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Andreessen Horowitz Defends $78 Million Expected From Instagram

Venture capital fund Andreessen Horowitz says its $250,000 investment in Instagram will be worth about $78 million after social network Facebook Inc. (FB) closes its $1 billion purchase of the mobile photo-sharing startup.

Ben Horowitz, a co-founder of the venture firm, said on his blog that the fund passed on another investment round in Instagram to avoid a potential conflict of interest after backing Dalton Caldwell, whose company built a mobile photo- sharing service called PicPlz.

“Despite Instagram’s awesome performance and our monstrous return, a number of articles have come out criticizing us for not making even more money,” Horowitz said. That has put the entrepreneurs behind Instagram and PicPlz “in an unfair light and glosses over an important ethical issue that we faced.”

When Andreessen Horowitz invested in Instagram, it wasn’t yet a photo-sharing company. It had a different name -- Burbn -- and was focused on microblogging, according to Horowitz’s blog post. Burbn founder Kevin Systrom transformed the service into Instagram to focus on photo-sharing, the most successful aspect of his original idea, according to the blog post.

That pivot put the venture fund in a bind when the time came to exercise its rights to participate in Instagram’s subsequent funding rounds, Horowitz said.

“Valuable Rights”

“These are important and valuable rights, but it seemed completely unethical for us to exercise them since we funded a competitor,” he said. “As a result, we unilaterally and without compensation or consideration gave Kevin back those rights and did not invest further in Instagram.”

Facebook said on April 9 that it agreed to buy Instagram, using its biggest acquisition yet to lure users of mobile devices.

Instagram lets users take pictures with smartphones, retouch them with borders and filters, and then post the images on social networks. Founded in 2010, it had become the most popular free photo-sharing application on Apple Inc.’s App Store and boasted more than 30 million users by the time the deal was announced. Owning it may help Facebook attract handset users and advertisers who target them.

Instagram was introduced in October 2010 by Systrom and Mike Krieger. Building on its popularity among iPhone users, earlier this month the company added an application for devices that use Google Inc.’s Android operating system.

Bloomberg LP, parent of Bloomberg News, is an investor in Andreessen Horowitz.

To contact the reporter on this story: Lisa Rapaport in New York at lrapaport1@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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