Photo-Sharing Service Instagram Gets $7 Million in Funding

Over the last decade, the market for photo-sharing services on the Web has come to resemble a relay race. One service rises to prominence and then gets overtaken by a more innovative newcomer.

Photo-uploading sites like Ofoto and Shutterfly emerged at the end of the 1990s as consumers began collecting and printing digital photos and creating simple albums online. Flickr was founded in 2004 and acquired by Yahoo! (YHOO) the following year, giving serious photographers a place to publish and show off high-resolution images. Other photo sites like Google's (GOOG) Picasa, MySpace's (NWS) Photobucket, and, more recently, Facebook have each taken their place at the head of the pack.

A new photo service called Instagram may be next. Designed for use with Apple's (AAPL) iPhone, Instagram has managed to attract in four months 1.75 million members, who are uploading 290,000 photos per day. The program lets users snap pictures with the smartphone and add visual effects that give images the look of photographs captured on traditional film and developed with chemicals. Then members can post their shots to an Instagram online account or to services like Facebook and Twitter. They can also comment on other people's pictures and browse the collections of the most prolific photographers. "You post and a community gives you instant feedback," says Scott Beale, founder of Laughing Squid, a Web hosting company, who has embraced the service. "It's a quick way of seeing what everyone is up to with minimal effort."

Instagram represents a new kind of stylish startup on the Web—one whose skyrocketing popularity, thanks to the prominence of outlets like Apple's App Store, largely precedes its evolution into a traditional company with such accoutrements as financing, office space—or even a permanent Web address. Despite its rapid growth, Instagram has only four employees; Twentysomething co-founders Kevin Systrom and Mike Krieger work with two colleagues in a former conference room, adorned with vintage Polaroid Land cameras, in the San Francisco office that was once home to Twitter. They say they have never created a single PowerPoint slide deck explaining their moneymaking plans (which are hazy, but will involve advertising). And they only recently purchased the Web address from a cyber squatter in China (they launched the service with the clunkier URL, using the Web's country code for Armenia).

High-Profile Investors

Instagram is about to get the backing it needs for expanding in other ways. On Feb. 2, Instagram will announce its first major round of funding: $7 million from Silicon Valley venture capital firm Benchmark Capital and a list of high-profile Silicon Valley investors including Jack Dorsey, a Twitter founder, and Adam D'Angelo, co-founder of another suddenly fashionable Web service, the question-and-answer site Quora. The startup will use the funds to hire engineers and add features. Instagram "enables people to tell their story through a visual dialogue in a way that feels very intuitive," says Matt Cohler, a partner at Benchmark, who will join Instagram's board of directors and apply some of the lessons he learned about rapidly growing Web services at his past employer, Facebook.

Systrom, who was a product marketing manager working on Google's Gmail just two years ago, says his creation benefits from luck and good timing. "There's this new wave of folks that are obsessed with mobile phones and obsessed with taking photos of the little but beautiful parts of their day, like sunsets," he says. "People are now sharing their lives as they happen." Also key to Instagram's popularity is the emergence of devices like the iPhone 4, which has a 5-megapixel camera that takes respectable photos, and wireless networks that are now fast and reliable enough that people don't mind uploading pictures as they take them. The startup also has some influential friends. When Instagram first released its application in October, Dorsey, Twitter's chairman, wrote about it to his million-plus Twitter followers. A few days later, Apple made Instagram the featured app of the day on the App Store, and soon after Apple marketing exec Phil Schiller signed up and started posting photos to the service. The site has resonated beyond Silicon Valley. Last month the rapper Snoop Dogg became an Instagram user. He has 2,000 followers on Instagram and has so far posted 14 pictures, mostly of himself.

Instagram will need all the fans it can get. Tech blogs and even many venture capitalists believe Twitter will introduce photo-storage tools and make it easier for its members to share photos, features that may reduce the need for services such as Instagram's. Then there are the well-funded competitors, such as Mixed Media Labs, which raised $5 million from Marc Andreessen's venture capital firm, Andreessen Horowitz, and built an application similar to Instagram called Picplz. Mixed Media Labs Chief Executive Officer Dalton Caldwell says he believes he can catch up to Instagram by moving more quickly. Picplz already has a fully working website and applications for the Google-backed Android operating system as well as the iPhone. It's also got a grand total of eight employees. In the fast-moving world of Silicon Valley mobile startups, even Instagram may not be holding the baton for long.

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