When Facebook paid $1 billion to acquire photo-sharing website Instagram last month, eyebrows were raised.
It seems that Facebook’s founder took the view that Instagram was worth a 1 percent dilution [Facebook having earlier been valued at $100 billion]. 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 (it moved from four employees and 4 million users, to 12 employees and 30 million), 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 irrationally.
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 30 million 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 of dollars-worth of Social companies to be invented, built and sold, faster and more capital-efficiently than ever before. Stay tuned.
Frédéric Court is a general partner at Advent Venture Partners and can be followed on www.twitter.com/fcourt