Open source was worth at least $143M of Instagram’s $1B acquisition

Every tech company built after 2000 has benefitted from open source infrastructure — that is, free, public code that anybody can use to build software.

It’s saved companies countless dollars, developer hours, and headaches to be able to use someone else’s code to get up and running instead of having to build everything from scratch.

I decided to take a stab at calculating how much that infrastructure is actually worth to a company.

Instagram is a great example to look at, not just because of its acquisition price, but how quickly it was able to scale and exit.

Instagram was famously acquired by Facebook in 2012 for $1B, two years after it launched, and at double the Series B valuation they had raised on just a week before. Today, $1B+ valuations are not so unusual, but at the time, it was an astounding figure for a consumer photo sharing app. The hefty price even spawned a new unit of measurement: Google acquired Nest for 3 Instagrams, Facebook acquired Whatsapp for 19 Instagrams.

Cofounders Mike Krieger and Kevin Systrom have been remarkably transparent about Instagram’s underlying infrastructure. Mike noted that “neither of us had deep infrastructure experience” when they started Instagram and pays it forward by sharing their knowledge.

Mike frequently credits open source infrastructure with helping Instagram grow so quickly. In 2013, he recommended that similar founders “borrow instead of building whenever possible”:

There are hundreds of fantastic open-source projects that have been built through the hard experience of creating and scaling companies; especially around infrastructure and monitoring…that can save you time and let you focus on actually building out your product.

Mike particularly points out that “mature” and “stable” projects are important for building core software components, rather than risking stability by using something experimental or building it oneself.

In February 2012, Mike wrote a terrific blog post highlighting some of the infrastructure that powers Instagram. He emphasized that Instagram’s principles in building their system were:

Keep it very simple
Don’t re-invent the wheel
Go with proven and solid technologies when you can

And Instagram’s underlying technology reflected these principles: of the 20-odd tools that he listed, nearly all were open source.

It’s clear that open source played a serious role in Instagram’s ability to not only get the initial version out the door (Mike noted that “When we started, we were running on a single server in LA with less computing power than a Macbook Pro”), but also to scale in the face of unprecedented demand (1 million users in their first three months).

So how much was that actually worth to Instagram, financially?

I tried to approach this question from a couple of different angles:

  • Open source makes it cheaper to build things. I could have estimated the cost of each developer tool if Instagram had to pay for them.
  • Open source make it faster to build things. I could have estimated the number of developer hours it would have taken to build Instagram if they had to do it all from scratch.
  • Open source makes it faster to scale. I could have estimated the headcount they would have needed to scale Instagram, or the additional dilution Kevin and Mike would have taken if they weren’t able to raise at such high valuations.

I ran all these different scenarios in my head, but there were just too many. It would have been a behemoth task, for example, to list out all the open source technology that Instagram uses and calculate the cost of each.

Finally, feeling overwhelmed, I consulted the help of my life partner and best friend, Nathan, who won his first guess-the-jelly-beans contest when he was 10 and has an uncanny superpower to guess just about anything within a 5% margin of error.

We reviewed all the ways to estimate the financial value of open source to Instagram’s $1B acquisition. Nathan zeroed in on the “faster to scale” option. “Why not calculate the present value of $1B over a shorter vs. longer timeframe?”

Perfect.

So we started with a very conservative assumption: Open source helped Instagram reach an exit twice as quickly. This is a perfectly reasonable claim, given Kevin and Mike’s lack of resources at the outset, and how quickly Instagram grew its user base and valuation.

What was it worth to Instagram’s shareholders (investors, founders and employees) to be able to exit in 2 instead of 4 years?

Calculating the present value of $1B:

$1B/(1.1)^2 = $826M in a 2-year timeframe

$1B/(1.1)^4 = $683M in a 4-year timeframe

The accelerated time frame enabled by open source infrastructure created an additional $143M in value, or a 21% increase.

(Note that while this is a very simplistic approach, the base assumption is also extremely conservative. A company using open source infrastructure can launch and scale today for 1/10 of the cost. This impacts how startups get built in so many ways; it is nearly impossible to imagine the full impact.)

If open source infrastructure created hundreds of millions in value for just one company, imagine how much it is worth to our entire economy.

I’m currently exploring better ways to support open source infrastructure. If you want to stay involved, you can sign up here to get updates when I post something new, or follow me on Twitter.