Gustavo Ballvé on April 11th, 2012
Corporate Strategy, Food for thought, Industries, Investment Themes, Media, Mental models, Portfolio Management, Risk management, Signal or Noise, Tech

Two weeks after a Veja cover story on Brazilians making waves in the digital market, and one week after Instagram was valued at US$ 500 million in a funding round, comes Facebook’s US$ 1 billion acquisition of Instagram. I highlight the deal in a “linkfest” inside.

I also try to understand Facebook’s strategy and future and come up short – which says a lot about my (in)capacity to invest in this realm with any degree of margin of safety.

Finally, I look at another successful Brazilian Silicon Valley entrepreneur and wonder if it means that Brazil is finally going through an innovation “boom”. Nah, we’re not.

Pre-IPO Facebook certainly had a lot of guts to pull off a quick and huge deal with cash and stock that will have people discussing their strategy – and mathematical skills – for months. Valuation-wise, there’s nothing to discuss, as there were no revenues yet. Are they buying it for the mobile foothold they didn’t have? For Instagram’s engineers? Are they defending against the “Death of the Web” trend (also here)? Is it designed to show potential competitors that they will do whatever it takes to block them?

The intellectual exercise of trying to figure out what is Facebook’s strategy, how its future will play out and how much it could be worth under each scenario is definitely stimulating, and the skills you gain in trying to do so will affect your understanding of media, technology, advertising and so on – all of which can and should inform your investments in traditional sectors. But investing a significant amount of capital in either direction (long or short) seems to be, at this point, very dangerous. I don’t think most people really can know, with a reasonable margin of safety, how all these intersecting businesses will evolve.

The alternative is to always try and find who will benefit from this increased data usage/traffic, and what’s in the prices of “forgotten” companies such as Cisco, HP, Dell etc… Perhaps companies who can help brands advertise on Facebook and/or mobile platforms? And so on.

Finally, it can be tempting to see Brazilians involved in these companies (Mark Krieger + Instagram, Eduardo Saverin + Facebook) and see it as evidence that Brazil is somehow booming in innovation. It’s not. It’s improving, but these were highly special cases of people embedded in highly innovative and entrepreneurial institutions (Stanford and Harvard, respectively) and locations (Silicon Valley and Boston). We still have a lot of work to do before we foster an environment in which such people and companies thrive here.

The linkfest:

The deal announced (alternatively, here’s a great 2-min video summary by Yahoo News). Also at TechCrunch and AllThingsD.

Instagram deal signals change in Facebook’s M&A strategy – NYT’s Dealbook. Also here, in a way: if Instagram is worth US$ 1 billion to Facebook, what do they think Facebook is really worth?

Contrasting theories on why they did it: CNN Money and NYT’s Dealbook. The lure of mobile is better explained here.

On the possible impacts to both Facebook and Instagram: AllThingsD one and two (location?), TechCrunch’s wishlist of new features.

Immediate analyst reaction was mixed, but Instagram users (or at least the most vocal of them) reacted, in aggregate, negatively. Stories at TechCrunch and NYT’s Bits blog.

For entrepreneurs, the deal highlights the difficulty of deciding when to sell.

An aside: Does Instagram owe Kodak a billion thanks? – Mashable.com.

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