Facebook has purchased Instagram for $1 billion, which is big news, but that’s just the start of things. Heard today via TechCrunch is that Instagram closed a $50 million Series B round from Sequoia, Josh Kushner’s Thrive Capital, Greylock, and Benchmark at a $500 million valuation.

Apparently, investors, many of whom didn’t know about the Facebook acquisition doubled their money overnight.

Instagram, which has 30 million users gathered in about 18 months, was named iPhone’s best app of the year in 2011. Their Android version, the smart phone of choice among most of youth culture, was released last week and had millions of downloads in days.

What’s so interesting about this acquisition, which was inevitable for Facebook because frankly, a large percentage of people use Facebook to showcase photos, is that Instagram doesn’t actually have a business model for making revenue, yet got bought for $1 billion. As Forbes magazine put things, the fact that Facebook paid twice the company’s valuation within a week’s time of it having closed Series B funding suggests a defensive move.

The photo wars are heating up. Facebook, which has been going after Yahoo’s Flickr, has made a new move. Like Google buying YouTube.

So what’s up next? Paying for the “free” Instagram app and its upcoming extended versions could be in the near future.

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