Everyone was surprised to see Instagram sell to Facebook for $1 billion. It was a crazy valuation: it should have been $3 billion.

Instagram has ~30 million users, making a per-user valuation of ~ $30.

Facebook has about ~1 billion users, and wants to IPO in a few months.

So Facebook just set their valuation at $30 billion.

Ooops: Facebook wants to IPO closer to $100 billion.

GroupOn was the master of this strategy, single-handedly creating the daily deal space by buying up companies at an ever increasing price-per-user, thereby driving up the value of their own users, thereby being able raising more money, to buy more companies, to drive the value of their users higher. As much as I hate that game, you have to admire the execution. And it’s a good thing that Facebook isn’t playing that game!

There are lots of ways for Facebook to justify buying Instagram, not least that if Google had bought it, that would have been an instant boost for Google Plus. Think it was a coincidence that Instagram launched on Google’s Android just before their acquisition?

But we should be asking how Facebook thinks that a Facebook user is worth $100, when an Instagram user is worth $30. I think Facebook have a pretty good answer, but if we’re asking why the valuation was so high, we’re asking the wrong question.

Kudos to Facebook for picking up a $3 billion company for $1 billion.