Top 3 Lessons for Young Entrepreneurs from Instagram’s $1 Billion Sale : Under30CEO Top 3 Lessons for Young Entrepreneurs from Instagram’s $1 Billion Sale : Under30CEO
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Top 3 Lessons for Young Entrepreneurs from Instagram’s $1 Billion Sale

| April 19, 2012 | 17 Comments

When Facebook announced that it was purchasing Instagram for $1 billion, there was immediately a large scale outcry from seemingly everyone from entrepreneurs to loyal Instagram users. How does an 18 month old startup with 13 employees and zero revenue go for that kind of money? That was the question on everyone’s minds.

I’m not here to argue whether or not it was worth the money (it was), or if this is the start of the next tech bubble (it probably is) but I think it’s safe to say that as with any large scale success story, there are always core lessons we can learn from. As one of the best success stories of our generation, Instagram is the perfect case study for young entrepreneurs who want to know how they can break it big themselves someday.

Here are the top 3 lessons from Instagram’s $1 Billion Sale:

1. Act Small but Think Big

From the start, Instagram founder Kevin Systrom wasn’t shy about his large scale ambitions. In an interview with Time Magazine in 2011, he said he wanted to build a “social tool for social life on the go… we want to change the way people communicate and share in the real world.” There’s no doubting the fact that the Stanford graduate who had no experience running a company was determined and confident in his abilities.

What Systrom was shy about though, was scaling up his business operations. Unlike many other ambitious startups (who didn’t break it big), Systrom kept his organization lean and efficient. With only 13 employees, that’s a remarkable average of $76.9 million of value per employee. There’s no doubt Systrom could’ve gone out there and hired 25 more engineers, coders and marketers. But would that have increased Instagram’s $1 billion valuation? I doubt it. By keeping his company small and efficient, Systrom was able to focus on his core message without becoming a larger, less dynamic organization.

2. Build users first, worry about revenue later

This is tough to swing if you don’t have the capital or funding, but the core value remains the same either way. I don’t care what kind of business you’re running: you absolutely need a critical mass of users and followers. Whether you’re the new pizza shop in town or creating the world’s largest mobile sharing app, it doesn’t matter what kind of revenue you have today so much as what kind of loyal customer base you’re building. Without a loyal customer base, you’re dead in the water.

Instagram could have easily charged up to $5 a download for its iPhone app, and made a solid amount of revenue doing so. But was that in the best interest of the company’s future? No, and Instagram was well aware of this, which is the company decided to keep the app free. They knew that what was important wasn’t the revenue they were losing today, but rather the incremental value they were gaining with each additional subscriber. Without their critical mass of millions of users, Instagram never would’ve grown fast enough to catch Facebook’s eye and earn their $1 billion valuation.

3. Build an emotional connection with your audience

Hans Roxas-Chua, co-founder of the Internet and Mobile Marketing Association of the Phillippines (IMMAP), said that “Facebook didn’t seem to have that kind of emotional connection. It didn’t have the soul of Instagram,”. He noted that those who use Instagram take the time to get just the right angle and the perfect filter to capture the mood of the picture. In the end, they are more invested in the product. “It’s more emotional.” This is another lesson that is relevant to just about every business or startup.

If you aren’t able to create an emotional connection with your customer, whether you own a restaurant (see: McDonald’s) or a theme park (see: Walt Disney), you will have a tough time setting yourself apart from your competitors. McDonald’s excelled at creating a playful emotional connection with their Happy Meals, golden arches and toys. Similarly, Walt Disney was all about creating a strong emotional connection of magic and mystery with its theme parks and movies. Instagram was able to add emotion to a seemingly mundane and saturated space: mobile photo sharing.

While not every startup can reasonably expect to go from business plan to $1 billion sale as quickly as Instagram did, there are many things aspiring young entrepreneurs can learn from this. Overall, the core message is to stay ambitious, and know the value of what you’re creating, stay lean before you overextend yourself, and find a way to make a connection with your customer. Instagram succeeded at all of these things, which is why regardless of whether you believe it was worth the large sum or not, it was able to make it as one of the best success stories of our generation.

Does your startup have what it takes? Share your story in the comments below.

Puneet Lakhi is the Co-Founder of EntreRev.com, a fully functional young entrepreneur social network. EntreRev allows young entrepreneurs from around the world to share their startup ideas, activities and events, and network without the unrelated noise of Facebook or the stifling corporate atmosphere of LinkedIn.

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Category: Startup Advice

  • http://twitter.com/javivo Javier Duarte

    Love this article,  Thanks Puneet!

  • Colby

    Users first, revenue later is horrible way to start your business. It only works for a fraction of 1% of the companies that try to approach the market that way.

    Keep your vision big but DO worry about how you’ll make money. Many a fantastic product has gone away because the founders had no idea how to build a business, they only knew how to build a product.

  • http://EntreRev.com/ Puneet Lakhi

    Thanks Javier, I’m glad you liked it.

  • http://EntreRev.com/ Puneet Lakhi

    Thanks Javier, I’m glad you liked it.

  • http://EntreRev.com/ Puneet Lakhi

    Thanks Javier, I’m glad you liked it.

