Instagram

Now what the hell is you lookin’ for?

Can’t a young man get money anymore?

Let my pants sag down to the floor

Really do it matter as long as I score?

—Mase, Lookin’ at me

Two years ago we invested $250,000 in Instagram. Thanks to the spectacular vision and effort of Kevin Systrom and the Instagram team, the investment will be worth $78,000,000 when the Faceboook acquisition closes. The work that Kevin and team did will go down as legend in the industry and we thank them immensely. We also thank our co-investors Steve Anderson of Baseline and Matt Cohler of Benchmark.

Despite Instagram’s awesome performance and our monstrous return, a number of articles have come out criticizing us for not making even more money on our investment. Ordinarily, when someone criticizes me for only making 312 times my money, I let the logic of their statement speak for itself. However, in this case, the narrative that some critics put forth has the nasty side effect of casting two outstanding entrepreneurs—Kevin and Dalton Caldwell—in an unfair light and glosses over an important ethical issue that we faced. As a result, I will clarify what happened and why we didn’t make even more money.

When we invested in Instagram, it wasn’t actually Instagram. It was a company called Burbn, and the idea was roughly to build a mobile micro blogging service. Technologically, it was also different: an HTML 5 application rather than a native app. As Kevin iterated on Burbn, we made another investment in an excellent entrepreneur, Dalton Caldwell. Dalton’s company, Mixed Media Labs, initially built a product called PicPlz. PicPlz aimed to be a mobile photo sharing service built on its own social graph. Furthermore, the graph would be public like Twitter rather than private like Facebook.

Subsequently, Kevin noticed that while Burbn wasn’t taking off, the photo-sharing component of it was doing quite well. As a result, he pivoted Burbn into Instagram, which then competed directly with PicPlz. It’s important to note that Kevin did not steal Dalton’s idea—Kevin came to it organically based on the Burbn data.

Still, we needed to make a decision. Should we fund the venture round of PicPlz, Instagram, both or neither? We loved both entrepreneurs, but they were building the exact same product. Since we were less than a year old ourselves at the time, this kind of conflict—which happens frequently in the venture capital business as companies evolve—was brand new to us.

Here’s how it looked then:

- We liked both entrepreneurs very much, so there was no issue there—we would gladly back either.

- Instagram’s numbers were much better at the time as it had already begun its rocket run.

- From the perspective of the entrepreneurs, we’d invested in Dalton when he planned to build a photo sharing service, but we’d invested in a different initial product from Kevin.

After speaking with both entrepreneurs and much internal discussion, we concluded that funding Kevin to compete with Dalton would be a violation of the original implicit commitment we made to Dalton—to not fund competitors to PicPlz. On the other hand, funding Dalton did not violate our implicit agreement with Kevin because he changed his business—we’d funded Burbn not Instagram.

So our choices were: a) invest in Dalton b) invest in neither or c) invest in Kevin and violate our commitment to Dalton. As soon as we fully recognized those were the choices, we ruled out option c and elected option a.

However, we still had a problem: because we had invested in Kevin’s seed round, we had both information rights and pro rata rights to the series B. These are important and valuable rights, but it seemed completely unethical to us to exercise them since we funded a competitor. As a result, we unilaterally and without compensation or consideration gave Kevin back those rights and did not invest further in Instagram

And that’s the thing that we did that many writers think was really stupid. Despite that, if we had to do it again, we would.

As an epilogue, Dalton later pivoted out of PicPlz and is now building an exciting new service called App.Net.

I’d like to make two things absolutely clear that some writers, in their zeal to find something wrong with our investment, have gotten completely wrong:

1. Kevin absolutely did not steal Dalton’s idea. He pivoted to Instagram because that’s where his users were—period, end of story.

2. We are excited and enthusiastic investors in Dalton’s company. Several reporters implied that we regret funding Dalton, because he did not sell his company to Facebook for $1 billion after two years. News to world: it generally takes longer than two years to create a billion dollars in value. What Kevin and team did was special and unique. We expect great things from Dalton and look forward to another massive return from his new idea.

So, write what you will about us, but please get that right.