TECHNOLOGY SPECTATOR: TECH DEALS - Instagram lives the start-up dream

Instagram's billion dollar sale to Facebook provides a model for Australian technology companies looking to grow big quickly and cash out.

Technology Spectator

Facebook has pulled off its biggest buy to date with the $1 billion buy of mobile photo-sharing sensation Instagram. Facebook’s head honcho Mark Zuckerberg isn’t exactly a big spender so there’s presumably enough here to convince Zuckerberg that Instagram is worth the billion dollar price tag.

The biggest incentive for Facebook is that by bringing Instagram under its wing the social network has effectively absorbed one of its number one threats. Instagram is much more than just a photo-sharing service it is a social network that is not only wildly popular but is importantly a competitive mobile-only social platform, which has so far had little problem in raising funding. Last week, All Things D reported that Instagram was close to wrapping up a $US50 million Series B round led by Sequoia Capital at a $US500 million valuation. With interest at Instagram hitting fever pitch, Facebook may have decided to make a pre-emptive strike

The deal is also good news for Instagram because while it has more than 30 million registered users, it has no business model nor has it posted a single cent of revenue. The thing to watch now is how the likes of Twitter, Google and Yahoo will respond to the deal.

Home-grown talent

Instagram’s billion dollar pay day is the stuff start-up dreams are made off and don’t be surprised if the deal revives talk of the social media bubble, where valuations are thrown out the window.

Outfits like Instagram are not alone in riding the social media wave. Australia has its own contender that is turning heads across the globe. That contender is Brisbane-based Kondoot which is forging ahead with its $10 million capital raising plans. The live video social network has secured the services of KPMG as its corporate advisor.

Kondoot announced its plans to raise the dough last month and I recently caught up with the co-founder Mark Cracknell to discuss what led to the move and where he hopes Kondoot is going to be in a couple of years from now.

Last year, Kondoot raised about $800,000 and later completed a remarkable $3.2 million funding in the United States. According to Cracknell, the experience with VC funds in the US was an eye-opener and prompted the latest capital raising initiative.

"We did talk to a few VC companies and found that the level of control that they wanted was something we were not comfortable with, they wanted an awful lot of control,” Cracknell says.

Faced with that scenario, Cracknell says tapping the rampant interest among Australian investors was a much better alternative. For the time being a listing is not on the cards but that could change, especially if the Facebook IPO goes according to plan.

What’s really exciting about Kondoot is that there is no other social live video network out there that comes close to matching its buzz and if the Instagram example is anything to go by then it’s only a matter of time before a market heavyweight comes knocking.

Cracknell says that while he isn’t expecting a billion dollar buyout offer from the likes of Google just but there has been a number of strategic partnership approaches which are under review.

The Instagram deal shows that the big boys are willing to pay top dollar when it comes to integrating new functionalities and the immediate challenge for Kondoot is to translate the positive buzz in the market into a competitive social platform.

It’s a challenge that Cracknell is well aware of, hence the focus on staying "ahead of curve” and working on a fast development time, introducing new features and increasing its geographical reach.

Like Instagram Kondoot is yet to be profitable but it does have a sound business strategy that is underpinned by a paid broadcasting model, where users can charge viewers a fee to watch a conference or a concert and Kondoot takes a 20 per cent cut. Cracknell adds that there is also an option where users can record the said concert or conference and sell that to interested viewers. For the time being advertising is out of the picture mainly but there is strategy in the works.

"We recognise that advertising is not where the money is. Almost all sites advertise and almost everyone struggles to make revenue from it,” Cracknell says.

"The alternative is you end with advertising that is very instructive and the last thing you want to do is destroy customer experience.”

Interestingly, Cracknell reckons that mobile gaming could become a bigger revenue driver for Kondoot in the future. However, the real game for Kondoot is, as Cracknell describes, to "stay ahead of the curve” and not only build a stronger global presence but also ensure that it is still the talk of the town when the likes of Google and Facebook decide to take a look.