Instragram, Leverage and the (Second) Silicon Valley Goldrush

Almost everyone and their grandmother has weighed in on the Instagram acquisition over the last 24 hours, which demonstrates the extent to which tech startups have made it into the mainstream consciousness of our culture (in part thanks to ‘The Social Network’). There is compelling Aaron Sorkin-esque storyline behind the Instagram acquisition: company sells for $1B with zero revenue in two years flat. It’s impressive to say the least and, of course, controversial. But the real story is the fact that Instragram built and scaled their service to thousands of users with just a dozen people. Do the math on that. $1,000,000,000 / 12 person headcount = approx. $83M per head. That is just nuts.

The Instagram acquisition provides us with yet another proof point for a very big trend in tech. The cost of starting AND scaling startups going down = dramatically more leverage for entrepreneurs.

10 years ago, entrepreneurs with an idea and a Powerpoint presentation had to go to the VCs on Sand Hill road and basically ask for permission (read: $5M) to start their companies and hire the 20 engineers needed to work on a prototype. Today, two twenty something year olds can get free office space, free hosting and start building their prototype on a shoestring Rammen budget-funding the entire venture on their credit cards. The reduced cost in getting started has unleashed a dramatic shift in leverage away from investors and towards entrepreneurs. Sweat, not money, is where the power lies now.

This shift in power represents a golden opportunity for entrepreneurs-a sort of modern day tech gold rush. Unlike the frothiness of the late 1990s, the Internet has matured as a platform and become ubiquitous in every household and on every mobile phone. The catch 22 here is that there will be a dramatic rise in the number of founders (see Naval’s post on why we have a shortage of engineers in the Valley) which will inevitably lead to a lot more companies being created and destroyed-capitalist creative destruction on steroids. This is not a bad thing. The net effect is positive because there will be more product experiments going on simultaneously, more companies achieving product-market fit, more value created, jobs created… you get the picture. However, it does mean that if you are a founder, you are going to have to spend much more time picking your market to avoid the “me too, also ran” syndrome For More Information Please Visit .

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