How Instagram Managed to Snooker Facebook into Paying $1 Billion

The tech world was buzzing when it was revealed Facebook had acquired the hot photo sharing app Instagram for a $1 billion dollar cash and stock deal. Instagram has no ad revenue model, but its userbase has grown like a weed to more than 30 million users in less than two years.

Venture Beat describes what sources have told them how Instagram was able to double its offer to Facebook when it received a buy out offer from Twitter:

Twitter made a very real offer in the hundreds of millions of dollars range, according to two sources with knowledge of the deal. Twitter chairman Jack Dorsey, an early Instagram investor and a one-time avid photo-sharer, was said to be involved in all aspects of the deal. But Instagram shrewdly did not sign the term sheet, which would have bound it to a no-shop clause, and went ahead and closed its financing round.

This put Systrom in an odd — but useful — situation in which he had both the new funding and the Twitter offer still on the table. According to one source, Systrom went to Zuckerberg for a better deal and Zuckerberg bid just to block the Twitter deal.

Instagram co-founder Kevin Systrom then apparently leveraged this fresh offer to Facebook’s Zuckerberg, who then placed an offer only to block the bid from Twitter. Sources mentioned Zuckerberg acquired Instagram out of fear, as he apparently ‘lives in perpetual anxiety’ and did not want his competitor Twitter to acquire the photo start up.

The New York Times describes how the deal was entirely Mark Zuckerberg-driven. Also, Instagram had just recently been valued at $500 million based on a recent financing round:

Less than 24 hours after the ink dried on Instagram’s latest financing round — an investment that valued it at roughly $500 million — Mr. Zuckerberg placed a call on Friday to Kevin Systrom, Instagram’s chief executive, according to people with knowledge of the matter, who spoke on the condition of anonymity because the discussions were private.

Mr. Zuckerberg was blunt: Facebook wanted to buy Instagram. Over the next 48 hours, Facebook and Instagram hammered out the details for a $1 billion cash-and-stock deal, the social network’s largest acquisition to date, the people said. By the end of Sunday, the deal was done and announced the following day.

So Facebook buys Instagram out of fear it would fall into the hands of Twitter. For $1 billion. Now that’s winning.

[via Venture Beat]