Understanding Instagram’s founding story and more from SXSW

Each week, Extra Crunch members have access to conference calls moderated by the TechCrunch writers you read every day. This week, in addition to Zack Whittaker’s discussion about a complicated university grade-hacking case, Josh Constine reported from Austin where he attended SXSW.

While at SXSW, he interviewed the founders of Instagram, Kevin Systrom and Mike Krieger. They discussed autonomy within Facebook after the acquisition, Sen. Elizabeth Warren’s proposal to break up big tech and early experiences being a small team heading a big product. There are indeed some gems about fixing code over dinner and on camping trips after a few drinks.

He also discussed the ins and outs of a few startups he saw at the event, including Ever Loved, which he wrote about this week, Clearbanc and Formant.

For access to Constine’s full transcription and the call audio, and for the opportunity to participate in future conference calls, become a member of Extra Crunch. Learn more and try it for free.¬†

Josh Constine: Thanks to everybody for joining the Extra Crunch conference call. I’m Josh Constine, the Editor at Large for Tech Crunch.

On today’s call, we’re going to be discussing SXSW and some of the insights from there, because I know a lot of you don’t go anymore, as SXSW has kind of fallen out of favor amongst the innovation crowd. We’ll talk about my talk with the Instagram founders and what they discussed about why they left Facebook, and what they’re doing next.

We’ll talk a little bit about some of the landscape here, and what’s been changing in terms of who are the big players and who’s kind of pulled back, which might be a sign of companies trying to right their balance books.

And then finally, I’m going to talk about a few startups to watch. And again, as we go through this, if you have questions, feel free to chime in and discuss them with us.

So, let’s kick it off and talk about Instagram founders Kevin Systrom and Mike Krieger. So they left Facebook in September, and this is their first big talk that they did together as a team. And that was really exciting. We did it in front of a 2,500-person audience. It was totally sold out. There was a line thousands of people long, and thousands of people actually had to be turned away. So it was really exciting to have that level of interest, because I think people really do want to know, not only where is the future of social media going, but what really happened inside of Facebook while they were there.

And so after talking a little bit about their superhero origin stories, where Kevin Systrom, the former CEO, used to use AOL instant messenger booter programs to boot people off of AIM, and that was how he sort of got exposed to computer science. And co-founder Mike Krieger was hitting view source on browser on everything he could find, to try to learn how things work. From those roots, they ended up getting in this period that they called incredi-bad, which was when Instagram was growing so fast that the servers were basically melting, and Krieger would have to bring his laptop with him on camping trips, to every dinner, just in case he might have to fix something.

And he told us a hilarious story of one time waking up in the morning and seeing that a big problem with Instagram had been fixed, and the site had been revived, and he couldn’t figure out who had done it. And only by checking the code base did he actually determine that he had woken up drunk in the middle of the night and fixed the entire site.

So pretty exciting to see how just a few people can control an app that has such a massive influence. But when we fast forward to what was going on at Facebook, they talked about their autonomy, and they said — I think the most interesting insight of the whole panel — was that they thought losing autonomy within Facebook was actually a sign that Instagram was winning. And what they meant by that was that eventually, if an acquisition becomes really powerful, if some app that gets bought does really well and starts growing, to rival the size of the acquirer, it’s almost fiscally irresponsible for that acquirer to let that acquisition operate completely independently, without really trying to develop synergies with the rest of their products.

Systrom said that he thought it was totally natural, and actually predictable that eventually Instagram would lose autonomy within Facebook if it succeeded the way that it did. And that’s a pretty rosy way of spinning the conversation, though. And what I think you can read between the lines there, in talking about how they grew to have some disagreements with the company and with Facebook, it sort of tells you a little bit about why they’re leaving.

One reason they said that they were not leaving, was because they were forced to do modernization. That was a big claim that a lot of people assumed was, oh, the pressure to make money was what made them leave Instagram. In fact, Kevin and Mike said that they had been trying to make money off of Instagram. They wanted to contribute to Facebook’s bottom line, and they knew that they would only get the resources they needed and be able to be sustainable and grow their product, and grow their product team, if they were making money.

