$1 billion for Instagram is a big number for a company with no revenue. That's a bigger valuation than The New York Times, and about 30x more than the last major photo sharing app acquisition, Flickr, which sold for a mere $35 million to Yahoo! in March 2005. It's a year's worth of cash flow for Facebook--a company that is about to ask a lot of stodgy public investors to start buying its shares. I'm personally not thrilled to see such unfathomable valuations in an industry that is constantly at threat of mania. But if the world of startups can learn the lessons of building a great product from Instagram, $1 billion will be a bargain. The story of Instagram's launch is a brilliant case study of all that is right about building a great product by designing for people's needs. To make a long story short, the founders of Instagram originally planned to create a social network called Burbn. It was essentially Foursquare with photo sharing and a lot of other features to help you "discover and share" with others. Today it sounds a lot like the Social Discovery Apps that were fighting for attention at SXSW this year. The team spent 8 months working on the product--which few of their friends and family really used. In other words, it was just another failed idea. The team realized that the users had spoken, and they chose to start over.

We decided that if we were going to build a company, we wanted to focus on being really good at one thing." - Kevin Systrom in Fortune

They saw photos as a big, existing market with universal appeal and a seemingly endless ability to add value, and they made a big decision to focus their efforts. In looking across the photo market, they loved the filters of Hipstamatic, and hated how Facebook, Flickr and other social networks made mobile photo sharing so difficult. The solution was simple, and took only 8 weeks to get to market. The result won on many keys to new product success:

• Make something people love - People already cherish photos and the subjects of their photos--like the "gaggle of cousins," above. By making a great thing even better you succeed. We see ideas like this win again and again in our Minimum Viable Concept tests.

• Make people better - By using Instagram amateurs can make art; and it doesn't take $1000 cameras and monkeying with special lenses and light settings. Everyone has a desire to create something beautiful, and the simple filters of Instagram make magic.

• Solve a problem - Before Instagram you had to use individual social networks and email accounts to share photos--a true pain, as photo sharing is one of the most popular online activities.
• Built-in word-of-mouth - Instagram built word-of-mouth marketing into its core service. As Max Klien says, "build around your discovery mechanism."
• Provide an immediate "wow" - Mobile apps win when they provide "ahhh!" value within the first 60 seconds of downloading. Otherwise people get bored and move on. Instagram makes photos instantly look great.
• Build a habit - Lots of apps get a first "wow" but very few are used again after the first day. Instagram found success here by allowing people to discover and follow each other. You're hooked by creating your own photos, then suddenly discover a wide field of amazing photographers who make you laugh, cry and think. (You should learn more about habit-formation by clicking here)

  The other big lesson from Instagram is that there is always room for creative+disciplined entrepreneurs to build enormous businesses right under the noses of the market leaders. Kodak fell behind long ago--and the other manufacturers (e.g. Sony, Samsung, Canon) know nothing about software. Flickr has been stuck in the bureaucracy of Yahoo! And even Facebook fumbled because it was too busy making the entire world sharable. It has never been harder to innovate in a large company, and it has never been easier for a small startup team to create a billion-dollar business. In the short-term, the zaniness of Instagram's $1 billion price tag will dominate the news and water cooler conversations. Instagram will be absorbed into Facebook somehow, and we'll find a new killer photo app to try and share. But I hope in the long-term that our startup ecosystem captures a photographic memory of the beauty of a product-market fit that is Instagram. You should learn more about the MVC Test here, and follow me on Twitter here +Bob Gilbreath