(Image: Instagram)

Instagram is living the ultimate startup dream.   The San Francisco-based upstart, which launched exclusively as an iPhone app back in October 2010, has created a new clique of photo enthusiasts.  Instagram alone boasted over 30 million users prior to its acquisition by Facebook. Now, the platform’s user base surpasses 40 million users; that’s equivalent to 5% of Facebook’s user base. When the company launched the Android version of the popular photo-sharing app earlier this month, it added an additional 10 million Instagram users to its already growing numbers in a six day time period.

What startup wouldn’t want a robust acquisition or initial public offering with a huge payoff?  Facebook acquired Instagram for a cool $1 billion in early April, and this story could not have been written any better, even if Steven Spielberg penned the script himself.

With Facebook’s Instagram acquisition still the topic of conversation in the tech space, here’s a look at why the popular mobile application has experienced tremendous growth:

A True Problem Solver

When pitching your product or startup idea, ask yourself: What problem am I trying to resolve? Instagram focused on solving the dilemma of taking strong, visually appealing photos from your mobile device and sharing them instantly. The startup does it better than any of their competitors—Facebook and Flickr included.

Perfect Your Product Before Expanding

What makes Instagram so popular is that it creates beautiful photos without the hassle of lugging around heavy photography equipment. The startup started small, focusing on Apple’s iOS platform. This allowed the company to create a greater user experience. Instagram users can utilize one of several pre-created filters or other effects to capture those shareable moments. Instagram’s decision to expand to the Android platform was done only after the team felt it was ready to advance.

Capitalize On the Desire to Share in Real Time

One might argue Instagram is what Facebook wants to be—a mobile app.  If Facebook could turn back the clock, it’s safe to say (with all the opportunities mobile has to offer)  it would launch on a mobile platform.

Timing Is Everything

If Instagram launched before its 2010 debut, I’m not sure they would’ve been as successful as they are today. The platform’s release, which came shortly after the iPhone 4 stepped onto the market, was a strategic business move. Photo-centric apps didn’t stand a chance prior to the release of this version of the Apple product.

With Facebook serving as the largest photo sharing social network, the powerhouse company decided to eliminate their competition: Instagram. Why, you might ask? Well, for one, so Google and Twitter could not acquire them first. And, secondly, in order to get a stake in the mobile-first, user-centered, photo-focused space, they needed to merge with a company that was already doing what they sought to do. (Remember: Facebook is a web-based interface that allows users to curate albums of photos.)

Instagram honed in on creating the best possible product, which would yield the greatest user experience. Instagram CEO Kevin Systrom and his team kept it simple, meeting the needs of the user and filling an industry void.

The one billion dollar question…how will the Facebook acquisition of Instagram change the mobile app we have come to love?

In recent years, investors have reaped gains of roughly 25% when they own a merged or acquired stock. Here’s how it works: Suppose you own ABC Tech Co., now trading at $50 a share. Say XYZ Computer Corp. decides to take it over. A month after the announcement of the deal, ABC Tech’s stock is likely to be trading at $60-$65, some 20%-30% higher than the pre-takeover price.

As you might expect, such profitable plays have been hard to find ever since the stock market swooned in 2008. According to Bloomberg, M&A activity in the U.S. dropped by about 50% from 2008 to 2009, falling to its slowest pace since 2003. Toward year-end 2009, though, merger activity picked up. Takeovers involving U.S. companies rose from $26.6 billion in August to $49.1 billion in September.

Why the increased activity recently? A somewhat healthier economy and a stronger stock market builds confidence among prospective acquirers. At the same time, stocks remain far below their peak prices so buyers can find possible bargains. Perhaps most important, as a recent Goldman Sachs report put it, “Companies accumulated historically high cash balances over the past twelve months as they sought stability in face of an uncertain macroeconomic environment. Cash-rich balance sheets are ripe for use.”

Among those uses, big-fish companies may use their cash to feed on tasty littler fish. “There are only so many things companies can do with cash,” says Seth Ellis, co-founder of RWE Private Wealth, a financial advisory firm in Orlando. “They can pay dividends to shareholders, invest internally, or purchase other companies. Recently, nonfinancial companies were holding around 5% of their assets in cash, which is extremely high by historic standards. A lot of that cash probably will be used for acquisitions.” The best acquisition targets, according to Ellis, can be found among companies with market capitalization of $250 million to $2.5 billion. In that size range, they’re big enough to be worth buying but small enough to make an acquisition practical. (Market capitalization is found by multiplying a company’s stock price by the number of outstanding shares. For perspective, Apple has a market cap over $175 billion.)

