Mergers & Acquisitions

Mergers & Acquisitions

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November 11, 2010

Will Facebook Buy Instagram?



Is Facebook in a buying mood? According to a Business Insider piece, the social networking giant may be the buyer behind the startup Instagram. I’ll try to explain the process.

Picplz, which is a mobile, social photo-sharing site, has just announced they successfully raised $5 million from the venture capital firm, Andreessen Horowitz. The firm’s general partner, Marc Andreessen, is expected to take a seat on the company’s board.

This social photo-sharing site sounds a lot like Instagram – which raised $300,000 in seed funding -- also from Andreessen Horowitz.

The situation presents an interesting scenario as most VCs try to not invest in competing companies for a number of reasons – obvious conflicts of interest, not enough diversification, etc.

In turn, most entrepreneurs know they should not try to raise money from VCs who have already invested in their competitors. Board directors also have a legal fiduciary duty to shareholders. Have all of these things been forgotten here?

The answer could be that Instagram is being acquired. Entrepreneur and superangel Ouriel Ohayon made the assumption on Twitter – which started the rumor mill.

If an acquisition is truly in the works, Facebook (News - Alert) is the most likely to be interested. For one, Instagram was founded by Kevin Systrom, a former Googler, and Facebook has a reputation for attracting Google (News - Alert) talent.

Facebook has also been on the move, acquiring small startups to gain access to the talent behind the companies. This may not be enough to prove Facebook is behind the action, however, as it could also be Google, Yahoo, AOL or even Microsoft.

If Facebook is behind this activity, this could be bad news for early adopters who love Instagram. Facebook generally shuts down the startups it acquires and plugs in the human talent into other parts of its organization.

It is also possible that Andreessen Horowitz does not care about the conflicts of interest, as it wouldn’t be the first time. One of its name partners sits on the board of Facebook and the other on the board of Foursquare (News - Alert) and the two companies are now directly competing.

The argument could be made in this case that the companies were not directly competing when the investments were made and were actually hoping for a partnership. In this latest case, however, the conflict cannot be disguised as the direct competition is obvious.


Susan J. Campbell is a contributing editor for TMCnet and has also written for eastbiz.com. To read more of Susan’s articles, please visit her columnist page.

Edited by Tammy Wolf
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