In any Economics 101 class, students learn how to balance costs and profits. They learn that before launching a company, a detailed analysis of potential profits should be conducted. Whether it's a one-year, five-year, or 10-year structure, most economists teach the importance of having a plan to get out of the red and into the black in the foreseeable future.
But that whole concept may be flying out the window.
In April of last year, Kevin Systrom instantly went from being a computer geek with a good idea into a mutimillionaire. In 2010, the 28-year-old Stanford grad founded Instagram, the iPhone and Android photo sharing app that lets users apply filters, tweak their pictures, and now, post directly to Facebook.
Facebook purchased the app for a cool $1 billion in cash and stock, and soon after the company was appraised at half that value. What's striking about that figure is that the 12-employee company had no structure in place to make a profit. Instagram has no advertising and is free to use. So why would Facebook pay mega-bucks for it?
A Critical Mass of Users=Real Value
If Instagram had bogged down its interface with marketing early on, people would have been less likely to adopt the app as a critical element of their phone photography. Because it was simple, clean, and easy to use (with striking visual results), the app attracted users by the millions.
Sure, a small percentage of those users may have loved Instagram while choosing to shun social media behemoth Facebook, and they make up the vocal minority groaning about the sale online. For everyone else, the purchase simplifies the connection between two networks integral to their social media usage. Facebook eliminated a potential competitor while simultaneously moving a step closer to offering the perfect photo-sharing platform.
Knowledge Is Power
Remember when Google was just a search engine? Upon its launch, it was already the best. Sites like AltaVista and Yahoo! had struggled to become the leading search engine, but none could compete with Google.
Even after Google became so ubiquitious that the word Google became a verb, average users still wondered how the company planned to turn a profit on its obviously substantial investment. Just a few years later, Google has its hands in everything from smartphones to navigation to government contracts.
How did Google do it? It began by creating a product that trumped that of all of its competitors. Then it launched email, calendars, and servers that collected the contact information of its users (with which it could track search histories and tailor results). Google may arguably be the most informed company in the world about our personal lives and preferences, and no one questions its ability to use that for profit.
Cash Out When You Can
History is littered with entrepreneurs who had the chance to sell when their buzz was booming but held out, only to watch their company value dwindle in the face of competition.
On one hand, being bought out could be viewed as bullying. Had Instagram held out, perhaps it could have monetized the product and made even more than a billion dollars. But there's no doubt that Facebook would have then launched its own in-app photo editing and sharing to compete with Instagram, and its debut would have taken a serious cut of Instagram's prospects.
In the digital age, business moves fast. Social networking sites grow in popularity almost overnight (Pinterest, anyone?), and dwindle just as quickly (MySpace). Don't miss the boat.
Whether you're a restaurant owner, a bike rental company, or an app designer, pay attention to the Instagram model. Focus on quality and build a critical mass before worrying about profits. Once the demand is there, your value will be far higher than you could have ever imagined.
Erin Schwartz manages marketing programs for 123Print.com, a provider of customizable items like business cards, address labels, postcards, and other promotional printing materials for small businesses and solo practitioners.