"I was always trying to convince [Instagram CEO] Kevin Systrom to partner with us--we wanted to be the print button on Instagram pretty badly," says Adrian Salamunovic, cofounder of CanvasPop, the service that turns digital photos from sites like Facebook and Instagram into physical prints. "We really harassed him, the poor guy. But he was always very cool about it--always supportive. Whenever we’d communicate with Kevin, he’d always just ask, 'How is the API working for you? What we can do to make it better for you?' It was never, 'How can you help me make more money?' Honestly, revenue seemed to be the last thing on his mind. Maybe that’s why the product is so authentic."
For critics of Instagram’s $1 billion valuation, Salamunovic’s experience with Systrom gives fascinating insight into why Facebook considers the startup so valuable. CanvasPop is a multi-million-dollar business that could’ve given Instagram a steady revenue stream. But Systrom always valued product design over short-term revenue gains--it’s the reason he didn’t simply cram the app with ads or sell sponsored filters. "They were probably getting partnership requests five to 100 times a day, but they stuck their ground," Salamunovic says. "Revenue was never on Kevin’s radar--he was singularly focused on users and developers."
Revenue, as some have argued, has the potential to deflate a startup’s valuation. Having no revenue allows startups to arbitrarily boost their worth, creating the "illusion of value" for startups like Instagram, as The New York Times put it. But there’s another side to the argument many often ignore: The negative impact a business model can have on product design.
As Salamunovic shows, Systrom had myriad opportunities to monetize. He could’ve added third-party print buttons or branded pages or virtual goods. But revenue streams can’t be implemented in a vacuum: Business models infiltrate the user experience and make products beholden to a startup’s bottom line. "If Instagram did have revenue, would that have brought down its valuation?" wonders Salamunovic. "That’s a tough question. I don’t think so, but it depends on the following: Would it have impeded user acquisition or created friction [in the product]?"
Systrom was careful to avoid product friction--he was even hesitant to allow photo imports from third parties like Hipstamatic. We’ve seen the downside of startups that haven’t been so discriminating. OMGPOP, which Zynga just bought for $200 million, has taken a different approach to product design: Rather than focus on improving paint brushes or performance--something its app desperately needs--the company has instead pumped the service full of ads, and is now throwing branded words into its program, despite having a jarringly deficient library of terms that’s as bland as it is repetitive.
Entrepreneurs often preach that "the user is king." But then we see them hawk cheap virtual goods, sell-out with sponsorships, load up a service with bloatware, or make performance and design compromises to get a product to market quicker or in time for the holiday season.
Of course, not every startup has the the luxury of not monetizing. But in the case of startups like Instagram, revenue is far from the only way metric to calculate value. A startup can be measured by its technology, its products and design, its talent, its user base, its engagement. So it’s not necessarily true that a revenue stream in itself would’ve diminished Instagram’s valuation. However, it’s likely the case that the avenue the startup would’ve had to take to build that revenue stream would’ve hurt other aspects of its service--its product design, its engagement, and the type of users it seeds.
Admittedly, it’s less tangible than a monetary value, but it would be boneheaded to discount the user experience and fun of Instagram in its appraisal. If that sounds too fluffy, then consider the following: Roughly 20% of sales on CanvasPop now come from Instagram. Meanwhile, Facebook’s percentage is barely in the "single digits," according to Salamunovic.
"When we launched CanvasPop with Facebook, we figured that with nearly a billion users--and more images than any other place on earth--if we were just being purely mathematical and statistical about it, it’s well worth it. I mean, I thought, 'If Instagram is taking off, imagine what we’re going to do with Facebook,'" Salamunovic says. "But Facebook actually turned out to be very small percentage of our sales--it’s nowhere near the success of our Instagram integration."
"The difference is that with Instagram, there is just something special about those images: the filters, the moments that it captures, the context," he continues. "It’s the DNA of the Instagram user, the type of user who is hyper-connected and very visual. They’re not uploading albums--not just a bunch of random pictures of a vacation. Instagram is: I see something, I want to capture it, carefully select a filter to make it more personal, and share it with my network. It has more value somehow than the bulk-uploaded memory files of Facebook: the volume of Facebook versus the individualistic, artistic approach of Instagram."
That may be the true value of Instagram. And we’re already seeing the startup’s unique aesthetic play into Facebook products like News Feed, which the social network redesigned this week with larger, Instagram-like photographs. Even in Mark Zuckerberg’s announcement of the acquisition, we saw a CEO who was unwilling to simply force the products together--a sloppy product approach that might’ve added to Facebook’s earnings in the short term, but would’ve hurt the long-term value of both services.
After all, creating long-term value isn’t just about earning short-term revenues.
Top image: armancatalasan/Shutterstock; the rest by Cliff Kuang.