How To Make An Insta-Billion

So I’m sure most of you have heard of Instagram and its recent sale to Facebook. Now if you’ve actually used Instagram, you’d know that on the face of it the technology behind it isn’t exactly ground breaking. One could essentially summarize it as a picture version of twitter with a collection of hipster photo filters. Some of you might be thinking “Damn why can’t I get Zucky to hand over a cool billion”. Well I don’t want to dash anyone’s dreams (you never know, you might just make it), but here’s why you probably won’t.

First to Market
If you did it first, chances are you’re probably going to get the bigger customer base and have more success. Granted this isn’t always the case. Google ousted Yahoo and Facebook did the same with MySpace, but in general arriving to the market second is a huge disadvantage. Especially when it comes to apps or websites that have a social network aspect, a critical mass is needed to make the experience what it is  and if a user is guaranteed that experience elsewhere, there’s no need for them to use your product. A classic example of this is Google+ . I’m afraid it was just too late to an already overly saturated market and it just never really reached an acceptable critical mass to really go anywhere.

App Stores are Hard
People are tighter than Ebenezer Scrooge when it comes to opening their purse strings or even trying something free when it comes to mobile application stores. No one wants to try an un-tried and tested application, let alone pay money for it. In general if you don’t see at least 20-30 ratings and 1000+ downloads on an App you don’t give it the chance of an install. So once again a critical mass is needed here.

Now I’m quite saddened to report that this phenomenon is worse on Android than iPhone. We’ve released identical applications in price and function on Google Play and on the App Store at my place of work and every time, we see the free and paid versions being installed at a much higher rate (5x-10x) on the App Store than on Google Play. This might simply be because of volumes of users, but based on the reported handset numbers, the real reason is probably demographic related, ie. Apple users are probably a bit more app crazed than android users who probably just use the phone for its more basic functions.

It’s a Long Hard Road to Revenue
Many people are probably wondering why is Instagram worth 1 Billion. Well the short answer to that question is it probably isn’t. The manner in which technology companies work might actually surprise many of you. Most technology startups don’t make money. If anything they burn through it faster than a wildfire in the bushveld. Where do they get all of this extra cash? Well quite simply they get investment from venture capitalists. A venture capitalist is a rich person who basically throws a lot of their money away to try and make more money. They put in the cash and get out shares in private startups. If the startup flops, their money is gone. If the startup succeeds they’ll make their money back and probably make a LOT more on-top of that. But for the first few years of a tech company’s life they make no money, they just pay out huge salaries. Eventually they go to market with a product. In the case of Instagram, not a single US Dollar has most likely been made … yet. But they have a huge user base and that’s what scared Facebook into buying them. This is actually the dream right here, they basically never had to even figure out how to monetize Instagram, they just needed to build it with the idea of it being valued at more than the money that got put into it and subsequently get bought at that value. How Facebook plans to monetize Instagram without crippling it is a mystery to me. At the end of the day one either gets users to pay or you use your users as a product to sell to companies (eg. advertising revenues). Both of these avenues affect user experience and will most likely curtail use.

That’s about all I have to say on the matter. If you really do think you have a good startup idea you can always try and get some ad-hoc venture capital funding on Kickstarter. You never know, you might be the next Facebook acquisition.