Stephen Foley: Zuckerberg bought it to insure himself against becoming obsolete

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It was Mark Zuckerberg's very own idea to buy Instagram. Facebook's decision to lavish $1bn on a 13-person start-up was apparently a "chief executive to chief executive deal", hashed out in just a few days after Mr Zuckerberg called his Instagram counterpart Kevin Systrom.

Instagram doesn't have any profits. It doesn't have any revenues. It doesn't have a business plan to generate any money in the near future, either, so there is nothing you can do to model its value. There is no point trying to discuss whether it is "worth" $1bn. It cannot possibly be, at the same time as it most definitely is.

Mr Zuckerberg decided it is worth paying Instagram's founders and backers $1bn-worth of Facebook stock and cash, just in case he was staring at the thing that would relegate his career to an online historical curiosity. If only MySpace had bought Facebook in 2006 (or Friendster had bought MySpace in 2004, or Yahoo had bought Google in 2005 for that matter).

Facebook doesn't have to work out a way to make a $1bn-plus return on Instagram. It is enough that Instagram cannot now go on to build a rival social network, built on smartphones, where Facebook is weak.

Only YouTube, sold to Google for $1.65bn 18 months after it launched, rivals Instagram for the speed at which it grew and the eye-dropping, jaw-popping price tag at which it sold. Google knew its Google Video project was failing; it was as terrified as Zuckerberg that a rival was sprouting up that would soon wreck its dominance of advertising on the internet.

These hyper-defensive acquisitions are rare, particularly by companies still in their growth phase, like Facebook. More often, the buyers are stagnant big companies looking for growth, such as Yahoo. There are also scores of small deals in the tech industry every month, where talent-hungry giants like Google buy a developer's not-that-hot start-up just as part of the process of hiring him.

As for the hope-and-a-prayer valuation, no one in Silicon Valley is going to complain. A relatively small cabal of large venture capitalists are in the biggest or hottest deals, and they are as likely to be sitting on the boards of the acquirers as they are on the acquired. High valuations mean mark-ups all round for their portfolio of investments.

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