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The Untouchable Social, Mobile Companies

Stocks in this article: FBTWTR

NEW YORK (TheStreet) -- When Instagram agreed to take $1 billion from Facebook (FB) 18 months ago, it was a watershed moment -- not because it was a big deal for Instagram's founder and backers but because of the message it has since sent to any CEO and VC of a hot mobile/social start-up.

The message is clear: Don't you dare sell now because a better price is coming down the road.

Quite simply: the world looks back on that deal now and thinks that Instagram founder, Kevin Systrom, and his backers got fleeced by Mark Zuckerberg.

Sure a billion dollars is a lot of money, but so is $15 billion, which is probably what Instagram would be worth today if it was to do an IPO.

How do I come up with that number?

Instagram has 150 million users (at last count several months ago). Twitter (TWTR) has 236 million most recently.

Most of Instagram users, I assume, are in the U.S. or North America. Most (70%) of Twitter users are outside North America (and therefore are a lot less valuable to advertisers).

Twitter is worth $30 billion today on anemic revenue but big dreams of growing that in the next couple of years.

Instagram should be worth at least half that today -- and some might say it should be much higher given the more valuable user base -- even though it generates next to no revenues today.

It is a highly monetizeable service at any time when Facebook decides to flip the switch. And, as I've argued before, Instagram is really a new replacement social network for a lot of (younger) users. It's lighter, more visual and a great way to stay in touch with friends.

There have been some -- like Farhad Manjoo of the Wall Street Journal -- who have argued that Instagram wouldn't be as big today (with 150 million users) if not for being swallowed up by Facebook. In other words, he believes Instagram would be plunking along at 30 million users which is what they had prior to the Facebook acquisition 18 months ago.

This argument is total hogwash.

Yes, Facebook certainly has promoted Instagram to its users who have since joined and now enjoy both services. However, the trend lines of Instagram's explosive growth were evident well before the April 2012 acquisition. It was clear prior to Facebook taking them out that this service was on the cusp of exploding. Trace a line of their growth prior to joining Facebook and afterwards and it is clear that this service would have gotten to 150 million users without Mark Zuckerberg blessing it.

If it hadn't been so obvious then that the service was going to be so valuable, why was there a lot of criticism at the time for the Instagram backers taking too little for an incredibly valuable service?

Case in point: Ben Horowitz of Andreessen Horowitz responded to these criticisms in one of his inimitable blog posts:

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.

Except Ben goes on to clarify why he didn't invest even more money in Instagram (because they'd already backed another photo-sharing site) instead of explaining why he didn't make even more money from selling Instagram.

In any event, that choice -- and some, including me, would say "mistake" -- has reverberated around the Valley and beyond. Matt Cohler of Benchmark (also an Instagram backer) was reported to have been disappointed that Instagram didn't hold back from being acquired for better prices.

So, now Benchmark is a backer of Snapchat and has endorsed Evan Spiegel rejecting a $3 billion buyout offer from Facebook.

Welcome to the new normal for mobile social hot start-ups.

There are a handful of what I'd call "untouchable" private companies in the mobile/social space right now. All of them have watch Kevin Systrom's decision 18 months ago and judged it to be the biggest blunder of his lifetime.

Even though start-up founders think that they have the Midas touch when their initial start-up hits it big and they believe that they'll be able to repeat their hits start-ups five more times in their lifetimes before they retire, their backers know different.

Their backers know that the Midas touch is more like Powerball luck. There were lots of photo sharing sites out there when Instagram hit it big. Instagram was a great service and struck gold. But that doesn't mean that Systrom will be able to do another start-up and create the next big video service or whatever service he wants to create then.

So, the backers are now telling the founders that they need to make the most of this existing supernova hit company. Don't sell now -- because the company will probably be worth 3x in a year, 5x in 3 years and 100x in 10 years. You only have to look at Mark Zuckerberg for the biggest poster boy of this phenomenon.

The untouchable private social mobile companies now are: Snapchat, WhatsApp, Pinterest and Line. It's possible that Kik might grow to become an untouchable in another year or two -- although I'd expect them to be taken out in the next 3 months.

These four companies will likely never sell. They're likely heading for an IPO.

Will it work? Will Snapchat be able to monetize all those messages and pics being exchanged? It's unclear. But they're all going to go for broke.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Eric Jackson is founder and Managing Member of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. In January 2007, Jackson started the world's first Internet-based campaign to increase shareholder value at Yahoo!, leading to a change in CEOs in 2007. He also spoke out in favor of Yahoo!'s accepting Microsoft's buyout offer in 2008. Global Proxy Watch named Jackson as one of its 10 "Stars" who positively influenced international corporate governance and shareowner value in 2007.

Prior to founding Ironfire Capital, Jackson was President and CEO of Jackson Leadership Systems, Inc., a leadership, strategy, and governance consulting firm. He completed his Ph.D. in the Management Department at the Columbia University Graduate School of Business in New York, with a specialization in Strategic Management and Corporate Governance, and holds a B.A. from McGill University.

He was previously Vice President of Strategy and Business Development at VoiceGenie Technologies, a software firm now owned by Alcatel-Lucent. In 2004, Jackson founded the Young Patrons' Circle at the Royal Ontario Museum in Toronto, which is now the second-largest social and philanthropic group of its kind in North America, raising $500,000 annually for the museum. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson.

You can contact Eric by emailing him at Dr.eric.jackson@me.com.

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