Friday, 1 March 2013

Is Pinterest really worth $2.5 billion?

$2.5 billion....
That is the recent valuation of a company that is still in the early stages of start-ups, has a modest 100 employees, and who's revenues are non-existent. So why is it being valued at so much?

The recent trend of billion dollar online company's valuations seem to be based on one thing, user engagement. What do Facebook, Zynga, Groupon on Pinterest have in common? They all have captured the interest of hundreds of millions of people worldwide. However, what we have learned from those other examples is that user interest does not equate to revenue. Of course with a user base so large there is massive potential, but why is a group investing $200 million in a business that does not generate money?

Many people still do not know what Pinterest actually is, for that reason here is a short simple video explaining it

This video makes the idea seem so simple, which makes the idea of it being valued at €2.5 billion even more extraordinary. Figures like these get thrown around so much that they lose all meaning to them. This is a site that was launched in 2010, yet could clear a small country's debt in one go. This new 'interest economy' is definitely fascinating, but it just seems like these investors are jumping on the bandwagon of whatever the latest social media trend is. The company doesn't even have a revenue model yet, and have been using this financing as a way to develop and improve on their product, but at the end of the day, without a revenue, they can't succeed. Frankly I think it is ridiculous that people want to put these amounts of money into these new generation start-ups. If history is anything to go by (albeit a short one), there is no evidence that Pinterest will be able to reach the very high bar that the public and market has set for them. We have seen what has happened to Facebook, Groupon and Zynga yet people just seem to be ignoring them. If I had a couple of million to invest, I can guarantee you it wouldn't be going into a company with a profit of exactly $0.

Valiant Capital Partners (the lead investors) are taking a huge risk, there is no question in that. They are investing in a companies potential. Pinterest has so far raised $337 million in finance, and I once again have to reiterate, they do NOT make any money. I'm not going to even try and understand what goes on behind the scenes of these companies, but I am very interested in seeing how it turns out.

Pinterest does have a lot going for them, I am sure they have learnt from their competitor's mistakes, they are still in the early stages of their start-up and they do have an incredibly large user base for such a new business. Whether these valuations blow up in their face or not remains to be seen, but if they do succeed in reaching their potential, it could completely change the game of how these online super companies are run. I am sure the likes of Mark Zuckerberg, Andrew Mason and Jack Dorsey will be keeping a very close eye on their new rivals

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