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Ben Horowitz Sheds Light on Instagram Investment

Explains 'meager' $78 million return

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Ben Horowitz Sheds Light on Instagram Investment
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Ben Horowitz, cofounder and General Partner of high technology venture capital firm Andreessen Horowitz, just explained on his blog why his company was only able to achieve a $78 million dollar return on an initial $250,000 investment in Instagram.

For a little bit of backstory – along with partner Marc Andreessen, Horowitz founded a cloud computing startup called Loudcloud in 1999, which evolved into Opsware, an enterprise software company. Opsware was then sold to Hewlett Packard in 2007, for $1.6 billion in cash, which supplied the funds to establish Andreessen Horowitz in Menlo Park, CA, in 2009. This lead to an investment of $250,000 in Instagram two years ago, which will soon be worth $78 million with the Facebook acquisition – though some have been wondering why Andreessen Horowitz didn’t make even more than 312 times their investment.

Horowitz explains that Kevin Systrom’s Instagram was initially known as a Burbn, a micro blogging app built in HTML 5. At around the same time, Andreessen Horowitz also invested in a mobile photo sharing service called PicPlz, developed by entrepeneur Dalton Caldwell – which was built on its own social graph. PicPlz was successful, though Burbn wasn’t really taking off – but its photo segment was doing alright, which evolved into Instagram. At this point, Andreessen Horowitz had to decide whether to fund the venture round of PicPlz, Instagram, both or neither.

Horowitz had this to say regarding the decision:

- We liked both entrepreneurs very much, so there was no issue there—we would gladly back either.
- Instagram’s numbers were much better at the time as it had already begun its rocket run.
- From the perspective of the entrepreneurs, we’d invested in Dalton when he planned to build a photo sharing service, but we’d invested in a different initial product from Kevin.

After speaking with both entrepreneurs and much internal discussion, we concluded that funding Kevin to compete with Dalton would be a violation of the original implicit commitment we made to Dalton—to not fund competitors to PicPlz. On the other hand, funding Dalton did not violate our implicit agreement with Kevin because he changed his business—we’d funded Burbn not Instagram.

So our choices were: a) invest in Dalton b) invest in neither or c) invest in Kevin and violate our commitment to Dalton. As soon as we fully recognized those were the choices, we ruled out option c and elected option a.

However, we still had a problem: because we had invested in Kevin’s seed round, we had both information rights and pro rata rights to the series B. These are important and valuable rights, but it seemed completely unethical to us to exercise them since we funded a competitor. As a result, we unilaterally and without compensation or consideration gave Kevin back those rights and did not invest further in Instagram.

And that’s the thing that we did that many writers think was really stupid. Despite that, if we had to do it again, we would.

As an epilogue, Dalton later pivoted out of PicPlz and is now building an exciting new service called App.Net.

I’d like to make two things absolutely clear that some writers, in their zeal to find something wrong with our investment, have gotten completely wrong:

Kevin absolutely did not steal Dalton’s idea. He pivoted to Instagram because that’s where his users were—period, end of story.
We are excited and enthusiastic investors in Dalton’s company. Several reporters implied that we regret funding Dalton, because he did not sell his company to Facebook for $1 billion after two years. News to world: it generally takes longer than two years to create a billion dollars in value. What Kevin and team did was special and unique. We expect great things from Dalton and look forward to another massive return from his new idea.

So, this is why Horowitz only made $78,000,000.

Ben Horowitz Sheds Light on Instagram Investment
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