Instagram and Facebook: Inside The $1 Billion Deal

The paradigm shift in what we sociologically consider a “friend” and community received considerable focus this past week.  As Facebook consummated the acquisition of Instragram for $1 billion, it reinforced the value of community building.  The unanswered question is how does a company with 13 employees in a time frame of 18 months with no revenue stream create value?  The answer lies in the power of the value proposition that Instagram created.  Let's take a closer look at what Instagram offers with a community of 30 million users and why it is so important to the world’s largest social network.

If we look at the positioning of Facebook in the social media sphere, you see the world’s largest network with many good features and a constant effort to improve intuitive user engagement.  Even with 850 million members there is always a way to find a better experience.  The sheer size of Facebook’s operation does not allow for dynamic changes that avant-garde early adopters demand.  This vacuum creates opportunities for small tech companies like Instagram that are able to create and deliver a unique application.  In the case of Instagram, the value proposition of a mobile interface that allows users to “filter," enhance and share pictures over multiple social media platforms proved quite valuable.  Who knew that adding an artistic blurriness with a touch of yellow and beige to photo that I share with my “friends” would generate this amount of attention (I am referring to the Instagram "filter" Earlybird) 

From a competitive analysis lens it is understandable why Facebook highly valued Instagram.  Although the acquisition may be reactive and the price carried a premium, the benefits to Facebook will be both immediate and tangible.  Since photo sharing is such a large component of the social network and as this content increasingly shifts to the mobile platform, Facebook wants to make sure they are strategically positioned to deliver the best possible engagement.  With the purchase of this asset Facebook not only buys a community of 30 million users but it further monopolizes the photo sharing category as it prepares to compete for market share with upstart Pintrest.

How this ties to local business in Skokie

The case of Instagram shows how entrepreneurs need to build their community of users/customers as this becomes your biggest asset.  How do you put this into practice for your Chicagoland based business?  Here are a few steps Instagram mastered:

1.  Define your expertise and create skills that positively affect user experience.  For an independently owned business make sure when the customer leaves your establishment, they are bound to come back and can't live without you. In turn this person tells friends and family, thereby sowing the seeds of an organic vibrant community.

2.  Continually prototype and accept constructive criticism on your venture.  Instagram’s CEO Kevin Systrom not only narrowed the capabilities of his application but he continually beta tested it on friends and socially influential users until he found the right mix of features and benefits.  Remember as an entrepreneur we cannot be all things to all people.  A highly specialized niche is the proper strategic position.

3.   Finally, stay engaged with your community.  Make use of resources like Skokie Patch and other forums to inform and show that you are thought leader in your field.  In addition share your experience building your venture as a great narrative is one of the best sales tools.  Everyone loves a great story.  

So there it is, friendship, community building and massive wealth in three easy steps.  As you move forward seizing opportunity and creating value just remember your old friend blogging from a basement in suburbia.  I always knew you could do it, please let me know when you get to the promised land.

Benjamin Goldman
The Economic Dilettante
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