Ask HN: Why did Instagram need to raise $57M?
I'm having trouble getting a good answer as to why Instagram found it necessary to raise $57M? Please enlighten me.
6 comments
It's the VCs that make the decision to pump that money into a company like Instagram. They do it for only two big reasons:
1. Align the interests of the founders with that of the VCs.
How else are you going to convince the founders to "swing for the fences" (read: IPO or $1B+ exit) except to let them take a large chunk of money "off the table" now?
Any company as hot as Instagram is getting offers for $100M+ acquisitions on a regular basis. That would likely mean $10M+ for the founders. It's just not rational to pass up a personal windfall like that unless you're already very very wealthy.
The neat thing is that VCs have solved this problem. In the past few years it's become common to let founders sell some of their equity for $N millions when they've reached a certain level of success.
Once the founders have banked millions of dollars they start seeing things from the same perspective as VCs. It's completely rational for them to attempt world domination. Instagram would have eventually tried to threaten Facebook's position. Had they succeeded they might have ended up with $20 billion (like Zuck). They also might have ended up with nothing.
2. To fund expansion.
You can't plan world domination if you don't have the servers and manpower to attempt it. Servers and datacenter space are expensive. Employees are even more expensive.
1. Align the interests of the founders with that of the VCs.
How else are you going to convince the founders to "swing for the fences" (read: IPO or $1B+ exit) except to let them take a large chunk of money "off the table" now?
Any company as hot as Instagram is getting offers for $100M+ acquisitions on a regular basis. That would likely mean $10M+ for the founders. It's just not rational to pass up a personal windfall like that unless you're already very very wealthy.
The neat thing is that VCs have solved this problem. In the past few years it's become common to let founders sell some of their equity for $N millions when they've reached a certain level of success.
Once the founders have banked millions of dollars they start seeing things from the same perspective as VCs. It's completely rational for them to attempt world domination. Instagram would have eventually tried to threaten Facebook's position. Had they succeeded they might have ended up with $20 billion (like Zuck). They also might have ended up with nothing.
2. To fund expansion.
You can't plan world domination if you don't have the servers and manpower to attempt it. Servers and datacenter space are expensive. Employees are even more expensive.
To prove their valuation and get a stronger hander at the negotiation table. Many companies raise money not for capital investments, but for:
a) create news and get free PR (press loves such eye-popping numbers)
b) get higher valuation numbers that will motivate the employees more (they have the stock options after all)
c) get more powerful/influential shareholders who will help clear the hurdles in the company's way
This is not exactly how capitalism is supposed to work - capital has to be used judiciously to build future growth.
a) create news and get free PR (press loves such eye-popping numbers)
b) get higher valuation numbers that will motivate the employees more (they have the stock options after all)
c) get more powerful/influential shareholders who will help clear the hurdles in the company's way
This is not exactly how capitalism is supposed to work - capital has to be used judiciously to build future growth.
It's likely that they were already in the process of closing the round (i.e. had signed some term sheets) prior to having the acquisition conversation with facebook. At that point they probably were legally bound to close the round prior to the acquisition (and is likely a reason the company went for such a high price... the investors wanted to at least double their money).
To build a perception of value. An investment of $57M allows an argument to be put forward that the company value is $1B.
mark suster wrote a good post on this: http://www.bothsidesofthetable.com/2012/04/14/dont-try-to-pu...