Counterparties: 1 Pinterest=1.5 Instagrams

By Ben Walsh
May 17, 2012

As Facebook, at eight years of age, prepares for its landmark IPO, two-year-old Pinterest has managed to raise $100 million at a jaw-dropping $1 billion valuation. If you’re scoring at home, 1 Pinterest = 1.5 Instagrams.

Both Pinterest and Instagram are perfect examples of the delicate art of valuing companies with little to no revenue. This conundrum also faced investors in Tumblr, Foursquare and Twitter. Of course, when you have zero revenue, current revenue multiples are not the right place to turn to justify an investment. As the WSJ‘s Dennis Berman put it:

@dkberman: Oct. 2011: Pinterest is valued at $200M, roughly infinity times revenue. May 2012: Pinterest valued at $1.5B, roughly infinity times revenue.

If you’re looking for a different metric for valuing companies that don’t make money, VC Marc Andreessen recently said that he doesn’t value startups by their revenue, but instead looks at how much they’re worth to a larger company. Sometimes that’s active, as in Google finding a way to monetize YouTube, and sometimes it’s defensive, as in Facebook buying Instagram to keep it out of the hands of Twitter. Either way, the startup’s value is based on being able to sell to someone huge – the kind of exit that VCs in general, and Andreessen in particular, love.

If valuing a no-revenue company remains a challenge, the lead investor Pinterest chose, Japanese e-commerce company Rakuten, seems to have a clear idea of how it wants to earn its return. Pinterest users will be able to buy products they see pinned directly from Rakuten, and the company’s shoppers will have their Rakuten IDs integrated into Pinterest. And this is no small matter: Techcrunch notes that 75% of Japanese Internet users, 80 million people, have a Rakuten ID. In fact, there’s some evidence that Pinterest users are already buying things they see on the site.

This model, Rakuten hopes, will help it wake up its “sleeping customers,” and it may make Pinterest the rare tech startup that isn’t going for acquisition or bust. Pinterest’s move to attract a large strategic partner before acquisition is a test case for Andreessen’s theory that making money, at least in today’s tech world, may not matter. Andreessen, though, wins either way: His firm was a small participant in the round. – Ben Walsh

And on to today’s links:

JPMorgan
Mitt Romney’s response to JPMorgan’s trading loss: “That’s the way … America works” – WSJ
JPMorgan’s CIO unit trading losses are $1 billion larger – DealBook

EU Mess
Spanish official says $1 billion in withdrawals from Bankia is “not a deposit flight” – Dow Jones
Felix: How Europe’s banking crises threaten the eurozone – Reuters
Roubini: “Either this year or next, Greece must exit the eurozone” – Project Syndicate
About that Spanish downgrade… – FT Alphaville

Charts
50 years of government spending, in one graph – NPR

Bubbly
Justin Bieber is now a venture capitalist – Forbes

Wonks
The Fed will actually be able to fill its two open vacancies – Yglesias
“It is with regret that we announce the death of inflation targeting” – Project Syndicate

The Speech TED Didn’t Like
“If median household income had kept pace with the economy since 1970, it would now be nearly $92,000, not $50,000″ – BI
Why TED passed on Hanauer’s talk – Chris Anderson

Politicking
Swing-state voters resoundingly disapprove of Obama’s handling of the housing crisis – Huffington Post

Frightening
“Dental abuse” – Private equity somehow makes dentists even more despised – Bloomberg

Boondoggles
Gouging taxpayers for sport:inside the financing of sports stadiums — The Economist

Regulations
Fitch: Basel III will reduce big banks’ return on equity by more than 20% – FT Alphaville
EU regulators are still haggling over bank capital requirements – Bloomberg Businessweek

Investigations
The SEC is (finally) investigating Magnetar over its role in infamous crisis-era CDOs – WSJ
2010: How Magnetar’s trades kept the housing bubble going – ProPublica

More From Felix Salmon
Post Felix
The Piketty pessimist
The most expensive lottery ticket in the world
The problems of HFT, Joe Stiglitz edition
Private equity math, Nuveen edition
Five explanations for Greece’s bond yield
Comments
6 comments so far

The Planet Money people don’t do math particularly well. They describe a 338% (inflation-adjusted) increase in federal spending over the past 50 years as “roughly as fast” as real GDP growth of 229% over the same period. (My calc uses the numbers provided in their article for total federal spending and percent of GDP in 1962 and 2011).

