An instagram photo of money might be the best way to explain why Instagram is worth $1 billion.

A lot of people were scratching their heads yesterday at the news that Facebook is acquiring photo-sharing site Instagram for $1 billion.

The allure of retro-styled photo filters is pretty weak justification for a price tag that high. But of course it’s not about the photo filters, it’s about the fact that Instagram engages your reptilian brain in just the right way. It’s simple, superficial, self-indulgent, and it feels so good.

The truth is, Instagram’s founders Kevin Systrom and Mike Krieger did everything right. Their app took off like wildfire, racking up 30 million users on Apple’s iOS — and they’ve added another 5 million Android users since launching on that platform less than a week ago.

Let’s take a look at why Instagram rocketed into orbit so quickly, while other, similar startups are still trying to light their engines.

First, compare Instagram to another photo-sharing startup, Path. There are many similarities.

  • Both companies were founded in 2010.
  • Both companies raised a first round of investment in early 2011: $8.65 million for Path, led by Kleiner Perkins Caulfield & Byers and Index Ventures, and $7 million for Instagram, led by Benchmark Capital.
  • Both were rumored to be angling for a major second round in March, 2012. Path was supposed to be going for a $20 million raise (a rumor the company denied), while Instagram may have actually closed a $50 million round led by Sequoia Capital.
  • Path created an iPhone (and later Android) app that let people take photos, apply creative filters to them, and share them. Instagram created an iPhone app (eventually, much later, an Android app too) that let people take photos, apply filters, and share them.
  • They’re also both extremely small companies, with just 13 employees at Instagram and 25 at Path. Back in May, 2011, when Instagram already had 4 million users, it only had 4 employees.

But Instagram has over 30 million users of its apps, while Path has only 2 million, which is a big reason why Instagram is worth a billion dollars in cash and pre-IPO Facebook stock, while Path’s second round is puttering along at a reported $250 million valuation, just a quarter of its competitor’s.

So what helped Instagram take off so much faster than Path? Partly it’s that Instagram provided an easy-to-understand, extremely simply proposition: We’ll help you take photos, make them look cool, and share them with your friends.

By contrast, Path launched with a strangely inverted proposition, touting the fact that you’d be limited to just 50 friends on the service. Photo-sharing was part of Path, but it is just a part of a larger, complicated lifeblogging idea, in which you capture moments that are important to you and share them to a select circle of friends. Explaining that to consumers was and is difficult.

Path improved its odds considerably with a second version that was much easier to understand. It also wisely downplayed the limits on the number of friends you can connect to, increasing it to 150. Still, it’s hard to escape this fact: Instagram has a visceral appeal that Path lacks.

I spent some time chatting with former Java evangelist and current vice president of product at Kii, Miko Matsumura, at VentureBeat’s Mobile Summit last week. Kii helps companies make and market their apps.

He told me that the most successful apps trigger a reaction in your limbic system: the primitive, reptilian part of your brain. For the limbic system, Matsumura told me, only three questions pertain to anything in front of you: Can I eat it? Will it eat me? Can I mate with it?

I think it’s fair to say that Instagram has a strong limbic-system trigger, appealing to the part of our brains that crave recognition and validation, and fear nonexistence and irrelevance. Path, by contrast, has a more cerebral premise.

There are other reasons Facebook bought Instagram and not Path.

  • Instagram has a deeply useful set of data about where its users are in the physical world, as many of its photos are tagged with geolocation information. In fact, Instagram is one of the largest, if not the largest, user of the FourSquare API. As someone who has never understood the appeal of “checking in” to locations with FourSquare, I appreciate that Instagram has found a way to check me in to places without troubling me at all, simply by tagging my photos with their location.
  • Path didn’t quite nail it with its first version and had to reset with a significantly overhauled 2.0 version, which hurt momentum. Meanwhile, Instagram has trucked along with barely a hiccup.
  • Path ran afoul of a privacy controversy when it emerged that the company was uploading and storing people’s address books without making it clear that’s what it was doing. The company apologized, and it later turned out that many other companies’ apps, including Instagram’s, also upload your address book. Path had the misfortune of being the first one fingered, so it took the brunt of the PR hit.
  • Another reason Instagram is attractive to Facebook is that it represents a captive network that can easily be integrated into Facebook’s social graph with few problems. While Instagram utilizes other social networks, such as Twitter and Tumblr, to help expand its viral reach, you can’t actually follow Instagram users through those networks. There’s not even a way to follow them on the web — you have to use the Instagram app. In other words, there’s no competitive friction for Facebook. The company could integrate Instagram into its own network without any loss of utility for its users, and without providing any material benefit to its competitors.
  • Finally, Path, founded by former Facebook-er Dave Morin, is sort of an anti-Facebook. With its limited circle of friends, it’s aiming to make itself deeper and more meaningful. Instagram, by contrast, worms its way deep into your brain by being as superficial as possible — just like Facebook does.

Instagram succeeded for many good reasons, including its design, its viral qualities, its simplicity, and the fact that its engineers focused so obsessively on making sure that it works all the time. Part of its success, no doubt, is the fact that it was just in the right place, at the right time, with the right, crowd-pleasing mix of features.

In this, as in all things, fortune favors the prepared, and Instagram’s founders were very well prepared. More power to them.

Instagrammed money photo by Meghan Kelly/VentureBeat