Instagram, the new photo service created for the use on iPhones, has received $7 million funding from Benchmark Capital and reputed Silicon Valley investors such as Twitter founder Jack Dorsey and Quora co-founder Adam D’Angelo. The company, currently four employees strong, will invest the money in hiring engineers and adding features. The founders admit not having scrapped any business plan and the web address was purchased from China. The company attracted over 1.75 million members in four months and the number of uploaded photos going as far as 290,000 per day.

One possible explanation for the services’ success might be the accessibility of cheap cameras  or the ‘emergence of devices like the iPhone 4, which has a 5-megapixel camera that takes respectable photos, and wireless networks that are now fast and reliable enough that people don’t mind uploading pictures as they take them.’ At the same time, Instagram’s influential friends have a part in this affair; on Instagram’s first release of its application, in October 2010, Jack Dorsey spread the news via Twitter to his over 1 million followers. In a few days time, Apple made Instagram the featured app of the day on the App Store.

The cloud plays a big role in Instagram’s success as well.  As a tool for users to store their personal snapshots, they can then share them across networks and websites such as Twitter and Facebook, and receive immediate feedback.  As far as the industry goes, investors see potential in photo-sharing as well. Yesterday, Path announced it raised &8.65 million after having previously received $2.5 million from Index, First Round Capital, Founders Fund and angel investors.

But the cloud and all its sharing and storage capabilities don’t come without their pitfalls.  Earlier this week witnessed Flickr’s accidental but permanent deletion of 4,000 photos along with a user’s account. Until now, Yahoo has not made any public comment on this issue, but underlined on Flickr’s community forum its efforts to restore accounts as soon as possible. And in light of Facebook’s growing popularity, Flickr’s facing its own user exodus, having decreased 16% in unique daily visits.  It’s certainly something to think about, as we ponder the long-term effects and needs around consumers’ personal cloud effects at the O’Reilly Strata Conference this week.