Some fascinating facts about the Instagram sale

I had a very lengthy conversation with a friend last week about how incredible the $500 million valuation of Instagram sounded and I was stunned to find out that Facebook bought the company for 1 billion dollars yesterday!

Instagram is an app on the iPhone and Android that allows you to take photos from the phone and transform them using filters to give them a vintage look (among other things) like this image right here.

Instagram

Image Credit: nikrowell

The idea is simple, and executed very well, whether it’s worth a billion dollars or not – only Mark Zuckerberg knows!

I found several fascinating aspects about this whole story, and I think if you combine all the elements – it must be pretty unique.

1 Billion Dollars for an App

1 billion dollars is a lot of money, and I doubt that anyone could have predicted that a company with an app will sell for that much five years ago.

No Revenues

From what I’ve read – I can’t find any mention of revenues anywhere, and it is quite likely that Instagram has no revenues at all. Not low revenues, but no revenues, as in zero revenues. That a company can sell for a billion dollars without any revenues is mind boggling!

30 Million Users

Instagram has more than 30 million users, and they just recently came to Android, so that’s a very big base just riding on the iPhone for a long time.

Sign of Bubble or Brilliant Acquisition?

These huge numbers obviously make you wonder whether this is a sign of a bubble in the tech world, and if you call this a bubble, someone will be quick to remind you that Google paid $1.6 billion for YouTube in 2006 which sounded ridiculously high but turned out right in the end. I would tend to think that Mark Zuckerberg is smarter than all the analysts combined who are calling it a bubble.

12 or 13 Employees

This one is truly a wow – the whole company has just 12 or 13 employees in total! As has been repeated endlessly, those are some very valuable employees!

18 Month Old

Instagram is just 18 months old, and this is probably a record where such a young company has been valued for so much.

I’m wowed every time I think of this and I got plenty of new reactions every time I mentioned this to someone yesterday. One friend dusted off his iPhone development book and decided to give it another shot, a cousin complained that VCs don’t want to invest in big projects that solve real world problems, another friend with a young child resolved to raise his kid in the US because that’s where all the opportunities are, and another one lamented the fact that all this money doesn’t create large scale employment.

Whatever your view is – you have to agree we live in very interesting times.

Two great links about this story:

Mashable – Instagram CEO Kevin Systrom: The $400 million man?

WSJ – Insta-Rich: $1 billion for Instagram

How is a share price calculated at any given time?

Prat had an interesting question on how a share price is calculated on the stock exchange at any given point, and his question had more to do with the mechanics of share price calculation, and not on value or demand and supply etc. which is what is commonly talked about.

So, when you see that the price of Infosys is Rs. 2,850 – how was the price calculated at that given time?

The calculation of prices is completely automated, software driven, and anonymous at both BSE and NSE, and the price is calculated by electronically matching bids and offers for a particular share recorded an electronic limit order book (ELOB).

When you place an order to buy a share at a certain price that is called your “bid” and when you place an order to sell your shares at a certain price that’s called your “ask”.

The ELOB contains all the bid – asks for a particular share and the system matches the best bids and asks to execute an order. The price at which a transaction is executed is called the last traded price (LTP) and that’s what you see on TV screens.

From the NSE’s website – let’s take a look at an example ELOB to understand this process.

An example of an order book for a stock at a point in time is detailed below:

Buy

Sell

S.No.

Quantity

Price

Quantity

Price

S.No.

1

1,000

3.50

2,000

4.00

5

2

1,000

3.40

1,000

4.05

6

3

2,000

3.40

500

4.20

7

4

1,000

3.30

100

4.25

8

If you look at the above table, the left side are the bids and the right side are the asks. As it stands – there can’t be any transaction because the highest price that the buyers are willing to pay is lower than the lowest price at which the sellers are willing to sell. However, if you come in and put up a market order to buy 3,000 shares – your order will be executed and you will get 2,000 shares at Rs. 4.00 and the remaining 1,000 shares at Rs. 4.05.

Similarly if you wanted to sell 2,000 shares – the first 1,000 will be sold at Rs. 3.50 and the second thousand will be sold at Rs. 3.40.

The exchange gets you the best price that is available at that given time whether you are a buyer or seller and if you have placed limit orders then those orders will not be executed as long as someone matches that on the other side of the transaction.

At a high level, matching the bids and asks on a stock based on the volume at that time determines the stock price. I’m sure there are a lot of intricacies in this system, but I’m unable to write about them because I’m not familiar with them myself. If you have a link that goes deeper than this then please do leave a comment.

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