UPDATED 13:20 EDT / APRIL 23 2012

Ben Horowitz and Dalton Caldwell Speak Out on NYT Instagram Post

Ever since the Instagram acquisition was announced, everyone’s been more than willing to give their piece of mind about the deal.

Many Instagram users were pissed about Facebook’s acquisition, stating that the massive social network would just ruin the beauty of the popular mobile app for photo-sharing.  Some even threatened to quit the service because of the deal.  Though there’s an online petition to stop the acquisition, but that didn’t stop Instagram from becoming the most downloaded app on Apple’s App Store and equally as popular on Google Play.  But as we all know, any press is good press.  It’s no surprise that the announcement of the acquisition further piqued people’s curiosity, resulting in more Instagram users.   And though Instagram for Android was released just a few weeks ago, they now have more than five million Android users, the first million appearing in the app’s first 12 hours on the market.  It even paved the way for malware authors to cash in on the Instagram hype.

Experts were divided in their opinion of the acquisition; some say it was a great move by Facebook as they eliminated a competitor, and Instagram’s technology could make Facebook’s Timeline even better.  But others think the acquisition was not a wise move, paying $1 billion for a company that generates zero revenue.  But we simply don’t know what Facebook plans on doing with Instagram–the social networking giant might have figured out a way to make money from the photosharing app.

But there’s another angle that pundits are exploiting: what the deal means for Instagram investors.

Investor’s major mistake?

A report from The New York Times targeted Andreessen Horowitz, the investment firm which was one of the early investors of Burbn, what Instagram was before it became what it is now, stating that they invested in the wrong company.

Let’s back up a bit to make things clear.  Andreessen Horowitz invested in Kevin Systrom’s Burbn, which was then a microblogging service with a photosharing side, and Dalton Caldwell’s  PicPlz, a photosharing service built on a social platform.  Systrom noticed that the microblogging service wasn’t a hit but the photosharing bit of their service was, so they decided to transform Burbn into Instagram.

Here’s where everything gets messy.

Since the investment firm is already backing Caldwell’s PicPlz, Burbn’s transition into Instagram would violate their contract with Calwell to not invest in a competitor company.  So the firm ultimately decided to invest in Caldwell’s product and not on Instagram.  Since they already invested $250,000 on Burbn but not on Instagram, Andreessen Horowitz would still be making  $78,000,000 once the Facebook acquisition finalizes.

Now back to the NYT post, they believe that the firm supported the wrong company and even published that the firm wasn’t fully supporting Systrom in the first place.  And when they chose PicPlz over Instagram, Systrom wasn’t informed.

“Andreessen Horowitz suddenly found itself in the awkward — and conflicted — position of having two competing products in its portfolio,” the NYT post stated.  “The partners told the two that they would have to choose one or the other and promised to stay in touch.”

“But what happened next, people close to the company said, left some bad blood. Months passed without a word. That November, Instagram’s co-founders were left to learn from technology blogs that Mr. Andreessen had led a $5 million investment in, and would take a board seat with, their competitor.”

The NYT post goes on taunting the investment firm, stating that they invested in the wrong company.

“Andreessen Horowitz, it turns out, gambled on the wrong company. It took Picplz six months and two platforms to reach 100,000 users. Instagram acquired that many users within the first week. Andreessen Horowitz’s stake in the company was diluted by a $7 million investment round that February, which included Benchmark Capital; Jack Dorsey, Twitter’s co-founder; Chris Sacca, a Twitter investor; Adam D’Angelo, Facebook’s former chief technology officer; and Mr. Anderson of Baseline,” the NYT post added.

NYT’s post did not go well with the firm, and Ben Horowitz decided that it was time to air out the firm’s side.

First, Horowitz addressed the issue of not making more money out of Instagram.

“Two years ago we invested $250,000 in Instagram,” Horowitz explained on his blog.  “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.”

Then Horowitz went to to explain how the firm decided which horse to back.  Back then, this was how the situation looked like:

  • 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.

And because they backed Caldwell’s photosharing service first, and not to breach their contract, they chose PicPlz.

Horowitz also clarified a few things regarding the two companies:

  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.

But Horowitz did not clarify in his post as to whether or not NYT’s report regarding the rift between Systrom and the investment firm was true.

NYT’s report included an interview with Horowitz who claimed that after investing in Burbn, they constantly communicated with Systrom which unnamed sources said weren’t true because if that was true then the firm would have known that Systrom hired Mike Krieger which ultimately led to Burbn’s transformation into Instagram.  The report goes on to say that Andreesson Horowitz wasn’t happy about the transformation since they just invested in Picplz.  Sources stated that the firm told both companies that they needed time to think about the matter and would get back to them with their decision as to which company to back but sources stated that the firm went behind Systrom’s back and backed PicPlz without even talking to Systrom.

“It wouldn’t be super surprising if Kevin was mad that day,” Horowitz said in the NYT post. “The context is that we had already invested in Picplz. Once they made changes to their business to compete with them, we couldn’t morally go with Instagram.”

Caldwell’s side

The NYT post bashed Caldwell’s company for comparing it to Instagram.  Of course, Caldwell reacted to this with a comment on Hacker News.

“Anyone reading this article needs to remember to never be afraid of putting yourself out there because you are afraid of failure,” Caldwell pertaining to the NYT post.
“I saw the market first, I created picplz, and I went for it. I was a huge believe in the mobile photo sharing opportunity, and I went for it with all of my heart. Clearly, picplz didn’t win, but I have ZERO shame or regret for doing my best.
When I read articles like these, which are about myself, my company and people that I know well, I can’t help but feel vitriol aimed at me for DARING to create, launch and raise funding for picplz. I am not clear on what exactly people want, an apology for trying?
The fact is, I saw the writing on the wall that we wouldn’t win early and pivoted out of photo sharing which I had ~90% of my series A cash still in the bank. It certainly seems like that was the right move, but all of this press makes it look like pivoting was the wrong call(?) The press I read is written in such a way that it assumed that the A16Z investment is dead and my entire company should just be written off to zero today. That is bullshit. If I started to take press like this too seriously I might as well just dissolve my company and stop coming into work.
I say this to the hn community: never be afraid of failure. No one knows what will happen. All of this arm-chair quarterbacking is a waste of time. Stop reading this kind of crap and instead put your energy into doing your best work. Sometimes you win, and sometimes you lose, but if you give yourself the opportunity to win enough times, you WILL be successful.”

So the whole Instagram-Facebook deal created a lot of unwanted commentary, involving a lot of people who just wants to be left alone.  But in a deal that’s become so public, especially with Facebook’s pending IPO, I expect these discussions will only continue to flare up controversy, questions and outrageous expectations.


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