So they actually were very early in pushing Facebook to allow them to monetize. But, as that autonomy dwindled, it became very clear that they might have started one of the biggest things in the world, but they were not in control anymore. And I think when you’re a real leader and you build something, after 10 years, you want to have that leadership again. So it’s understandable that the Instagram founders eventually left.

And they did stick around for quite a long time. Remember, Instagram got bought in 2012. So it took them about six-and-a-half years to leave the company, so that’s a pretty remarkable tenure for acquired founders, and I think it actually proves that Facebook in the past has treated its acquisitions pretty well, when you think about it in comparison to other companies. If you look at Twitter, Twitter has pretty reliably dismantled or destroyed most of the companies it acquired, whether that was Vine, you know, Periscope has felt very neglected. They acquired a company called Niche that did influencer marketing deals, and they basically let that die out.

Twitter has reliably proved itself to not be a good acquirer, whereas Facebook, whether it’s Oculus, WhatsApp or Instagram, the company really gave them the leeway and the funding that they needed to grow really big. And what the Instagram founders recommended for, whether it’s an investor or a founder out there, when you’re considering whether your company should sell, you should know that you may just not get those resources.

You have to be okay saying that if this company buys me and then a year later decides that they want to shift in a different direction, that you have to be okay with that. You have to accept that that’s the fate of your product. And if you’re going to go into that feeling a ton of regret if that happens, then maybe you shouldn’t be acquired, you shouldn’t sell the company.

The other really interesting segment of our talk was discussing regulation. And so, Kevin Systrom admitted that there are a lot of problems with big tech, and he thinks a lot of the criticisms are well founded, but he took up issue with Elizabeth Warren, the Senator who’s now a presidential candidate, and her proposal to roll back acquisitions like Facebook’s buy of Instagram and WhatsApp, as well as doing more to regulate how Amazon allows its own products to be sold on its marketplace, how Apple excludes other people from building their own app store, or how Google preferences its own products in search results.

And Kevin Systrom said that there wasn’t enough nuance in this proposal, that it kind of lumps all of big tech together. And he thinks that breaking up companies is a very specific prescription for a very specific problem, but if you’re trying to alleviate election interference or solve bullying and safety issues, things like that, that’s not going to get solved by breaking up the company, and actually could make it more difficult, because those shared resources allow a company like Facebook to apply safety in moderation resources across the suite of apps.

Though, they did seem more amicable to the idea that Amazon specifically abuses its position as both owning the marketplace and having its own products within that marketplace, and that Google was able to preference its own restaurant reviews and locations database above things like Yelp, that might have more reviews.

And I think going forward, the question will really be can the government figure out how to create a nuanced enough platform for regulation of big tech, that it actually gets the different sectors of tech to support it? If they can make something that it feels nuanced enough that people from Facebook want to support the regulation of Amazon, or the people from Google want to support the regulation of Apple, because they don’t see it as just a shotgun approach, or using a sword when they should be using a scalpel, then I think this kind of regulation will be able to have a lot more luck of actually passing.

And finally, they also talked a little bit about what they see as going on next. But one last point on the regulation stuff. I thought their shakiest and weakest part of the talk was the Instagram founders saying why they thought Instagram being bought by Facebook actually benefited users. I was completely confused by this, and even when I asked them on follow-ups, they didn’t really elucidate their point.

Mike Krieger said that he thought Instagram getting bought by Facebook led to a gold rush of startups trying to be the next Instagram of video, Instagram of audio, Instagram of dog photos. So that supposedly increased competition. But clearly, we haven’t seen any of those companies grow to become real rivals to Instagram or Facebook. The only company that’s really succeeded there at all, and it’s still having a lot of trouble, is Snapchat, and that was started before Instagram got bought by Facebook.

And meanwhile, Kevin Systrom said that internal competition between Facebook and Instagram actually benefited consumers because it made them compete to create the best features. And while that might have been true in terms of trying to equip users with the best creative tools, it didn’t necessarily protect them from the privacy invasions of Facebook and Instagram, because the company knew that it didn’t matter if users left Facebook for Instagram, or left Instagram and went back to Facebook, that that wasn’t a problem for their business.

There was no incentive for them to treat users better when it comes to data portability, safety, and privacy. And I think that the government is not going to take those arguments in kind. They’re not going to say oh, of course. Internal competition was plenty. I think they really are going to want to see more external competition, which is the hope if Facebook gets broken up and Instagram is split off.

