Don’t Try To “Pull An Instagram.” Here’s Why …

Charlie Munger (Warren Buffett's partner) has kept a long-running list of psychological tendencies that commonly affect people's judgment. There's one item on this list that he's termed "Availability-Misweighing Tendency." In a nutshell, it's an observation that people tend to overweigh extra-vivid evidence, which (necessarily) means under-weighing evidence that isn't so vivid.

In this case, the extra-vivid evidence is the Instagram acquisition. It's been analyzed, or at least covered, by every blog and news network I can think of. I'm sure it's clogging most of our Twitter feeds. I even have friends and relatives who know nothing about tech but want to talk about it. It doesn't get much more vivid than that. And even if it wasn't receiving so much coverage, a billion dollars is enough money to be vivid in-and-of itself.

The point is, if you're re-thinking your business strategy or personal goals based on this news, you should tread carefully. The remedy to overweighing extra-vivid evidence is to always make it a point to seek out other side of the story. So I agree with Mark when he encourages "all other companies to do the harder work of finding out what happens in the 99.9% case, which is what is often never written in the annals of the tech news media."

The post is missing the most important point.

Instagram would not be worth $1B to Facebook if it has not raised a large round. Without the resources to fuel the expansion, build out the product, develop an application platform, invest in revenue team and so on Instagram would be in no position to threaten Facebook. As soon as the funding closed Facebook was suddenly facing a viable threat in mobile vs. just another resource-starved startup hanging onto dear life.

So it is pretty questionable to assume that Instagram itself "pulled an Instagram". They raised Series B because that was the deal that could happen first. Once it happened the environment changed and Facebook saw the need to take Instagram off the table.

If anything, the point is to avoid trying to pull "uncertain multi-step transactions". Use various strategic alternatives to create urgency / better terms for other alternatives, choose between the options you can get and focus on optimizing your immediate next step.

"As soon as the funding closed Facebook was suddenly facing a viable threat in mobile vs. just another resource-starved startup hanging onto dear life."

You are stating that like it's a fait accompli that the threat is real and a done deal as opposed to a mountain that they have to continue to climb and achieve with all sorts of things that could cause the dream (after $500m funding) to not even happen.

Perhaps it's the same bias on the part of Facebook that caused them to make this acquisition and overreact (possibly - and of course we'll never know the answer) to Instagram's funding.

And what about the fact that they waited until they were funded as opposed to having a system in place to identify the threat from "just another resource-starved startup hanging onto dear life" and getting involved before that?

A great book on the subject is Thinking Fast and Slow.

One thing I haven't seen anyone mention is that, depending on the stock vs. cash split (I guess we'll see in the S-1 eventually), the acquisition not only knocks out a potentual competitor/keeps bigger competitors away from Instagram, gains a talented team and a cool product, but also acts as a pre-IPO liquidation event. Instagram now has at least ~10% of Facebook's 2011 revenue banked.