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Facebook and instagram

Indian companies before they sell shares to the public sell a small percentage to a set of investors- usually private equity firms- at a very attractive valuation. This serves them two purposes: they can showcase that marque investors have reposed faith in their company and valuation. Second they will benchmark the price paid by this small group of investors to sell it to the wider public.

What is unknown to the wider public is that often these private equity firms have a firm exit clause- like if the company is not able to list it shares, it should return back the money on top of 16% or 20% return. If the company's shares get listed, they get to sell at a higher price or their valuation becomes that much more valuable.

Though in the Facebook and Instagram case is one of acquiring a firm, still it makes me wonder whether the real purpose of Facebook acquiring Instagram is to illustrate to the public that this is how social media companies are valued?

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