Valuation Without Revenue

Facebook’s IPO may not have gone nearly as well as hoped. But that hasn’t stopped the market from placing big bets on another social media site, Pinterest. Despite Pinterest’s much lower usage statistics, analysts believe that it is a strong IPO candidate. I have my reservations. In general, as you know from my writing, I am not so hot on the valuation-without-revenue deals.

Pinterest’s Monetization Plans

Founded in 2008, Pinterest lets users create pinboards about events and themes to share photos among friends. Earlier this year, the company had more than 28 million unique visitors per month, significantly behind Facebook’s more than one billion users. But the numbers are improving rapidly. Last year, they became the fastest site to cross more than 10 million visitors.

Unlike several other social media players, Pinterest tested their monetization opportunity even when in beta stage. As part of their revenue model, they direct links submitted by users to online selling site partners. Purchases made through these site partners help Pinterest earn affiliate commissions.

Some of the other monetization plans being tested by Pinterest include the new analytic tool offering. Last year end, they added a feature for business users that includes data analytic tools to track Pinterest traffic. Pinterest Web Analytics lets businesses see how many visitors were referred to their site through Pinterest, how many users have pinned from a site, and the number of views each pin has.

In addition, Pinterest is evaluating an advertising-based revenue model to help revenue growth and are working with businesses to understand how their tools can help the businesses improve sales.

Pinterest’s Financials

Pinterest does not divulge financials, but analysts are certain that revenues are low and the company is still making huge losses. But the model has potential. According to a social commerce survey by SteelHouse, traffic generated by Pinterest has a higher conversion rate in customer purchases than Facebook. The survey revealed that nearly 79% of Pinterest users were more likely to purchase pinned items compared to any sponsored link clicked on by Facebook users.

Pinterest recently raised $200 million last month at an estimated valuation of $2.5 billion. With the new round of funding, Pinterest has received more than $338 million in venture funding from investors that include Jack Abraham, Michael Birch, Scott Belsky, Shana Fisher, Kevin Hartz, Jeremy Stoppelman, Brian Cohen, Fritz Lanman, Hank Vigil, FirstMark Capital, Andreessen Horowitz, Bessemer Venture Partners, Rakuten, and Valiant Capital Partners.

They plan to use the funds for international and mobile expansion. They are expanding their mobile apps by adding features that would simplify the addition of content such as photos and video clips directly from mobile devices.

I am still wary of both the IPO potential and the valuation of the company. Granted, they have seen a rapid increase in user base, but they still have to deliver a revenue model that works and margins that make Pinterest a worthwhile business.

I am not terribly thrilled with this valuation-without-revenue trend. Unfortunately, though, market valuers think otherwise. Earlier last year, Instagram, another non-revenue earner made big news when it was acquired by Facebook. Facebook has yet to arrive at a monetization model for the offering, but that did not stop the social networking giant from buying out Instagram for a value of more than $1 billion.

Another company that boasts of a lofty valuation but no revenue is Snapchat. Snapchat claims to compete with Facebook and has a fan following of the younger generation. Their most recent round of funding valued them at $50 million-$70 million. Many believe that Snapchat will manage to command such valuations if and when they are bought by other Internet players, possibly Yahoo or Google.

Quora is another player that has managed to report strong usage growth by building a tool that is a collection of questions and answers. Quora lets users sign in through their mail accounts or social media accounts to list and answer questions. They have been toying with the idea of advertising on their site for a while and have yet to come up with a revenue model that works. But that hasn’t stopped them from getting valuation estimates ranging from $300 million to $1 billion.

Reading about such valuations make me repeat myself when I say that I feel we are back to the giddy “valuation without revenue” days of the  late nineties. I have not been comfortable with companies whose valuations are raised by speculative investors, entrepreneurs, and the media. To me, a high valuation can be justified only by a strong business model.