Mark Evans

Don't get carried away by Facebook-Instagram megadeal

Special to The Globe and Mail

A photo illustration shows the applications Facebook and Instagram on the screen of an iPhone in Zagreb April 9, 2012. (ANTONIO BRONIC/ANTONIO BRONIC/REUTERS)

At the height of the dot-com boom more than 10 years ago, valuations were insane as investors clamoured to get a piece of the action.

But what happened earlier this week when Facebook acquired Instagram for $1-billion (yes, that’s $1-billion) puts valuations in a completely different stratosphere.

You have to keep in mind that Instagram is a 13-employee company without a business model. Of course, Instagram is also growing at a tremendous rate, having doubled the number of users to 30 million from 15 million in the past four months.

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If you’re looking for more eye-opening numbers from the Facebook-Instagram deal, consider this: Instagram chief executive officer Kevin Systrom’s stake is worth $400-million, while the company’s dozen full-time employees will split $100-million.

While the media and blogosphere were overwhelmingly positive about Facebook’s decision to acquire Instagram, it should not take away from the reality that the valuation is astronomical by any measure.

There is no doubt that Facebook could easily afford to buy Instagram, given Facebook is worth about $100-billion. Meanwhile, GigaOm’s Om Malik suggested the big reason Facebook bought Instagram was because Instagram was a huge threat to Facebook’s photo-sharing service.

At the same time, however, a question that will probably be asked is whether the Facebook-Instagram deal is a sign the high-tech market is becoming too frothy.

While the investment landscape in Canada is still far from robust, it is a different story south of the border, where valuations for startups are getting higher, while investors are anxious to take equity stakes in startups that look promising.

For the optimists, the Facebook-Instagram deal is a huge positive because it provides more ammunition for entrepreneurs and investors to start and finance startups. The pessimists, however, could easily see indications that things are getting out of hand.

In some ways, the high-tech market today feels different from 1999-2000, when companies with little or no revenue were successfully doing IPOs, with little or no scrutiny.

These days, the IPO market is nowhere near as active. Instead, it is the big boys – Google, Facebook, AOL, Microsoft et al – that are snapping up startups and, in some cases, competing for them.

But it’s difficult not to get the feeling that the market is getting overheated. When you have a small company purchased for $1-billion, it is hard not to think otherwise.

So what’s the lesson for small businesses?

While mega-deals are sexy and attract a lot of attention, it is still important to build a business that generates sales and profits. Entrepreneurs need to focus on creating businesses that sell products or services that customers want to buy. This will help their business survive and thrive if the over-heated financing markets plunge.

You may not have 30 million users such as Instagram but you will have a business with a solid foundation.

For investors, the key lesson to be taken from the Facebook-Instagram deal is not to get too carried away.

Special to The Globe and Mail

Mark Evans is the principal with ME Consulting, a communications and marketing strategic consultancy that works with startups and fast-growing companies to create compelling and effective messaging to drive their sales and marketing activities. Mark has worked with four startups – Blanketware, b5Media, PlanetEye and Sysomos. He was a technology reporter for more than a decade with The Globe and Mail, Bloomberg News and the Financial Post. Mark is also one of the co-organizers of the mesh, meshmarketing and meshwest conferences.

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