Facebook’s $1 billion acquisition of Instagram was a watershed moment for Big Tech. It demonstrated just how much wealth and power the industry holds — and how it could be wielded. Secret emails, published as part of a historic antitrust hearing, revealed that Mark Zuckerberg viewed the app as a threat to his own social network, and one to be neutralized at great cost. In this excerpt from No Filter: The Inside Story of Instagram, author Sarah Frier offers a window into how this monumental deal unfolded behind the scenes — and what Silicon Valley power looks like in action.
In early 2012, Twitter had been aggressively courting Instagram for a potential acquisition. Instagram’s founders, Kevin Systrom and Mike Krieger, were wined and dined over sushi and breakfast at the St. Regis hotel. Twitter even put together a term sheet to acquire them for 7% to 10% of its stock, worth $500 million to $700 million. CEO Dick Costolo explained his vision: that Systrom would get to continue running Instagram, but could also be head of Twitter’s product, and help Twitter become a more visual destination.
Systrom told Jack Dorsey, his friend and then-executive chairman of Twitter, that he couldn’t sell now. He wanted to make Instagram so big and important, it would be too expensive to be acquired by anybody. Dorsey said he understood. He introduced Systrom to Roelof Botha, a partner at Sequoia Capital, who started negotiating to put the venture firm’s money into Instagram.
Systrom would tell his friends that Twitter never made a serious offer. In reality, they never offered him anything he wanted to take seriously. Only Mark Zuckerberg understood what would appeal to Systrom: independence.
The road to the Facebook deal started the first week of April 2012. Sequoia was going to back a $50 million venture round at a $500 million valuation, close to the Twitter offer price, and all Systrom had to do was sign the papers. But first, Zuckerberg called.
“I’ve thought about it and I want to buy your company,” Zuckerberg said, getting straight to the point. He wanted to meet as soon as possible. “I’ll give you double whatever you’re raising your round at.”
Zuckerberg could buy, copy, or kill competitive apps, making sure there were fewer opportunities for other companies to encroach on anyone’s Facebook habit.
Systrom panicked and called his board. Matt Cohler from Benchmark told him that whatever happened with Zuckerberg, he needed to sign the papers for the round of venture capital, or his reputation in Silicon Valley would never recover.
“Look,” Steve Anderson, the other board member, reasoned, “you just raised a lot of money. And if the current king of the internet wants to meet you… sure, why not? There’s little reason not to take a meeting like that.”
Anderson had been telling Systrom that he was just as much of a visionary leader as Zuckerberg, maybe even smarter. Over time, as Instagram grew, that would become clear to everyone else, Anderson thought. He didn’t think Instagram should sell — at least not yet. But for now, he might as well go kiss the ring.
Systrom signed to finalize the Sequoia round, and then called Zuckerberg back. As Facebook was publicly gearing up for its initial public offering, which would be one of the biggest in internet history only a few weeks later, Zuckerberg was forced to think about the long-term realities of his business. Facebook had created one of the most ubiquitous internet services, but its users were moving over to mobile devices fast. Facebook had an app, but, unlike Google and Apple, it didn’t make phones. That meant that unless Facebook rushed into the expensive, complicated hardware business, Zuckerberg would forever be building his company inside territory ultimately owned by other companies.
Which left only two ways to win. One, his engineers could make Facebook so entertaining and useful that it took up more and more of people’s time on their phones. And two, he could buy, copy, or kill competitive apps, making sure there were fewer opportunities for other companies to encroach on anyone’s Facebook habit.
When he heard about Instagram’s $500 million valuation fundraise, he realized that this tiny, buzzy competitor, flush with new cash, could quickly become a greater threat. The only answer was to buy it.
Zuckerberg had already tried this before — unsuccessfully, back in 2008, when Twitter CEO Ev Williams [who is founder and CEO of Medium, which owns OneZero] had indicated he would accept an offer worth about $500 million. But then Williams got cold feet, and now Twitter was a major competitor. Zuckerberg was upset about the outcome, but had done the same thing himself once. In 2006, when Facebook was about Instagram’s age, Yahoo! had offered him $1 billion. He went against the advice of his board and said no, confident that he could build Facebook to be bigger on his own. Zuckerberg derived much of his confidence from that pivotal moment of defiance. It affirmed that a founder’s instincts — his own instincts — should be trusted above all else.
Armed with those experiences, Zuckerberg thought he knew how to talk to Systrom, founder to founder. Systrom didn’t want to run a Facebook product. He wanted to keep his company, and to keep being the Instagram visionary, just with none of the risks of independence. Facebook’s network was already helping Instagram grow — and if Instagram was part of Facebook, they’d have unimaginable resources to keep growing, faster.