One last thing is that they did discuss where they’re going to be going next, but that’s really just that they’re currently still exploring ideas. They took some time to unplug, and they feel like they’re now re-energized. But they’re looking at new ideas.

It’s probably not going to be another social media app, but it will likely have something to do with creativity. But they were not ready to reveal anything just yet.

Attendee question: Do you think Instagram ultimately is a sign that, you know you’re talking about Facebook’s sort of corporate development. I mean, are future startups going to be worried about joining Facebook going forward, or do you think ultimately Instagram’s success over the last couple of years sort of says, look, Facebook knows how to grow these companies?

I think it will be a balance between that. I think the circumstances of them leaving, the way that that news leaked out, and the fact that they didn’t really have a great line of narrative on exactly why right away, definitely led to a lot of people viewing, I think, their departure as more contentious than it is. And I think that that may scare off some people from being acquired by Facebook.

That said, like as I discussed with Twitter, if you look at other acquirers, they’re often not a lot better. A lot of companies dismantle the companies that they acquire, or they underfund them, and that’s one thing Facebook hasn’t done. So I think its reputation there is still relatively strong.

And the fact that an app that had about 50 million users now has over a billion users, is a testament to how Facebook’s machine can really help grow a company. A lot of people might assume, oh, Facebook gave them a bunch of like distribution reach. That’s not really what Facebook helped Instagram with. The big things were these back-end problems that would have cost Instagram a ton of time and money to solve, and that includes internationalization, because Facebook had proven to be pretty much the world leader in building out a service for different countries. Anti-spam, if you remember spam was really overrunning comments on Instagram circa 2012, and Facebook’s anti-spam technology was really able to help solve that.

Plus, there’s the whole monetization wing. Facebook basically just extended its existing ad manager to let you place ads on Instagram. That made building the infrastructure for Instagram’s ad business extremely cheap and efficient, and very easy, so they could focus on building the product. And that’s one of the reasons why I think Instagram’s product has evolved so quickly and managed to leapfrog Snapchat, is because it hasn’t had to worry so much about the monetization, because Facebook has taken care of that.

So with that, I’ll talk a little bit more about SXSW as a whole. You might remember when South by Southwest was the darling of the media industry, circa about seven years ago. That was when Twitter and Foursquare and companies were getting off the ground. GroupMe hit its product market fit here, which led to a massive acquisition by Skype and Microsoft. That was the frothy days, when you just might run into a big time CEO on the street of South By.

And that is not how SXSW is anymore. It’s become a lot more of a festival than a conference. A lot of the really big tech leaders, they view it as a bit too branded, a bit too exhausting. And the influencers in the tech world aren’t there. It’s become more of a general festival for the public.

And so, a lot of those companies aren’t coming out. And a lot of them aren’t sponsoring the way they used to. There used to be these enormous parties with extremely high priced musicians, paid for by companies like Zynga and Uber, and a lot of those companies have scaled back how they’re approaching this problem.

So instead of having … Instead of trying to spend a ton of money to just impress a lot of people, they’re doing much smaller, much more focused events for VIPs, and they’re running marketing installations like Uber Eats is this week, that really focus on what their business does. And so, Uber Eats specifically is looking at … Basically has a booth where each day they have a different popular food vendor from somewhere in the US, and people can just line up to get free samples for takeaway. And it does exactly what Uber Eats does. It shows the value of the product, which is getting food fast, and that’s been a really valuable installation for them.

Meanwhile, I think we’ve seen a lot of the mid-stage startups hold back from South By. Because they’re really trying to show that they have a clean balance sheet, that they’re not wasting money, especially if they’re still trying to raise those later stage rounds, and they’re not really ramping towards IPO just yet. They need to show their financial health, and wasting a ton of money at South By is not necessarily the way to do that.

That said, you do definitely still find some really scrappy hustlers and entrepreneurs out here. And I have met some cool companies. Last year I talked about an awesome company called Proveit, which does real money gambling over trivia. It’s basically one-on-one HQ trivia, where you bet money. And there are some cool products like that that are still coming out of South by Southwest. But it’s not the same way as it was before, where it’s really the center of the tech industry, where everyone is spending a ton of money.