“You also should look for companies with clean balance sheets and good operating prospects,” says Ellis. “There has to be something that makes them attractive besides the low stock price.” Ellis, who is also a partner at Gator Mezzanine Fund, which makes loans to growing Florida companies, says the top M&A opportunities may be in the technology area because acquirers don’t have to buy a lot of outdated “bricks and mortar,” such as obsolete manufacturing plants.

Ellis has identified a handful of stocks to watch, companies he believes could attract acquirers:

Blue Coat Systems (NASDAQ: BCSI), which provides systems to protect corporate IT networks from viruses

Websense (NASDAQ: WBSN), which offers Internet security to businesses

Epicor Software (NASDAQ: EPIC), whose products help businesses with enterprise resource planning and customer relationship management

Radiant Systems (NASDAQ: RADS), which specializes in hardware and software for hospitals and retailers

Diodes (NASDAQ: DIOD), a manufacturer of semiconductor components

“Blue Coat might be a good fit for a very large tech company such as Micrsoft or Oracle,” Ellis says. “The same might be true for Diodes, where net income is down while revenues are up. It seems like the company is ramping up its marketing efforts so it has had to spend more in that area. Diodes has a clean balance sheet, with a lot of current assets.”

From March 2009 until late in the year, U.S. stocks had their best short-term run in 70 years. If stocks continue to soar, investors who choose well-priced small and medium-sized companies may reap a buyout bonanza.

WEALTH FOR LIFE PRINCIPLES

1. I Will Live Within My Means
2. I Will Maximize My Income Potential Through Education and Training
3. I Will Effectively Manage My Budget, Credit, Debt, and Tax Obligations
4. I Will Save At Least 10% of My Income
5. I Will Use Homeownership as a Foundation For Building Wealth
6. I Will Devise An Investment Plan For My Retirement Needs And Childrens’ Education
7. I Will Ensure That My Entire Family Adheres To Sensible Money Management Principles
8. I Will Support the Creation and Growth of Minority-Owned Businesses
9. I Will Guarantee My Wealth Is Passed On To Future Generations Through Proper Insurance And Estate Planning
10. I Will Strengthen My Community Through Philanthropy

Although he isn’t the founder of the Atlanta-based storage and distribution company, the 34-year-old entrepreneur says the process of taking over the operations in December 2006 and implementing his vision was nearly as stressful as if he had started the business from the ground floor.

While working as a manager in the finance department at John H. Harland (now known as Harland Clarke), a San Antonio-based payment solutions provider, McDonald used his accounting expertise to start a couple of businesses on the side but none took off. In October 2006, McDonald decided to put all his entrepreneurial efforts into something he saw potential in—Best Distribution and Warehousing, as the company was then called. He was familiar with the Atlanta-based business; it once stored and distributed his merchandise. After meeting several times with the owners to discuss the company’s future, McDonald felt confident he was making the right move. The company had been in business since 1971 and in 2006 earned $375,000 in revenues. At the time, the owners were eager to sell for personal reasons and agreed to the $275,000 offer, McDonald recalls. He paid half the money up front using his own personal savings, affording him half ownership in the company. The owners agreed to finance the rest. McDonald later gained majority ownership by pumping additional cash into the enterprise. In 2007, the entrepreneur financed the remaining balance owed on the company with a community bank loan, buying the owners out completely. In November of that year, McDonald officially took sole ownership of the business and changed its name.

But the transition was not without problems. The building was rat-infested and in need of repair; several clients were late paying invoices; and some of the company’s employees resented the new leadership.  First, McDonald tackled the building, spending a total of $50,000 renovating it. McDonald then severed ties with clients who were delinquent with payments and, before focusing on soliciting new ones, surveyed others to make sure they were happy with BWT’s services.

Today, McDonald has found his stride with 12 full-time employees, and BWT has made a name for itself through the packing, storing, and delivering of merchandise for clients in the Southeast. McDonald hopes to expand, banking the company’s future on lessons learned from the past. “I always believed that if you’re going to be an entrepreneur you must first understand the business from the ground level.”

This story appeared in the April 2009 issue of Black Enterprise magazine.