part of the bet ride.

At issue was this: Systrom didn't start Instagram as some sort of hobby. Unlike a lot of product oriented founders, he wanted to build a business. He and I talked about this on stage at last month's Business Insider conference. And, having heard reports of his agonizing with this decision, I asked him backstage whether he meant it. I'm not going to repeat what he said, but I came away convinced. I don't think Systrom went looking for this.

Reading the tea leaves of the deal terms, you can see that Zuckerberg had sought to address this fact. Zuckerberg is known for having singular control over everything product-wise at Facebook -- he would not have agreed to let Instagram be a standalone app otherwise. Much is being made of the price tag, but this term of independence was clearly Systrom's real price. And that's likely the reason that the company was continuing to negotiate a huge venture capital deal at the same time. Systrom was only going to do this deal, if the terms and the price simply could not be declined.

Of course, Silicon Valley has a mixed track record of sticking to promises of independence. But I bet Zuckerberg does. And I think $1 billion is the right price, oddly enough. This always puts people in fits, but the reality is that when it comes to a fast growing company, the math isn't about revenues or even near term revenue potential. It's about how badly the acquiring company needs or wants it.

This was a cash and stock deal, and poised before a $100 billion IPO, Facebook's stock is essentially monopoly money at this point. $1 billion is a rounding error, but it's a rounding error that allows Facebook to do three things: Re-boot photos, a process which has always been the core of the social network's glue; take out a potential competitor, since Instagram was increasingly viewing itself as another social network; and most importantly, keep Instagram out of the hands of Google or Twitter. For $1 billion of Facebook's stock currency, all of that was a bargain.

Instagram captured lightning in a bottle. No one can explain why it has taken off so much bigger than other photo apps, but it did. Even in the Valley, few things take off that fast with such a small staff and seemingly little effort. It reminds me of YouTube, but without the bandwidth and piracy implications, of course.

And like YouTube, I think Systrom did the right thing in selling. I say this about very few companies. The only ones I can remember in the fifteen years I've covered startups are PayPal, because so much of its business was over eBay anyway; YouTube, because of major costs and risks, with no clear monetization; and Macromedia, because of its uncanny fit with Adobe's creative software, with little overlap.

And it's not just that no one knew how Instagram was going to monetize. The right answer may be that it shouldn't be immediately monetized. Facebook doesn't monetize photos directly or the newsfeed or events or many of its most valuable features. This may be a rare case where they beauty of Instagram gets preserved under a cash-rich parent who gets value from its sheer existence and engagement.