It’s not all that often that a era-defining initial public offering comes along. In the next few weeks Facebook is set to go public amidst a great deal of talk that there is a “bubble” in Silicon Valley. The Facebook story is more than the question of whether you should try to get in on the IPO. It really puts a stamp on the Web 2.0. Veteran journalist Nancy Miller is covering the Facebook story in depth via her e-book The Facebook IPO Primer which also happened to get a positive review from David Merkel at the Aleph Blog.

Admittedly the vast majority of individuals and institutions who put in for shares in the Facebook ($FB) IPO will likely get shut out, but that doesn’t mean there aren’t lessons to be learned along the way. In light of the start of the Facebook road show next week I asked Nancy a series of questions about the Facebook and its coming offering. You can also read part one and part two our discussion. With no further ado here is part three of our Q&A.

AR: The technology media freaked out when Facebook bought Instagram for $1 billion prior to the IPO. Should investors be grateful it took a potential competitor off the board or worried that it paid so much?

NM: When Facebook bought Instagram, it essentially said the company is worth $29 per user. In just a few weeks, the user base has surged from 35 million to 50 million, Mashable reports. It’s adding 5 million users a week!  At that rate, Instagram will have 130 million users by  yearend, and the price per user will have dropped to $16.  If Facebook gets priced at $100 billion, then investors will be paying about $100 per user. Or just  $75 at $75 billion. Viewed that way, Instagram was a bargain. But if you add in pesky facts like ARPU last year for Facebook was just $5.11 and Instagram was $0, well, the numbers aren’t so pretty.

But let’s face it. The Instagram purchase wasn’t able the numbers, it was about DNA. Instagram was born as a mobile company. Facebook was not. Photos are at the core of Facebook. It says users upload 300 million photos daily. Yesterday, I was at my son’s karate demonstration. I clicked away, and put it up on Facebook (okay, via Instagram) to share with friends and family.

In addition to DNA, Facebook was buying something else: Love. One of the biggest dangers to Facebook is that a lot of people who use it don’t like it that much. Users complain constantly, especially when Facebook introduces changes. They also don’t like being in its walled garden.

The Instagram purchase was important for another reason: It really hammered home that Facebook is Mark Zuckerberg’s show. According to the Wall Street Journal, he was essentially a lone wolf negotiating the deal without the advice of the board or the most senior Facebook execs. Zuckerberg has been brilliant at steering Facebook so far. But it feels scary to have someone so independent at the helm of a publicly traded company. I’m inclined to think the Instagram deal was very shrewd, but I would like to have seen him consult with the grown-ups at Facebook – his CFO David Ebersman and COO Sheryl Sandberg. And the board.

AR: With only a limited number of shares offered by the company there will not be enough shares to go around for institutional, let alone individual investors. Are they any other plays that should benefit form a successful Facebook offering.

NM: The short answer to that is no. Investors need to face it now: The easy money from Facebook has  already been made. You can thank private stock exchanges like SecondMarket or SharesPost for that. Facebook was trading quite actively on those exchanges for quite a few years as early investors wanted to cash out. We already know that investors have already bought shares at a $103 billion valuation for Facebook. It’s now clear now that that level will hold at the IPO – but it could.

If you get shares at the IPO price, you probably will be able to make money on the pop on the first day or so of trading. Trading IPOs is risky stuff. Back in 1980 Apple was priced at $14 and ended its first day at $29. And then the stock did virtually nothing for decades.  There are tons of studies that show that buying on the first day of trading is usually a losing proposition. Josef Schuster, who runs the IPOX indexes, says that IPOs that pop 40% more on the first day usually end up as losers.

There are a few funds that invest in social media or information technology companies – but you won’t get much benefit from investing in them now, at least in my opinion. I see on my StockTwits feed that some people are buying Zynga because they expect a coattails effect from the IPO. Also, the QQQ may benefit – it’s likely that Facebook will be added to the Nasdaq 100 Index three months after the IPO prices.

I’m not an investment adviser – but it seems to me that you need to invest based on the thing itself. You said to me recently that investors who chase returns don’t end up doing very well. And I think that is true.

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For more on the Facebook IPO check out Nancy’s e-book and stay tuned for the final part of our discussion.