But, if you want to go to some good concerts, eat some brisket tacos, it’s not a terrible place to be. I think Twitter makes it out to be a lot more of a hellscape than it really is.

Attendee question: Josh, one question I had, looking at some of the brands participating in sponsorship, have there been any brands delivering unique or exceptional experience with marketing tactics that have really stood out to you?

I think Lululemon has done some really impressive stuff with actually helping people stay healthy at the conference. It’s a place where you can easily overeat and over drink for a week total, and just sort of come back completely shot. And the fact that they’re running these exercise classes, things like that there, I think is a really smart move for them. Patreon also has a big house, and you know, they’re really perfectly aligned at the center of this creative community that comes to SXSW. And so, for them it makes sense to do this.

But one thing I’ve found is very fascinating is the big music tech companies have massively pulled back. Spotify used to have this giant venue where they ran concerts all day and night, every day. No such installation this year. Sound Cloud isn’t throwing any big parties. Pandora has gotten rid of its massive house. Really, the only big music tech company that’s throwing sizeable events right now is VEVO, which has a small venue, but with some really elite artists. They had Nelly play the other night. Because I think they know they really need to impress those music bookers and those music industry professionals. And yeah, that’s one of the biggest ones I’ve seen.

And the other is Sub Hub. And that’s a terrible sign that one company was making enough money to actually support throwing big Sub Hub parties. It’s a company that’s basically a scalper of tickets. So, I find that a bit alarming, and I hope that as we come forward in the future, the future South Bys will see some more of those mid-stage startups figure out how their product market fit aligns with providing a service to the customers and people who show up at South By, so that their marketing dollar actually gets them a real ROI.

So with that, I want to move on to talk a little bit about some startups to watch. There’s been a lot of really cool companies that we’ve been covering recently, that I think you guys should take a look at.

One that I’m really excited about is called Clearbanc. They just raised $70 million a few months ago, and then raised another $50 million just a few months later. And what Clearbanc does is it offers an alternative to venture capital for startups that are looking to raise money to be able to finance advertising. So this is for companies that actually make a real product, and they sell it and they make money when people click through their ads. And the real problem for them is just the lack of ad money.

And what you see startups have to do, typically, is go to venture capitalists and sell their equity to get money, just to pour into Facebook ads. And that’s a terrible way to sell your equity. So clear Bank offers what are effectively 6% interest rate loans, where they will get a startup’s Stripe account, their Facebook ad accounts, they figure out if they’re really, truly ROI positive, and they just need more fuel for the fire. And then they loan them as much as $50 million at a time, to be able to buy those ads. And they’ve seen companies be able to massively increase how much money they’re making, because they can actually buy as many ads as possible.

And so, that’s a really fascinating company started by Andrew D’Souza and Michele Romanow. Michelle you might know is one of the sharks of the shark tanks of Canada, called Lion’s Den, and she’s seen so many of the CPG and consumer hardware businesses that could really blow up if they just had enough ad money. And so that’s why they built Clearbanc.

So that’s an awesome startup that’s really going to change the venture capital landscape, because if you’re a startup that needs that ad capital, you don’t have to be locked into these venture capitalists that are going to dilute you and really, you might end up paying … If your company grows significantly or you raise some big follow on rounds, you might be paying $100 to the dollar for ads, just because you sold your equity.

One other startup that I think is really fascinating in a similar space is called Untitled Lab. This is from Roger Dickey. He had started a company called Gigster, which raised $32 million to do on-demand product development for big companies. Basically, they’ll make any app you want. Just give them the specs, and they pull together a product manager, designer, engineering team, and they follow up with you every step of the way, so you can do completely outsourced app development. And this is really valuable for bigger companies who don’t necessarily understand innovation, or don’t have the kind of elite, mobile product teams necessary to build these current products.

So, now he’s left his own company, because he wants to go … He’s always been a consumer guy. He originally started Mafia Wars, that sold to Zynga and became Mob Wars, one of these enormously popular mobile games in the last naughts that was on Facebook. And so, he wanted to get back to his consumer roots.

So he started Untitled Labs to build out a bunch of new ideas, test them in house, and then find great operations and execution teams to go forward building those. So if you’re interested in starting up a new idea, or you want somebody who … If you’re looking for a partner in a project, keep an eye on Untitled Labs and Roger Dickey.

