Instagram: Picture a New Breed of Startup

Over the past decade, the market for photo-sharing services on the Internet has come to resemble a relay race, with one service after another rising to prominence and then passing the baton of buzz and leadership to a more innovative newcomer. Photo upload sites such as Ofoto and Shutterfly (SFLY) dominated the field in the late 1990s as people uploaded digital pics to the Web primarily so they could have them printed. Flickr emerged in 2004 and was acquired by Yahoo! (YHOO) the following year, giving serious photographers a place to publish and show off high-resolution images. Other sites such as Google's (GOOG) Picasa, Myspace's (NWS) Photobucket, and more recently Facebook have each taken a turn at the head of the pack.

Now the digerati are showering attention on a new photo service-cum-social network for the iPhone called Instagram, which in four months has managed to attract more than 1.75 million users who are uploading 290,000 photos a day.

The software—accounts are free of charge—allows members to snap pictures with their phones and add visual effects that give images the classic look of photographs captured on traditional film and developed with chemicals. Then users can post their shots to their Instagram accounts or to social networks such as Facebook and Twitter. They can also comment on other people's pictures and browse collections of prolific photographers. "You post, and a community gives you instant feedback," says Scott Beale, an Instagram user and founder of Web hosting company Laughing Squid. "It's a quick way of seeing what everyone is up to with minimal effort."

Instagram represents a new kind of Web startup: one whose skyrocketing popularity, thanks to platforms such as Apple's (AAPL) App Store, has largely preceded its evolution into a real company with accouterments like financing, office space, and a permanent Web address. Despite its rapid growth, Instagram has all of four employees; its twentysomething co-founders, Kevin Systrom and Mike Krieger, work with two colleagues in a former conference room adorned with vintage Polaroid Land cameras in a San Francisco office once home to Twitter. They say they haven't created a single PowerPoint slide explaining their money-making plans (which are hazy, but will apparently involve advertising). And they've only recently purchased the Web address from a cybersquatter in China. (When they launched the service, they used a clunkier Internet address with the country suffix for Armenia:

Systrom and Krieger have yet to create a website that mimics the app's functionality or a version for phones running Android—so far Instagram has been iPhone-only. That, however, is about to change. On Feb. 2, Instagram announced its first major round of funding: $7 million from Silicon Valley venture capital firm Benchmark Capital and a list of high-profile 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. Systrom and Krieger will use the funds to hire engineers, build an Android app, 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 and apply lessons learned about fast-growing Web services at a past employer: Facebook.

Systrom, who was a product marketing manager working on Google's Gmail just two years ago, says his creation benefited 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 helping Instagram is the emergence of handsets such as the iPhone 4 that take decent photos, and of wireless networks fast and reliable enough that people don't mind uploading pictures as they take them.

The startup has some influential friends. When Instagram first released its application in October, Dorsey, Twitter's chairman, tweeted about it to his million-plus followers. A few days later, Apple made Instagram the featured app of the day on the App Store, and soon after Apple marketing executive Phil Schiller signed up and started posting photos to the service. Last month the rapper Snoop Dogg became an Instagram user. He has 2,000 followers on the service and has so far posted 14 pictures, mostly of himself.

Instagram will need all the friends it can get. If Twitter introduces its own photo storage and sharing function—that may seem unlikely, given the Dorsey connection, but it's been rapidly adding features as it grows—that would diminish the need for a separate social network for mobile photos.

Then there are a few well-funded competitors, including Mixed Media Labs, which raised $5 million from the venture capital firm Andreessen Horowitz and built an application similar to Instagram called PicPlz. Dalton Caldwell, Mixed Media's chief executive officer, says he believes that he can catch up to Instagram by moving more quickly. PicPlz already has a fully working website, applications for Android as well as the iPhone, and a grand total of eight employees. By the standards of Silicon Valley's hot mobile startups, that's almost adulthood.

The bottom line: Four-month-old iPhone app Instagram became a hit before it got real office space. Now it has $7 million in venture capital.

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