Andreessen Horowitz banks 312-times return on Instagram

VC firm responds to criticism that it "fumbled" investment in photo-sharing app, which was just purchased for $1 billion by Facebook, by backing a rival as well.

Andreessen Horowitz stands to make about $78 million off an initial investment of $250,000 in Instagram, a partner in the investment firm revealed today in a blog responding to criticism that the investment firm "fumbled" its involvement in the photo-sharing app.

The New York Times ignited controversy earlier this week when it published a story that profiled how the VC firm "fumbled" its investment in Instagram, which was just purchased by Facebook for $1 billion, by investing in rival photo-sharing app PicPlz. The investment in PicPlz "was a calculated bet against Instagram and it left [Instagram CEO Kevin] Systrom livid," the Times reported.

"Ordinarily, when someone criticizes me for only making 312 times my money, I let the logic of their statement speak for itself," general partner Ben Horowitz wrote in the blog. "However, in this case, the narrative that some critics put forth has the nasty side effect of casting two outstanding entrepreneurs -- Kevin and Dalton Caldwell -- in an unfair light and glosses over an important ethical issue that we faced."

Horowitz explained that Systrom's startup started out as Burbn, focused on mobile microblogging, but shifted to photo sharing based on the popularity that feature. Prior to the morphing, Mark Andreessen and Horowitz were looking at investing in Caldwell's Mixed Media Labs, which had a mobile photo-sharing service called PicPlz.

Subsequently, Kevin noticed that while Burbn wasn't taking off, the photo-sharing component of it was doing quite well. As a result, he pivoted Burbn into Instagram, which then competed directly with PicPlz. It's important to note that Kevin did not steal Dalton's idea -- Kevin came to it organically based on the Burbn data.

We needed to make a decision. Should we fund the venture round of PicPlz, Instagram, both or neither? We loved both entrepreneurs, but they were building the exact same product. Since we were less than a year old ourselves at the time, this kind of conflict -- which happens frequently in the venture capital business as companies evolve -- was brand new to us."

Horowitz writes that the firm decided that "funding Kevin to compete with Dalton would be a violation of the original implicit commitment we made to Dalton -- to not fund competitors to PicPlz. On the other hand, funding Dalton did not violate our implicit agreement with Kevin because he changed his business -- we'd funded Burbn not Instagram."

"So our choices were: a) invest in Dalton b) invest in neither or c) invest in Kevin and violate our commitment to Dalton," he says. "As soon as we fully recognized those were the choices, we ruled out option c and elected option a."

He goes on the explain that the firm still held valuable rights in Instagram because of the seed investment. However, they felt it was an unethical conflict to exercise those rights and "unilaterally and without compensation or consideration" decided to return the rights to Systrom.

"And that's the thing that we did that many writers think was really stupid," Horowitz writes. "Despite that, if we had to do it again, we would."

 

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