Six Pixels of Separation - The Blog
April 24, 2012 7:47 AM

The Next Billion-Dollar Startup

The truth about Instagram.

There wasn't a building high enough for me to jump off of when I first heard about Facebook acquiring Instagram for a billion dollars two weeks ago. I know that sounds extreme, but I'm honest enough to admit that I could not see straight for a couple of days post-deal announcement. It was nothing against Instagram (I love the app), it was the purchase price that made me all weak in the knees. While everyone is still wondering how the valuation of a twelve-person employee business, that hasn't been around for three years and has no revenue could go for that kind of whopping amount, many conspiracy theorists think that it's more of a Facebook play to prove to the market that if Instagram is worth a billion dollars, than Facebook must be worth (at least) one hundred billion dollars. Between us friends, just writing out sentences like that makes me feel like I'm typing a script for the next Austin Powers movie, instead of what I'm really trying to do: write a legitimate business blog post. Some may call it a bubble, others may claim that it's a gross over-evaluation... either way, we're now evaluating startups using the "b" word and that changes everything. Again.

If it happened to Instagram, the next logical business questions are...

  • Who will be the next startup to get that kind of deal going?
  • Will it be for more money?

Believe it or not, there is a laundry list of great, new companies who had very interesting valuations prior to the Instagram acquisition, but now they're looking prettier than ever. Companies like Rovio (makers of the highly addictive Angry Birds video game), Foursquare (the location-based mobile social network), Spotify (the socially-driven music streaming service) and even Airbnb (instead of staying at a hotel, you can pay to crash at someone's pad) could be next. While I like each and every one them (for different reasons)...

Here are four other hot startups that are more than capable of cracking an Instagram-esque sale price:

  • Square. While Square has over one hundred employees and is already valued at over one billion dollars, I've been smitten with this business since it was first announced. The company was co-founded by Jack Dorsey (known as one of the creators of Twitter) as a simple way for anyone to accept an electronic payment through their mobile phone, by either swiping a card through the Square card reader (which clicks into the headphone jack of an iPhone) or by manually entering the information through an app. I love their vision statement: no more cash registers. The company makes money by charging 2.75% on every credit card transaction. You could see how financial institutions, credit card companies or any company dealing in monetary transactions might find Square to be a valuable asset.
  • Pinterest. Out of nowhere, this social photo sharing site that allows users to "pin" visual content that is appealing to them, create their own "boards" to display those pins and share them, has quickly become the third largest online social network (beating out LinkedIn) and an online darling. Once the Instagram sale was confirmed, many figured that Pinterest would be next. The company, which just celebrated its one-year anniversary, was founded by Ben Silbermann and, according to Wikipedia, the site is managed by Cold Brew Labs and funded by a small group of entrepreneurs and inventors. If Twitter or Google are still steaming over not getting Instagram, Pinterest may be their golden goose.
  • Fab. Originally launched as the Facebook for the gay and lesbian community, CEO Jason Goldberg and Chief Creative Officer Bradford Shellhammer soon realized that Facebook is the Facebook for the gay and lesbian community, so they turned their eyes to social commerce. Fab is an e-commerce company that creates flash sales (usually only lasting a few days) of very modern and contemporary design items (everything from artwork and t-shirts to furniture and accessories). The company has received over fifty million dollars in funding from people like The Washington Post, Ashton Kutcher, Guy Oseary (Madonna's manager) and some of the valley's more impressive venture capitalists.
  • Path. Path's founder, Dave Morin, allegedly turned down a one hundred million dollar offer from Google before his mobile social network started getting the attention and users it is currently enjoying. Better known as, "what Facebook should be," Path is a mobile-only online social network for your true friends and family. The app actually limits the amount of people you can share your online journaling with to one hundred and fifty friends. Path's focus is on helping people build close, tight-knit social networks to deliver true value. Think of it as the social media version of "quality over quantity." With about a dozen employees, it's obvious how some of the more web-based businesses (Facebook, Google, AOL, etc...) would be enticed to acquire this company that understands how to help people connect through their smartphones. 

While many of these companies have raised enough money to put their valuations in the billion dollar-plus range, it's going to be an interesting few years as the general economy claws its way back to a sense of normalcy (hopefully), while these new, brash and unique digital business models unfold before our eyes. Who could have ever imagined a business landscape where a company of less than twenty-people, an Internet connection and a handful of MacBook Pros could have these types of engaged customers and these types of wild valuations?

Which new startups do you think have the billion dollar magic touch?

The above post is my twice-monthly column for the Montreal Gazette and Vancouver Sun newspapers called, New Business - Six Pixels of Separation. I cross-post it here with all the links and tags for your reading pleasure, but you can check out the original versions online here:

By Mitch Joel


Comments Comments Feed
  • Posted by Stefania
    Mitch Joel

    I think Pinterest is the next logical step. Although their traffic is slowing down somewhat, there are real monetization possibilities, and they are very niche in the attractive lifestyle market.

    Reply
  • Posted by Dorothy
    Dorothy

    What about looking outside the 'next social network' play? Or even beyond a consumer play? With blur Group we're changing both an industry - media - and running a different sort of business - so our Creative Services Exchange generates revenues, creates community, and then delivers significant benefits and changes the way business works. Watch how this pioneering b2b exchange model will drive blur Group into the billion dollar startup space.

    Reply
  • Posted by Vikram
    Mitch Joel

    I think Pinterest but it may not be google or twitter .My guess would be Amazon :-)

    I'm also thinking getsatisfaction.com ,again by Amazon :-)

    and also the following .

    Square--->Apple
    Foursquare-->Google or facebook
    Fab-->facebook
    path-->Google

    Cheers,
    Vik

    Reply
  • Posted by Gini Dietrich
    Mitch Joel

    I'm fearful we're closing in on another dotcom bubble burst. We don't seem to learn our lessons, based on recent history.

    That said, I agree with your assessment here. I like Pinterest because it's not for social media geeks like so many of the others. When my mom and sister both were begging me to get on there, yet none of the social geeks were on it yet, I knew they had something.

    Or...maybe Spin Sucks Pro is the next billion dollar acquisition. :)

    Reply
  • Posted by LucasWilk
    Mitch Joel

    I’m not sure why everyone is so paranoid about the possibility of a bubble happening. Bubbles are to markets what fires are to forests (a critical part of the cycle) and in the tech arena bubbles are not only necessary but essential to make the system work. The beauty of bubbles is that they allocate capital to the most successful entrepreneurs and VC investors. Has anyone else noticed that a lot of the currently hot startups were seeded with capital provided by the same people who made money from the last bubble (Marc Andressen and Jeff Bezos are good examples). Secondly, in order for people to be attracted to providing venture capital they need to be tempted by the possibility of huge payoffs down the line. This is why bubbles are important because they can provide investors with 10,000% returns, which in turn cover the lost capital on those companies that never take off. As such, if we currently assume that we’re entering the bubble territory then what will likely happen is that the likes of Dorsey and Zuckerberg will have billions of dollars to fund the next wave of startups 10 years from now, something that obviously is not a bad thing.

    Reply
  • Posted by Erica
    Mitch Joel

    Pinterest gets my vote. It could come out of nowhere again, and anyone can be next billionare. Check out this other post on "building the next instagram"

    Reply
  • Posted by Mark
    Mitch Joel

    Bubbles start to form when we focus on the wrong metrics. Who cares about a $1B valuation? It's an arbitrary figure, especially in illiquid private markets. Moreover, in today's frothy market valuation bears little relation to the underlying value or sustainability of a business. Instead, how about we focus on the next startup that will generate $1B in revenue or better yet $1B in net income.

    Reply
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