Why Pinterest makes no money but is now worth $3.8 billion

AllThingsD just broke the news that Pinterest has raised another huge round with an even fatter valuation, and it’s done it without any revenue to boot. Late-stage investor Fidelity Investments led the round, which topped out at $225 million with a $3.8 billion valuation for the online scrapbooking company. Whoa mama. That’s a lot of cash. And it comes on the heels of Pinterest’s recent February Series D, where it raised $200 million. Are your eyes swimming in dollar signs yet? I imagine Pinterest’s founders are.

Furthermore, it’s done this all without any visible source of revenue. Although the company has recently started exploring promoted pins, the co-founder Ben Silbermann went out of his way to tell users that Pinterest wasn’t making money from the ads. In the blog post announcing the move he said, “Nobody’s paying for anything yet—we want to see how things go and, more than anything, hear what you think.”

So, Pinterest has a an infant monetization strategy, no revenue, and yet a $3.8 billion valuation.

We shouldn’t be surprised. If the giant Snapchat and Instagram valuations have taught us anything, it’s that no revenue means any price. Snapchat brings in no money, but landed an $800 million valuation. Instagram made no money but got a $500 million valuation. Plus it’s worth nothing that it was eventually bought for a billion, because even without a monetization strategy it was worth that much to Facebook in the Facebook vs Twitter landscape.

Without revenue, investors’ dreams can run wild. There’s little basis for anchoring hypotheses about what the company could be worth. So then it could be worth anything. Practically.

I don’t think it’s a coincidence that Pinterest started experimenting with promoted pins — that it wasn’t monetizing — a mere month before news broke of its massive latest round.

Pinterest is perfectly positioned for high value, targeted online and mobile advertising. After all, it’s a site where people go to pin pictures of what they want to buy, wear, decorate, visit, eat. That can be served up on a platter to advertisers — they can market straight to the consumers they know want them. Furthermore, they’ll be doing the marketing while the consumers are imagining life with similar products.

It’s like Google Ad Words, if Google Ads showed up in a beautiful, colorful, inspirational story board where people go to dream about the life they want to lead.

It’s a brilliant move for Silbermann to not take money from advertisers for the promoted pins. Then, he doesn’t have to worry about the reality of what companies are willing to pay to be promoted on Pinterest. He can just show investors the world of possibilities.

It’s like a monetization teaser for investors. Pinterest was playing the stripper who daintily picks up her skirt to show a single stocking clad leg beneath it. “Here’s a taste of what I have to offer…but if you want more you’ll have to pay.”

And pay they did. Pinterest has now raised a sum total of $563 million. It’s expanding internationally, setting up localized sites in France, England, Italy, and potentially Japan according to AllThingsD.

While we’re pointing out that valuation has nothing to do with revenues, can we just point out one other should-be-obvious thing? The myth that its cheap to build a consumer web company has to die. Yes the cost of starting one is some ten percent what it was 15 years ago, and that’s forever changed incubators, angel funding, ownership that entrepreneurs are allowed to keep and the culture around startups. But it is — if anything– more expensive to build a consumer Web company than ever before

See:  Facebook, which raised $2.33 billion before going public, Spotify, which has raised $233 million, Uber, which has raised $307 million, and Twitter which has raised $1.16 billion.

And now Pinterest.