The $4 Billion Secret: Don't Bother Making Any Money
Pinterest and Snapchat have two very important things in common: they were both recently, insanely valued by investors at around $4 billion, and neither of them has made a single dime in the entirety of their existence. How is this not a bubble, and why aren't more people saying this is crazy?
These prices are speculative for now—Snapchat is only "worth" anything on paper, based on relatively small amounts of real money investors are willing to pay today. But this fantasy worth has consequences, and puts Snapchat and Pinterest, in the minds of investors, on price strata several times higher than Instagram—and even that seemed absurd at the time. A Silicon Valley investor I spoke with about the Pinterest deal will tell you what most adherents will say: "It's on faith." In other words, there's little (or perhaps no) rational reason to say these companies are worth so much, or anything at all.
Pinterest is a lovely website. It provides something the internet has never had before (virtual window shopping and muffin JPEG fetishism) in a snappy, tidy package. It's very popular, particularly within the inscrutable Midwestern Mystery Zone, which baffles most tech companies, small and large alike. It's aspirational picture-collecting at its most refined, and certainly could end up being the way people plan future purchases. Maybe. Someday. There's no way to be sure.
And then there's Snapchat, the pubescent pic-sharing app du jour, enough of a phenomenon to tilt teens away from Facebook, and a cultural spike unto itself. It's fun! It's a very fun, very smart, very simple toy—and there's nothing wrong with that. The world needs things that are amusing and little else, lest we all be crushed beneath cloud services and spreadsheets. Fun is fine, and it's certainly proven popular for Snapchat's founders.
But these are both massive maybes bridging chasms of financial uncertainty. Maybe Pinterest will drive sales, and be able to keep a cut for itself. Maybe Snapchat will be able to turn its huge demographic reach among vulnerable young minds into revenue, and hold on to its trend status. Maybe. But that's almost $8 billion (estimated) dollars pinned on a maybe, the sort of breathless, thoughtless speculation bubble dreams are made of. It's $8 billion in maybe snapped against two companies that haven't even tried to make money. Of course any investment is a wager that something great will happen in the future, but there's a difference between a bet and a four billion dollar bet. But who needs reason? Work hard in this mortal present, and perhaps, guided by forces beyond our comprehension, we will all be rewarded in the hereafter—faith really is the right word.
Snapchat might be able to get its users to pay for add-ons or filters, or maybe it'll try sending sponsored snaps to tween consumers. Maybe! It hasn't experimented yet. Right now, it's not a business, in the sense that businesses try to make money. Snapchat doesn't. It must be typed until we're all sore in the fingers: two startups with no demonstrable interest in revenue are valued at nearly $4 billion, each. Even Facebook sold ads in its infancy—but that was before Tumblr's David Karp made it cool to eschew profit.
I just heard Tumblr slap itself for trying to generate revenue. #Pinterest
— Amir Efrati (@amir) October 24, 2013
Likewise, Pinterest has toyed with "sponsored pins," but hasn't actually tried charging its sponsors. Of course, internet stores will line up to pay for the eyeballs of Pinterest's legion, but will it work enough to justify a $3.8 billion price tag? No one knows. And unless either of these companies start earning money to deliver on their sky-high paper values—or get purchased by Yahoo!—the entire thing will be a bust. A very expensive bust, from a very, very expensive bet, and a sign that astronomical valuations are not only back, but bland. This sort of insanity is normal, and skepticism is the exception. When the Washington Post ran a story yesterday headlined "Investors think Snapchat is worth $4 billion. That's insane," they were in a minute minority, as was an investor they quoted:
"There was just no justification that any of us can come up with," says Josh Felser, a New York-based investor. "When I saw that, I thought, are we at the end? Is the bubble about to burst? On the outside looking in, it looks outrageous."
Unfortunately, almost everyone with the money to decide otherwise is on the inside, looking out.
Pin and cash images via Shutterstock