Investors Pin $3.8 Billion of Hope on One Social Site

Pinterest, the three-year-old virtual corkboard and one of the latest social media crazes to hit Main Street, is beginning to look like more than just another social site.

Last week, Pinterest received its second round of funding, bringing its total to $565 million, and with it a valuation of $3.8 billion.

For comparison, before Facebook (NASDAQ:FB)  made its debut in the public marketplace, All Things D reported the social network’s series B valuation was $525 million – $40 million less than Pinterest’s current series B valuation.

Similarly, Twitter, set to make its initial public offering on the New York Stock Exchange by the end of this year, was valued in its series B valuation in 2007 at $35 million after receiving a $5.5 million round of funding, according to Pitchbook, a private-equity analysis firm.

And while the market for social media companies is red hot, demand, some experts predict, is starting to wane. As Pinterest’s star rises all the resulting attention begs the question: Is the site overvalued even before it considers going public – and is social media the next bubble to burst?

Where the Smart Money Lives

With Facebook now public, and Twitter waiting in the wings, Pinterest could be poised to hold a similar blockbuster IPO if it maintains its current trajectory and develops a plan to monetize its platform, according to Brian Blau, research director at Gartner.

“It’s a really interesting question (if Pinterest’s valuation is worth it),” Blau said. “It’s a little hard to determine because Pinterest has no revenues at this point. “

Blau calls it a “fool’s game” to guess Pinterest’s future because it currently lacks a revenue-generating product, but he cautioned against counting the social network out of the IPO game just yet.

Pinterest, he said, has been testing various ways to advertise on its digital pin board site to experiment with the kinds of demographics the site can reach and what kind of promotions they respond well to.

“This is exactly the activity we should see from them at this period,” Blau said. “Because they want to get to a point where they can tell the value of the business. Advertisers are clearly a big opportunity for them.”

Blau said Pinterest should look to Facebook and Twitter as examples of how to effectively monetize social media – and learn from its predecessors’ mistakes, but also use the other platforms’ successes as a way to kick-start its own revenue-generating process.

As of this summer, according to Paris-based social media research firm Semiocast, Pinterest had about 70 million users.  According to All Things D citing a Comscore report, the social site had around 24.9 million unique desktop monthly users in September in the U.S. alone. It’s that point where Brian Blair, principal at Wedge Partners, suggests looking when beginning to analyze the social media site’s worth.

Blair said although the site seems to have quieted down within the last six months or so in terms of active users, it’s not impossible for the site to quickly gain momentum.

“Instagram is the best analogy,” he said. “It’s starting to slide ads into feeds now. Pinterest is a visual site and it would be very easy for them, based on what people pin, to get a sense for the interest for a particular user. I think they could target very specific ads based on their users’ interests.”

Pinterest: The Next Big IPO?

In light of its recent valuation and the potential money-making opportunities for Pinterest, Blair said the social site is well-poised to make a public offering.

“Thinking about it in terms of line of succession: Pinterest will be next,” he said.

Blair said the bet is Pinterest will continue to grow its user base and find a way to monetize it effectively, much the same way Twitter was able to incorporate promoted tweets. He said if it’s able to do both of those things well, the most recent valuation of $3.8 billion could actually be on the low side.

But Blau said he’s more on the bearish side.

“In short, the valuation with the extra $225 million in funding looks high. But if you compare it to top emerging Internet types like Facebook and Twitter, Pinterest is right up there on the social side in terms of user base,” he said.

Blau said it’s definitely possible for the company to make an initial offering, but the most important thing for the company is holding on to its user base – which features women in their 20s and 30s. He said if the site can do that, monetization will come. He pointed to LinkedIn (NYSE:LKND) as an example of a small-appeal company that’s done well in the public market, saying the professional social network does well taking advantage of its user base and suggesting Pinterest could do the same thing.

“For a Pinterest-like company, (an IPO) seems like a path it would go down because there’s such a large opportunity in the public. They want to raise a lot of capital for the business, if they can’t raise it privately, and going with employees and venture capital funding, then they have to go to the public  market to get that,” he said.

Further, he said looking at other social networks before Pinterest as guidance, it’s reasonable to say investors would put this amount of funding into the site at this stage.

“It’s a big risk, but (investors) got in on Facebook and private equity firms didn’t. It’s a good opportunity with Pinterest, but the heavy dose of risk can’t be ignored.”

Blau said it’s a question of how they want to grow, what capital expenditures they want to have, and what an expanded or diversified audience will do to the product. With those considerations, Blau said there are still some concerns about going public.

“It’s very difficult for companies to go public without revenues. It hasn’t happened very often. Investors won’t tolerate a company that won’t have revenue. So it’ll be a wait-and-see game,” he said. “It’s a good opportunity…this round (of funding) will propel them to the next big phase, and It might take a couple years to get to that next level.”

He said at that point, it’s a matter of whether investors will be able to maintain their appetite for social networks in the public sphere.

“Today, the market is more amenable. There have been a lot of businesses that have come before Pinterest, so there’s already some conditioning in the market. It’s tried and true, though, so investors might not be as worried about the model for mobile (and other worries with social media companies now),” he said.

In an effort to prove how fluid the interest in Pinterest still remains, Blair said he met with a slew of investors recently and said the appetite for another publicly-traded social network is mixed.

“Some (investment) companies are very risk averse, and some are risk tolerant (when it comes to Pinterest),” he said. “It really depends on the type of company that’s investing, who the principals are, and how they value their business.”