This argument seemed to appeal to Systrom. But it would take some serious negotiating: That Thursday night, at Zuckerberg’s new home in the tree-lined Crescent Park neighborhood of Palo Alto, Systrom started out by asking for $2 billion.
Zuckerberg was whittling down the number with Systrom when he decided to loop in others. He invited Facebook COO Sheryl Sandberg and CFO David Ebersman over for a serious meeting. They told him they trusted his instincts, but first they would need to alert deals director Amin Zoufonoun, who could make everything happen.
“Mark would like to buy Instagram,” Sandberg explained on their conference call, getting straight to the point.
A wonderful choice, Zoufonoun thought — it had been on his radar since he joined Facebook from Google as director of corporate development a year earlier, and he remembered Systrom from his time on the deals team.
“He’s already spoken to Kevin and they’ve converged on a price range at a high level,” she continued. He wanted to make a deal that would value Instagram at about 1% of Facebook.
Zoufonoun was shocked silent. Facebook’s private market valuation, a month before its planned IPO, was about $100 billion. That would mean an Instagram deal worth $1 billion. Nobody had ever paid that for a mobile app before.
Even though the app had a mere 25 million registered users, compared to Facebook’s hundreds of millions, businesses were already using Instagram to post photos of their products, and their followers were actually interacting and commenting.
“You seem skeptical,” Sandberg observed. “I’ll call you later tonight once you’ve had a chance to think about it and do some analysis.”
Zoufonoun thought about it, but still couldn’t make the math work in his head. Usually there are similar deals to compare to, or a public company’s value to match against. When Sandberg called back, Zoufonoun asked for clarification.
“The price is really huge,” he said. “I’d love to understand where Zuckerberg is coming from on this — how did they arrive at that number?”
Sandberg conferenced Zuckerberg into the call, who suggested he and Zoufonoun meet in person the next morning.
That night, Zoufonoun couldn’t sleep. He’d never done a deal this big, and his nerves were getting to him. He passed the hours until his meeting with Zuckerberg with his phone in hand, scrolling through Instagram, trying to predict its future.
In the darkness, he realized this wasn’t just an app for people to post pictures of their meals, but a potentially viable business. Even though the app had a mere 25 million registered users, compared to Facebook’s hundreds of millions, businesses were already using Instagram to post photos of their products, and their followers were actually interacting and commenting.
Instagram didn’t make money yet, but Zoufonoun surmised that because the Instagram product provided its users with the ability to endlessly scroll through posts, just like the Facebook news feed, they could eventually develop the same kind of advertising capabilities. They could use Facebook’s infrastructure to grow faster, the way YouTube did at Google.
The next morning, in a conference room at Facebook headquarters, Zuckerberg and Zoufonoun appeared as scheduled.
“Hey, what’s up?” Zuckerberg asked him. “I understand you have concerns.”
“Actually, I think your instinct is spot-on,” Zoufonoun concluded. “We absolutely should buy this company.”
“Okay, so what’s next?” Zuckerberg said, unsurprised at being right. “We should probably do this quickly. How quickly do you think we can get this done?”
Zoufonoun got up, went to the whiteboard in the conference room, and started writing out the steps: convening the lawyers, figuring out the details of the cash and stock in the payment, and determining how much risk Facebook was willing to take on by shortening the timeline for due diligence. Often companies spend weeks or months evaluating a prospect, but if Facebook hustled, they could get this done in a single weekend, without any outside bankers.
Zuckerberg wanted to hustle. If Facebook took too long to negotiate, Systrom would start calling his friends and mentors.
Zuckerberg knew that Systrom was close with Twitter’s Jack Dorsey. The faster he made the deal, the less likely Systrom was to call someone who would give advice unfavorable to Facebook — or a counteroffer.
As the lawyers were hammering out details at Facebook headquarters, Systrom went with Krieger so his co-founder could meet Zuckerberg for the first time. Afterward, the two of them sat for about an hour at the Palo Alto Caltrain station, talking about the gravity of the decision.
Without Facebook, Instagram would have to very quickly grow its team and its infrastructure if it were to have any hope of delivering a return for the new investors — and meanwhile, there was a chance it wouldn’t work, or that Facebook would perfect its own version of Instagram. Krieger deeply respected Facebook’s engineering team. If they joined Facebook, they would have the resources to reach a lot more potential users, with support, so that there would be fewer service outages.
Zuckerberg, Zoufonoun, and Systrom continued discussions at Zuckerberg’s sparsely furnished $7 million home that Saturday. Krieger stayed in San Francisco, but spent the weekend handling Facebook’s appraisals of Instagram’s technical infrastructure. He answered questions over the phone about how Instagram’s systems were architected, and what kind of software and services the company used. Facebook never asked to look at the code. We could be running this company on Legos and they wouldn’t know, Krieger thought.
