Financing to Value Instagram at $500 Million

Instagram is poised to raise a new round of financing that will value the popular photo-sharing application at as much as $500 million, people familiar with the matter said, despite some skepticism that the fast-growing company will find a way to make money.

The potential new valuation—roughly 20 times what the fast-growing company was worth around a year ago—highlights the promise and pitfalls of technology start-ups that have built their business around users of mobile devices, such as Apple Inc.'siPhone.
Instagram/Bloomberg News

Instagram Chief Executive Kevin Systrom said in an email that he couldn't comment on any speculation about fund raising.

The company's technology, which lets users touch up and share photos taken with smartphone cameras, has caught on quickly, allowing Instagram to build a base of more than 15 million users in just two years.

But as with other mobile-focused start-ups, such as Foursquare Labs and Flipboard, its success in attracting users has yet to translate into significant revenue in the way it has for some desktop-oriented Internet companies, such as Facebook Inc. and Zynga Inc.

Instagram was founded in the fall of 2010 by two Stanford University graduates, Mr. Systrom and Mike Krieger, and has just 13 employees, said Mr. Systrom.

The application, which is free and available only on the iPhone, allows users to share photos with followers on Instagram or other social networks, such as Facebook. Users also can comment on photos and "like" them. Some people describe the app as a visual version of Twitter.

The current funding round, in which Instagram is poised to raise about $40 million, is considered a hot deal, and has drawn a lot of interest. Still, some top venture-capital firms have decided to pass on it because of the app's high valuation and immaturity of its business, people familiar with the matter said.

Instagram may face some unique challenges in trying to develop a business model, said one of the people familiar with the matter. Since the app is only available on a smartphone and devotes most of its screen to featuring photos, it lacks the real estate of a desktop site for displaying advertising.

Instagram doesn't yet offer its content on a website, unlike other popular mobile services such as Twitter and Tumblr. It also doesn't lend itself easily to e-commerce strategies, such as offering daily deals, which mobile apps like Foursquare are pursuing.

Still, Instagram's valuation has grown considerably since the company first began raising money, said one of the people. During its last financing, in early 2011, Instagram raised $7 million from Benchmark Capital, Baseline Ventures and Andreessen Horowitz in a deal that valued the company at around $25 million, the people said.

One reason for the interest may be that many venture-capital firms are under intense pressure to finance hot Internet companies so they can use those marquee deals to help them raise capital for their new funds. Last year, location-based social network Foursquare raised $50 million in an investment valuing the company at $600 million, and news reader Flipboard raised $50 million at a $200 million valuation.

Instagram isn't without commercial possibilities. It has a growing and involved user base, and the app is also catching on with companies. The Ann Taylor clothing chain, Urban Outfitters Inc. and fashion label Marc Jacobs, for instance, have created accounts and use Instagram to promote their brands. The app is also popular with celebrities and politicians who have created accounts, including singer Justin Bieber, President Barack Obama, professional skateboarder Tony Hawk and rapper Snoop Dogg.

Last year, Apple named Instagram the iPhone app of the year.Instagram said it is working on a version of the app for smartphones that run on Google Inc.'s Android operating system, but it has yet to release it.

Foursquare, which was founded in the spring of 2009, is nearing 20 million users but it is available on several platforms, including Apple, Android and BlackBerry among others. Flipboard, which launched its app in July 2010, has more than 8 million users on the iPad and iPhone.
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