Also, while Planet Money’s text is accurate in referring to “federal government spending”, the headline is inexact and misleading by referring to this chart as a breakdown of “government spending”. That’s not at all accurate as it excludes state and local spending. It’s not a trivial distinction as, for example, I’ve encountered arguments where an author compares federal defense and education spending and tries to present these figures as “government” spending on each in the U.S., which is false since 80+% of U.S. public education spending is funded by state and local governments.

Anyway, I like the efforts of the site below to show true “government spending” in the U.S. – federal, state, and local – grouped into broad categories.

http://www.usgovernmentspending.com/year 2012_r

Posted by realist50 | Report as abusive

I’m with Chris Andersen regarding the TED talk on inequality. After seeing a transcript of it, it reads like something that would have been produced by a mix of Matt Yglesias and Slate commenters, which I definitely don’t mean as a compliment.

I’m not just remarking on Nick Hanauer’s point of view. Even if I disagree with one of Felix’s arguments, to take an example, I usually will concede that he has some underlying logic and follows reasonable economic concepts. Nick Hanauer’s argument, though, is pretty blah, not particularly new, and falls into some basic logical fallacies -

http://roundtable.nationaljournal.com/20 12/05/the-inequality-speech-that-ted-won t-show-you.php

Posted by realist50 | Report as abusive

“If you’re looking for a different metric for valuing companies that don’t make money…”

—–> pets.com

Posted by ottorock | Report as abusive

“I’m with Chris Andersen regarding the TED talk on inequality. After seeing a transcript of it, it reads like something that would have been produced by a mix of Matt Yglesias and Slate commenters, which I definitely don’t mean as a compliment.”

I’ve seen plenty of TED talks in my time. Believe me, only a very small fraction of them count as either interesting material or exceptional speakers.
The vast bulk of them consist of
“rich people are awesome” (and its many variants — rich people will save the world, great things rich people have done, great things rich people plan to do, how you can become rich) OR
“here’s some science that, if you’re in the slightest bit educated you already know” OR
“here’s some (high-brow, but not too high-brow) arts performance”

If TED want to add a TED-select channel which limits itself to maybe one new video a week, very definitely the best of the best, that is fine. But right now they shovel out vast amounts of crud, and it is disingenuous beyond belief for them to claim that this one talk crossed the ineffable barrier between good enough and not good enough to post.

Posted by handleym | Report as abusive

I disagree about the TED talk. It’s not some wild, crazy fringe theory that demand should drive the investment process. Demand is important and a middle class who spends most of what tey make is the most important ingredient. That’s some pretty basic economics. No idiot would ever add jobs or machinery to their firm if they didn’t think someone would buy the product. That’s what NPV is all about. Hanauer isn’t saying that it should be difficult to invest. That *would* mean that the bottleneck preventing job growth was investment. Firms are sitting on cash, interest rates are low… No one’s investing in jobs or anything else because there is not enough demand for new products and services. Flat wages (adjusted for inflation) for the last 30 years might have something to do with that.

But the real issue is TED. While it’s supposed to be about spreading ideas, they just clearly bowed to a powerful opinion while marginalizing a well-made point because it disagreed with their branding. They just sent a message: Our image is more important than the ideas we spread.

In a society with a fairly controlled political discussion, it would be beneficial to open up discussion as to whether the mainstream, orthodox economic discourse has been messaged and massaged to assuage the people and corporations who own major media outlets. That’s the only reason we need organizations like TED. If I needed the ideas to which I am exposed to be sanitized for my political protection, I’d watch TV.

Posted by http | Report as abusive

Pinterest is great for social bookmarking, but what about personal bookmarking – the bookmarks for the sites you visit over and over? My company operates http://iCrumz.com, and we believe it is exactly what the world needs now – a real personal productivity booster. It’s a free cloud-based Internet bookmarking service. With iCrumz.com all your bookmarks are always available using any browser from any computer, mobile phone or tablet. The iCrumz interface allows you to have 100 or more bookmarks on a single webpage without being cluttered. iCrumz also offers an import function, so you can import and consolidate all your bookmarks from all your browsers on all your devices. Check out our short (1 minute) intro video: http://youtu.be/QDD23whIlrw Contact me if you have any questions. Matthew[at]iCrumz[dot]com.

Posted by matthewgraczyk | Report as abusive
Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/