One of my (joencmorrison) instagram photos of an icebound boat; a pretty photo thanks to a nifty app.

Who knew 30 million geeky hipsters could be worth so much? As an instagram user, I’m flattered. I love this app: To a large extent, it makes taking photos, prettifying them, and sharing them with others a snap. I’ve even used it to help design business presentations. But not only is Instagram imperfect, it’s also probably not worth a billion dollars.

Acquisition at this price is evidence of a bubble. And if you don’t believe that based on Instagram’s lack of monetization, and you don’t have a sinking feeling that will all look back on deals like this as crazy and overblown, then perhaps you’ll believe it due to some further evidence. A week earlier, Instagram’s business was valued at $500 million when it closed a Sequoia Capital (and others) funding round. Doubling its value in a week and selling out to a Valley giant seems a bit too closed ecosystem to me, a bit too cozy.

Alarm bells started ringing when I came across these quotes:

• “Remember this day. 551-day-old Instagram is worth $1 billion. 116-year-old New York Times Co.: $967 million.” (the WSJ’s @dkberman via NPR)
• Facebook is acquiring a company “that (is) fast growing, doesn’t have revenue or a business model, but has become part of the online culture,” Gartner analyst Ray Valdes (via Reuters).

I have a hard time accepting that the online cultural significance of Instagram merits a billion dollars. I may detest Zynga’s products, but I at least respect them for generating cash from users. Instagram is completely unmonetized. Facebook cared enough about the buzz and the competitive opportunity to value Instagram at $33 per user; Facebook itself is currently valued at $117 per user (via Forbes). So Instagram is worth more than a quarter of Facebook’s business, a company that has 845 million users worldwide?

As an old-fashioned plebeian investor I tend to care whether a business likes Instagram makes any money now, can in the future or at least has some path or idea of how to get to inbound cash flows. While I can accept intrinsic value to a user base, while I love the app, I can’t accept that most online or mobile businesses that the entrepreneurs of today build end up only becoming future cost centers for tech giants. This seems unsustainable.

I remember distinctly the collapse of the last Internet bubble. I was invested there, and the principles behind my investment were fine: I was in a diversified fund, and indeed, if you were invested in the right choices you made money in the businesses that would change the world forever. There were very few of these, and they tended to be difficult to find, even for professional fund managers. I lost a lot of money. Two things crushed early investors in tech: One was the creative destruction surrounding business models, which weren’t validated (and maybe still aren’t); the second was that there was way too much heat out there –any online business idea was getting funded, plenty of bad ones were getting bought–too any companies circulating which held no real value.

In business school, we’re taught to some extent that it’s just fine if you launch an online business without a clear route to cash flows: There’s value in the users. This was true of some of today’s tech giants (Facebook, Google) and there’s truth in needing to shift and pivot, truth in businesses needing time to figure out the right business model and approach. Given access to enough time and funding, some do.

Most are not afforded this luxury, and most online businesses, whether only initially funded, sequentially funded, or not funded–they fail. So it’s not that I don’t think that Instagram shouldn’t be rewarded for getting fast traction and building a 30 million person user base in two years: it’s not that I don’t understand that there are competitive dynamics at play. It’s that things are getting a little too hot again and I don’t like companies that don’t make money.

When I was graduating business school, I remember sitting next to one of my peers in the computer lab as he searched for jobs and I setup the next pitch for my venture. At the time I was excited to promote a mobile business that had a clear route to monetization; but my peer was frustrated with his experience learning about entrepreneurship, particularly about the online world. Much of what we learned about starting businesses online, he argued, “isn’t entrepreneurship. It’s playing the lottery.”

That always stuck with me. Deals like this feed speculation, build the bubble and in the long run, end up damaging the industry.