Revealed: How Twitter’s secret offer for Instagram made Facebook pay $1B

The secret details of the $1 billion deal between Facebook and Instagram are more convoluted than anyone thought. VentureBeat has learned that Instagram chief executive and co-founder Kevin Systrom first got an offer and a term sheet from Twitter, then shrewdly doubled the value of his young company by striking a deal with Facebook.

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On Monday, April 9, Facebook announced that it was buying photo-sharing sensation Instagram for $1 billion in cash and stock. The unexpected, mammoth deal was a shock to the Internet community, and to many of Instagram’s own investors — including new investors in a $50 million round of funding that closed prior to the buyout (Instagram has yet to confirm the round).

Additional reports have since woven together aspects of the dealings between Facebook’s CEO Mark Zuckerberg and Instagram’s Systrom. Those reports detailed that the two CEOs moved expeditiously and hammered out a weekend agreement between Friday, April 6 and Sunday, April 8.

But what has yet to come to light is the behind-the-scenes, three-way chess match between Instagram, Twitter, and Facebook, orchestrated and played masterfully by Systrom, that helped Instagram double its worth in just a few days and end up at its preferred destination.

A previous report suggested that Twitter was interested in buying Instagram, but talks were far more serious, according to multiple people knowledgeable with the deal. Systrom, while negotiating with Sequoia and Greylock on a round of funding, used that pending deal to pressure Twitter to make an offer, according to information shared by a reliable source. Twitter had expressed interest in buying the service but was moving slowly up to that point.

Twitter did make an offer during the financing process, prior to the round closing. The company, interested in doing more in the media space, felt that Instagram’s service was nicely aligned with Twitter’s business.

Twitter made a very real offer in the hundreds of millions of dollars range, according to two sources with knowledge of the deal. Twitter chairman Jack Dorsey, an early Instagram investor and a one-time avid photo-sharer, was said to be involved in all aspects of the deal. But Instagram shrewdly did not sign the term sheet, which would have bound it to a no-shop clause, and went ahead and closed its financing round.

This put Systrom in an odd — but useful — situation in which he had both the new funding and the Twitter offer still on the table. According to one source, Systrom went to Zuckerberg for a better deal and Zuckerberg bid just to block the Twitter deal.

But the negotiation process was far more nuanced than Systrom simply playing Twitter against Facebook to get a better deal, and Instagram’s choice to go with Facebook had more to do with product and vision alignment than price, a person familiar with the negotiations said.

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Facebook had no comment on the deal.

How Instagram ended up at Facebook and not Twitter may not have involved any duplicitous or conniving acts on Systrom’s part, but the Twitter offer clearly gave him the confidence and strength of position to negotiate with the upper hand.

And while VentureBeat previously had it on good word that Facebook’s purchase of Instagram was directly tied to boosting the company’s position in photo-sharing and mobile realms prior to its IPO, we’ve heard that the primary reason Facebook bought Instagram originated from a much darker place: paranoia.

The buy, driven entirely by Zuckerberg, was made because Facebook’s CEO was petrified of Instagram becoming a Twitter-owned property.

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Zuckerberg, we’re told, lives in perpetual anxiety, preoccupied by the fear of Facebook losing its place, terrified that youngsters will get their social networking fix from other services. That fear served as the catalyst behind his decision to buy Instagram and keep it out of the hands of a cross-town competitor.

This type of paranoia is relatively normal at Silicon Valley’s largest technology companies. “These huge West Coast companies, peopled mostly by kids who cannot believe their good luck, commonly turn paranoid and think everyone is out to get them,” veteran columnist and broadcaster John Dvorak told VentureBeat. “Microsoft was the worst but not the first. Apple acts this way with Android, and Google has been paranoid for a few years.”

Indeed. Paranoia is a way of life in Silicon Valley that dates back to the earliest days of Intel, as former Intel CEO Andy Grove detailed in his 1996 book Only the Paranoid Survive.

Photo credit: leweb/Flickr

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