It is now two and a half weeks since Facebook announced its $1bn acquisition of Instagram yet people are still talking about how and why such a young startup with no revenues achieved such a high valuation. I have written previously about the why (Facebook wanted to protect their valuation at IPO and $1bn isn’t a big figure in the context of a $100bn+ market cap) and this morning there is an interesting post on Venturebeat which gives good insight into the how.
If the gossip and rumours are to be believed Instagram employed two pretty standard tactics to maximise their valuation on exit.
Firstly they used a venture capital round to induce Twitter to make an offer, and then they took that offer to Facebook and doubled their valuation.
There are elements of this that every startup can learn from.
- If you have M&A discussions that are not moving forward as fast as you would like then raising a round of venture will force the potential acquirer into making a decision. They will know that once a round is closed the valuation required to get a deal done will likely have to go up in order to satisfy the new investors, and so if they want the company they will get off the pot and make an offer. According to Venturebeat Instagram had been talking to Twitter for some time but didn’t get an offer until their venture deal was about to close.
- Fear and competition are important driers in M&A and it is often the case that market leaders only become interested in buying startups when they learn that one of their competitors is close to making an acquisition and start to fear for their market dominance. Photo sharing is at the heart of Facebook and they are vulnerable on mobile. It is easy to see how the combination of Twitters strength and Instagram’s coolness might trouble them.
The final thing to note is the obvious point that these strategies only work if the startup is highly desirable. Instagram was hot enough to be wanted by Twitter, courted by venture capitalists, and scary to Facebook. Most startups don’t get that lucky, and it is important to be realistic about potential exit valuations and whether the company is special enough that acquirers will enter into a bidding war.