Why Investors Love Pinterest So Much

Why Investors Love Pinterest So Much

Photograph by Pinterest/AP Photo

Pinterest has yet to make any money, but it sure is good at raising it.

The company recently took in another $225 million from investors, an enormous infusion of capital coming on the heels of a $200 million round in February. Over that time investors have decided the digital bulletin-board service has increased in value by 50 percent, putting the startup’s current worth at $3.8 billion.

This is a lot of money to support a company whose main product is the digital equivalent of cutting photos out of magazines, but then again it sure seems to be an activity people like to do: Pinterest drew almost 50 million users in March, according to AllThingsD, which first reported the latest fundraising round.

Investors are going batty for this idea because it cuts out a step in the basic business model of social-networking websites. On Facebook (FB) or Twitter, for instance, user activity reveals information that the companies can analyze to glean what you might be willing to buy, before selling access to you to relevant advertisers. On Pinterest, the process is much more direct: Just using Pinterest at all, in many cases, is a way of telling the company what you might want to buy.

Getting a bunch of users was step one. And we all know step three: profit. But Pinterest is now on that elusive second step. Over the summer my colleague Brad Stone asked Ben Silberman, Pinterest’s chief executive, how the company made money. Here’s what Silberman said:

“Right now we don’t. But the big-picture assumption of the company is that there is a direct link between the things you pin and the things that you eventually spend money on. In there, we think, lies a model where we can actually make Pinterest more useful. And we can help businesses by bringing in more customers and helping them sell things and connect with people.”

Businesses really want in, too, says Apu Gupta of Curulate, a firm that helps advertisers prepare to advertise on such image-heavy sites as Pinterest and Instagram (FB). “We work with 300 brands. I can’t tell you how many brands are calling us saying, ‘When can we work with Pinterest?’” he says. “The conversation on Pinterest is about the product already. You can bypass the whole demographic phase and reach the exact people who like the exact products you’re trying to push.”

Despite running a startup that seems naturally linked to shopping, Pinterest is approaching advertising very carefully. Last month the company said it was beginning to experiment with advertising by adding promoted pins, which look just like the rest of the content but are placed by sponsors rather than users. Pinterest swore the ads will be clearly marked and won’t be overbearing, tacky, or irrelevant. It has been asking for user feedback. The company also says it’s not charging for the ads yet, while it figures this all out.

Instagram is also trying to ease into the transition slowly. But Pinterest could have an easier time, because ads are such a natural fit. Seeing a visual advertisement mixed in among your friends’ selfies could be jarring; seeing one more supercute chair on a board you’ve assembled of supercute chairs is actually helpful.

The first way Pinterest says it will use its new money from investors is to spend on international growth, with a plan to launch in 10 countries before the end of the year. The company also wants to focus on mobile. Turning into a real business—one with significant revenue—remains lower on the list. Pinterest still has to find the right types of ad products to serve brands and come up with an effective way to sell them, all without chasing away its users.

But the image-sharing website doesn’t seem to be feeling much pressure to worry about that at the moment, and investors seem more than happy to fork over money based on potential alone.

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