Facebook’s big-money mobile maneuver

Contact: Brian Satterfield

Ahead of what’s shaping up to be a seminal IPO next month, Facebook has purchased San Francisco-based mobile photo application developer Instagram for $1bn in cash and stock. The deal not only stands as Facebook’s priciest ever, but also as the largest acquisition we’ve yet seen in the consumer smartphone application sector.

Until Monday’s reach for Instagram, Facebook had never even officially released a deal value, despite having made nearly 30 buys in the past five years. Of those transactions, nearly one-third (including all three of its other acquisitions announced this year) were geared toward adding key patents or employees that the social networking behemoth needed to build out features on its own platform. In the case of Instagram, though, Facebook specifically mentioned that it planned to continue operating the company as a stand-alone entity rather than attempting to completely integrate its photo editing and sharing features.

Founded in 2010, Instagram had accumulated a large user base despite employing just 13 people. Instagram’s flagship iOS application, which allows users to apply filters to mobile photos before sharing them, has racked up 30 million downloads since its launch. Demand for the Android version of the application, released only on April 3, was also high, with more than one million downloads in less than a week.

Instagram, which offers its applications for free, likely had next to nothing in terms of revenue, but that didn’t stop VC firms from injecting nearly $58m into the company over the past two years. Andreessen Horowitz and Baseline Ventures were responsible for the bulk of this investment, co-leading a $50m series B round in late March. The recent infusion was not only the largest ever for either firm but also yielded by far the highest return on investment. Baseline Ventures’ previous largest exit came in 2010, when salesforce.com purchased its portfolio company Heroku for $249m. Meanwhile, Andreessen Horowitz has come up big on mobile software for the second time – the firm’s only other $100m-plus exit came early last year, when then-PE-backed Skype paid $121m for video recording application developer Qik.