I’m going to talk about a company called Ever Loved. This is a really awesome company, started by an ex-Googler. Her name is Allison Johnston. She was one of the early employees at Aardvark, a Q&A service that got bought by Google, and then she started a company called InstaEDU, which was on-demand tutoring, and that sold to Chegg. And now after two years, she’s left and started her new company called Ever Loved.

And what it does is, it’s a comparison shopping engine for funerals. And that might seem like a weird place to want to get into as a startup founder, but she realized that it was really difficult to find pricing estimates, see reviews or get advice about the end of life process. And a lot of the brands that exist in this space, they either are all education, or they’re all commerce, and they don’t necessarily bridge those two.

So she built Ever Loved, which offers both a comparison engine for shopping for funeral products, that right now is making money off of affiliate fees for Amazon, but will eventually be creating a true two-sided marketplace to sell these products. And meanwhile, she drives attention and traffic to that comparison shopping engine by building a memorial site builder, so that you can collect memories, or distribute invites to a memorial service. And, users can actually fund raise right through the memorial site.

So, for people who don’t have enough money to cover the funeral costs, you know, most Americans don’t have more than $500 in savings, but a funeral’s average cost is $9,000. They can actually fund raise from their community to pay for that funeral, or if they already have the money for the funeral, they can fundraise for a cause that was close to the heart of the person that passed away.

And I’m just really excited about seeing more Silicon Valley tech companies tackle real problems that affect everybody. Not just the elite, not just the office worker, not just somebody who lives on the coast, but everybody. And especially people in financial hardship.

And I think there’s a lot of green space in that area to innovate, because so much of what’s been built so far has been built by tech use, for tech use. Problems that they experience as they work at big other tech companies, like all these SASS products, or something that anybody could instantly understand why they might want it, like a consumer photo app.

But these more niche utilities for the average person, but that is for a problem that night everyone might have in Silicon Valley, I think are going to be a really valuable place for innovation. And that’s where we’re seeing companies like Flexport do an extraordinarily successful business, where you’re basically approaching an un-sexy problem, but bringing sexy modern technology and approaches to it.

And lastly, one more company I think is really cool, that focuses on a big mega trend, is called Formant. And basically, this is building the intelligence system that allows humans and robots to work together in a new way. So, a lot of times, robots are basically tireless and efficient and reliable, but they don’t have the human intuition to make the decisions about edge cases.

And so until the workplace robots are really perfectly ready to be able to handle those edge cases on their own, they need humans behind them. But it’s not efficient to have human per robot. And so Formant is building software that allows a single person to control maybe 10 robots at a time, and the robots basically ask through Formant, “Oh, I’ve found an edge case which I don’t understand. My AI says my confidence level of my approach to this problem is low, so I should just ask for your advice.”

And by doing that, they can very quickly solve these problems and get those robots back to work. And I think that this is going to be a huge area, because a lot of these … A lot of people want to add robotics to their product line, to their manufacturing process, but they don’t necessarily know how they’re going to handle the complexities of these problems that humans have been handling for so long.

And so, if we’re really going to get to this future where robots and humans can work together, software for controlling those robots efficiently at scale is one big piece of it, and another big piece of it is the augmented reality world map, both indoor and outdoor, that will allow robots to act as if they understand what’s around them, and basically give a crowdsource set of eyes to robots.

And companies like Fantasmo are working on that. Fantasmo’s first use case is to create an augmented reality map of streets that’s more accurate than GPS, so that scooter can put a camera on the scooter, that detects where they are based on the vision of what camera is seeing. And then you can say, hey, you’re riding on the sidewalk, we’re going to start applying the brake and putting off this alarm bell until you actually go back onto the street like you’re supposed to.

And so, I think any startup that is going to be able to build that scaffolding, that infrastructure that allows humans and robots to work together, is going to be extremely successful. And probably more successful than the companies building the specific robots for the specific use cases.

Well, I think it’s been really awesome getting to talk with all you guys about these ideas. Thanks again. I’m Josh Constine, the Editor at Large for Tech Crunch, and thanks for coming to the Extra Crunch conference call.

To download and listen to the full conference call, click here.