Instagram to raise funds at $500M valuation?

Photo-sharing app reportedly set to raise $40 million in new funding

If the rumors are to be believed, then Instragram is about to raise some significant funds at an hefty valuation. 

San Francisco-based Instagram is set to raise a round of $40 million for a valuation of $500 million, according to the Wall Street Journal. The new funds would bring the total amount raised to $47.5 million in this second round of investing. Not bad for a two-year-old service that only employs nine people.

It's not surprising that Instagram, an app that allows its users to share photos instantly, is a hot deal. Not only was the app an instant hit, reaching one million users in only two months after launching in October 2010, it has only grown stronger since then. This month, the app surpassed 25 million users and is adding 3,000 every hour. 

Apple even named Instragram its app of the year for 2011. The app is not available on Android devices, nor is it available on the Web.

Instagram is a free app which allows users to take photos with a variety of filters, such as Inkwell, which takes the photo in black and white, and 1977, which gives the photo the slightly worn out tinge of an old photo. Users can then share their pictures with other friends on Instagram, on their Facebook wall or their Twitter feed.

Sure there are other photo-sharing services, like Flickr. But Instagram not only takes great quality pictures, it immediately allows you to share them with the world. Its popularity stems from how easy it is to take a picture and have it up on your Facebook and Twitter in seconds.

Clearly, it's the penetration that's gotten investors ga ga because it appears that for now there's no real revenue model. In November, CEO Kevin Systrom told Business Insider that while he doesn't know what direction monetization will take, it is on the top of his mind.

"The question is, is there an opportunity beyond group buying, search advertising, to make a whole lot of revenue on the iPhone, on Android. I believe the answer is yes, that's what we're going after," Systrom said. 

If the company were to develop a Web-based app, it would be in a better position to draw advertising dollars there. In the same interview, Systrom mentioned numerous times that he wanted to set up a website for users to share their pictures, yet the company has yet to realize that goal.

Instagram has competition from some smaller apps, such as glmps, which combines a video and a photo into one, and Streamzoo, which also allows users to take photos with filters but neither of them has seemed to raise any money. None of the other similar apps have taken off the way Instagram has. At one point it seemed like a new app known as Sequoia-backed Color, which organizes photos by event and location, was going to give Instagram a run for its money when it raised $41 million in March of 2011, but the app didn't take off the way investors had hoped.

Instagram has come a long way. It was just February 2011 that it raised $7 million for a reported $25 million valuation, led by Benchmark Capital. A year later, they are on the verge of being valued at half a billion. Whether it retains that value or builds on it will depend on whether it can figure out how to monetize.  

Instagram was not immediately available for comment. 

(Image source: themoneydoc.com)