  • http://EntreRev.com/ Puneet Lakhi

     I definitely agree it’s a dangerous strategy, which is why I offered the disclaimer: “This is tough to swing if you don’t have the capital or funding” haha. Dangerous territory to stay in for too long  I’ll admit, which is why it helps to have VC funding and at least a long term revenue goal if you don’t have an immediate realizable one. I just think it’s better than going to the other extreme and trying just to make as much money as possible without trying to create a great and widely adopted product first. Facebook was the same, they were much better off worrying about creating a great product before they could make any revenue at all. If they worried too much about revenue in the beginning, there’s no way it’d be as successful as it is today.

  • http://EntreRev.com/ Puneet Lakhi

    Thanks Javier, glad you liked it. Check out EntreRev.com and follow me on twitter @EntreRev for more!

  • http://EntreRev.com/ Puneet Lakhi

    Thanks Javier, glad you liked it. Check out EntreRev.com and follow me on twitter @EntreRev for more!

  • http://www.facebook.com/profile.php?id=889370643 Tshimangi Mawela

    In addition to Colby’s comment, I would say you need to qualify the article. In my experience self-funding businesses (I am based in S.A. VC industry is non-existent) you will run out of money if you do not focus on generating revenue. I suppose the model works best for VC funded businesses…

  • Colby

    Tipping points really only matter in consumer-focused products. I’ve built a couple and I completely understand where you’re coming from – it’s exceptionally hard to do and growing your user base is of paramount importance.

    For the vast majority of business, though, that kind of focus is detrimental. Even if you are building a consumer product I’d argue that keeping an eye on possible revenue potentials (and exploiting them responsibly) will take you a lot farther than ONLY focusing on user acquisition. If you can find something that adds value to an ecosystem and users are willing to pay for it, even if you are far from your critical mass, you will have a better idea of how to effectively monetize your users as the product grows. 

    Path is a good example. They have more funding than you or I would know what to do with at the moment and yet they still offer paid camera filters. I’d hazard a guess that they are making at least some money off of those, or else it would be an easy engineering decision to drop them and free up resources.

    Your restaurant example actually proves my point rather nicely I think. They are willing to take short term losses to gain long term profits, but they are still making money (and focused on how to grow it) from the start. Can you imagine a restaurant that starts out charging absolutely nothing in the interest of getting in a critical mass of patrons so that they can perfect the menu? That would be Facebook style :-)

  • Colby

    Tipping points really only matter in consumer-focused products. I’ve built a couple and I completely understand where you’re coming from – it’s exceptionally hard to do and growing your user base is of paramount importance.

    For the vast majority of business, though, that kind of focus is detrimental. Even if you are building a consumer product I’d argue that keeping an eye on possible revenue potentials (and exploiting them responsibly) will take you a lot farther than ONLY focusing on user acquisition. If you can find something that adds value to an ecosystem and users are willing to pay for it, even if you are far from your critical mass, you will have a better idea of how to effectively monetize your users as the product grows. 

    Path is a good example. They have more funding than you or I would know what to do with at the moment and yet they still offer paid camera filters. I’d hazard a guess that they are making at least some money off of those, or else it would be an easy engineering decision to drop them and free up resources.

    Your restaurant example actually proves my point rather nicely I think. They are willing to take short term losses to gain long term profits, but they are still making money (and focused on how to grow it) from the start. Can you imagine a restaurant that starts out charging absolutely nothing in the interest of getting in a critical mass of patrons so that they can perfect the menu? That would be Facebook style :-)

  • http://www.punit.co Punit Shah

    Spot on in so many ways. What I’d caution entrepreneurs on is arriving at the middle ground, not enough users and no business model in hand to defend your efforts just because your aim was building up the product. If you don’t see rapid adoption of any iterations of your product, your user growth to critical mass will span longer than your runway and you’ll be stuck 25 miles out on the ocean without a paddle.

  • http://www.punit.co Punit Shah

    Spot on in so many ways. What I’d caution entrepreneurs on is arriving at the middle ground, not enough users and no business model in hand to defend your efforts just because your aim was building up the product. If you don’t see rapid adoption of any iterations of your product, your user growth to critical mass will span longer than your runway and you’ll be stuck 25 miles out on the ocean without a paddle.

  • http://www.punit.co Punit Shah

    Spot on in so many ways. What I’d caution entrepreneurs on is arriving at the middle ground, not enough users and no business model in hand to defend your efforts just because your aim was building up the product. If you don’t see rapid adoption of any iterations of your product, your user growth to critical mass will span longer than your runway and you’ll be stuck 25 miles out on the ocean without a paddle.

  • Rsfoskett

    Yes becoming an entreprerneur and how to fulfil that dream.
    Its often due to timing. Releasing a product into a market having been created for it and a fresh approach. But not evreyone has the benefit of going down the Facabook route.
    If you are a entreprerneur or starting a new business irrespective to what it is, fundamentally you need to form a business plan based around the product that you wish to take to the market.
    This will involve the costs involved to take it to market. What is the anticipated size of the market thay you have determined to focus on and what % will you need to grasp to gain revenue over a suitable period of time and what will the anticipated growth be in sales revenue.

    Now to drive forward with this and then grow the equity of ones company will typically require some form of finacial investment to keep the doors open. Its at this point that one would need to seek VC or AVC. But if you are able to show that your revenue stream is realistic in a timely fashion this will of course encourage the ivestment community and/or buy out cowboys.

    So do not throw caution to the wind, rather ensure that you tick all the boxes. Be practical solid and secure. Because it is just as easy to get it wrong as to get it right. Many have sought the path of wishing to become entreprerneurs and never made it. So I guess we should never forget the basic rules of starting that new business venture.

      

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