In Palo Alto, there was a disagreement about the cash versus stock portion of the deal. Cash in hand is tough to pass up compared to the riskier offer of potential future gains. Zuckerberg was working to convince Systrom that with stock, the price of the deal would be worth much more in the future. One percent of Facebook was only worth $1 billion if you thought Facebook’s growth was flatlining. But Facebook was planning on growing, making that stock worth closer to Systrom’s original $2 billion number or more.
Systrom knew if Facebook took measures to copy Instagram or target the app directly, that would make it a lot more difficult to grow.
Still, Zuckerberg even admitted to Systrom that he was surprised at Facebook’s $100 billion private market valuation. While he thought Facebook would continue to grow, and that it was fair to base Instagram’s price off Facebook’s, he was concerned over the acquisition price tag. If he valued Instagram so highly, with its tiny team and no revenue, he might create a bubble in Silicon Valley, raising the price of every related company he might want to buy in the future. (He was partially right. In 2013, venture capitalist Aileen Lee came up with a name for startups with billion-dollar values: “unicorns.” At the time, there were 37. When she wrote an update on the rare breeds in 2015, there were 84. By 2019, there were hundreds. But if it is a bubble, it hasn’t burst.)
Zuckerberg fired off an email to the Facebook board, letting them know the deal was happening. It was the first they were hearing of the massive deal, which was all but completed. Because Zuckerberg held the majority voting power in the company, the board’s role was merely to put a rubber stamp on his decisions.
Systrom’s board conversations faced more resistance. Anderson, in particular, was confused and opposed to the deal. Just a week prior, Systrom had been raising money to grow the company for the long term. And a month before, he’d been rejecting Twitter.
“What’s up with this change of heart?” he asked, with Systrom on the phone from his car in Zuckerberg’s driveway. “If it’s about the money, I know I can raise you money at whatever valuation Zuckerberg’s willing to pay.” Anderson thought taking Instagram out as a competitor could be worth $5 billion to Facebook if they just waited a little longer.
Systrom gave four reasons for the sale. First, he reiterated Zuckerberg’s argument: that Facebook’s stock value was likely to go up, so the value of the acquisition would grow over time. Second, he’d take a large competitor out of the picture. If Facebook took measures to copy Instagram or target the app directly, that would make it a lot more difficult to grow. Third, Instagram would benefit from Facebook’s entire operations infrastructure, not just data centers but also people who already knew how to do all the things Instagram would need to learn in the future.
Fourth, and most importantly, he and Krieger would have independence.
“The internet is not a friendly place. Things that don’t stay relevant don’t even get the luxury of leaving ruins. They disappear.”
“Zuckerberg has promised me that he will let us run Instagram like a separate company,” Systrom said.
“Do you believe that?” Anderson asked skeptically. He’d seen enough buyers say whatever they needed to say to get a deal done, then renege later.
“Yes,” Systrom replied. “Yes, I really do believe that.”
Back in Palo Alto, the terms were pretty much settled in time for Zuckerberg to host a small evening gathering of friends to screen that night’s episode of Game of Thrones. Systrom didn’t watch the show. He signed the contract late that evening in Zuckerberg’s living room.
The structure of the Instagram acquisition — a company purchased not to be integrated — would become an important precedent in technology M&A, especially as giant companies got even more giant, and small companies like Instagram wanted to find some alternative to competing with them or dying. In the coming years, Twitter would buy Vine and Periscope, keeping the apps separate and the founders in charge, at least for a little while. Google would buy Nest, keeping it separate. Amazon would buy Whole Foods, keeping it separate. And so many corporate development teams would court startups, promising to “do it like Instagram,” only to change their minds about granting independence once everyone was in the building.
Instagram’s perceived independence at Facebook would help Zuckerberg win some otherwise impossible deals with headstrong founders, especially in 2014, with the chat app WhatsApp and the virtual reality company Oculus VR.
But mostly, the Instagram deal would give Zuckerberg a tremendous competitive advantage.
Zuckerberg wasn’t sure how things would play out. But his motivation is outlined in a little red-orange book, handed to new Facebook employees at every orientation. On one of the last pages, against a navy backdrop, there are a few sentences in light blue writing that explain Zuckerberg’s paranoid leadership: “If we don’t create the thing that kills Facebook, someone else will. The internet is not a friendly place. Things that don’t stay relevant don’t even get the luxury of leaving ruins. They disappear.”
The question that Systrom would be asking, six years later, was whether Zuckerberg considered Instagram part of the “we,” or the “someone else.”