Path, Instagram, and the Greater Fool Theory
Now we know why Facebook didn't build a good mobile app. It didn't have to. It could afford to pay $1 billion for a 14-person company, Instagram, that managed to figure out the secret sauce for winning over smartphone picture-takers. So, clearly, Path is next, right?
Not exactly. Path has a lot going for it, but it's lacking some key elements. It's a valuable company, but arguably over-valued given its recent funding news: A $40 million funding round from Redpoint Ventures (source: AllThingsD). Update 5:24 p.m.: Path said it has raised $30 million in a funding round.
Here's what Path has: the best user interface for social content creation. Path is a model for dozens of mobile startups-- not in functions, but in the way it works for users. Nearly every startup CEO I talk to who's working on a mobile app that looks halfway decent tells me that Path served as a design inspiration.
Path is also a good front end to Facebook. This is its hidden feature. It's easier and more fun to use Path to post a picture to Facebook than it is to use Facebook's own mobile app (I'm speaking of iPhone apps here). While Path is known as standalone micro-social network, it has utility beyond its own walls.
These two characteristics make Path valuable. But Instagram valuable? Not really, because Path is not a social powerhouse. As Om Malik notes, Path is no Instagram. It is, by design, a network of small networks. There are no celebrities on Path because nobody on the network can have more than 150 friends.
Another thing Path isn't: a threat to Facebook. The limited nature of the Path social model means that the system isn't generating the same social graph and interest graph data that Facebook is profiting from. There are (currently) no Path apps buttressing the business, either. It's just not a platform that's siphoning off the activity of Facebook's most passionate social photographers, as Instgram was becoming.
And for that, Path is valued at $125 a user ($250 million valuation on a reported 2 million users). Facebook is in the ballpark of $100 a user (it will probably be less on IPO). By this thinking, Instagram was a bargain at about $33 a user.
Is Path overvalued? By any sane analysis, yes. In fact, I could argue that Path's latest funding puts it in a dangerous no-man's land of valuation. It's a good product with a good team and it's worth a lot. But more per user than Facebook? That may be an unrecoverable position.
Instagram's $500 million valuation also looked loopy, until the moment Facebook bought it for $1 billion. It would be folly to think that Path can never recover its valuation in acquisition, because you never know how much Google, Facebook, Microsoft, or Apple is willing to pay to keep a core product out of the hands of competitors.