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Want to Make Credit Guys Scream? Pinterest Valued at $3 Billion+. And It Makes No Money.

This is a study in what happens when funding rates—Fed funds, repo, offer rates of all stripe—fail to discount the future in any meaningful way. Want make to make a bond guy crazy? Just talk about Pinterest.

Fidelity Investments led a funding round for Pinterest, offering $225 million with an estimated $3.8 billion valuation for the online scrapbook company. And Pinterest’s has already raised $200 million in a February Series D. Pinterest has now raised a sum total of $563 million. It’s expanding internationally, with sites in France, England, Italy, and potentially Japan. Mission accomplished without any visible source of revenue. The co-founder Ben Silverman said, “Nobody’s paying for anything yet—we want to see how things go and, more than anything, hear what you think.”

There is a perverse logic at work in this. Without revenue, investor dreams can run rampant. There’s no basis for anchoring what the company could be worth in reality. So then it could be worth anything. It’s important for Pinterest to have little to no connection to reality. So the company doesn’t take money from advertisers for promoting company pins, otherwise non-daydream believers could estimate what companies are willing to pay to be promoted on Pinterest. With no money it’s just a parade of colors and dreams in a world of unlimited possibility. Pinterest is like Google Ad Words, if Google Ads showed up with colorful story board that tells people what is cool and what is tasty and what to think about and how to live their increasingly empty lives.

Pinterest is not alone. Instagram makes no money but has 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. Facebook raised $2.33 billion before going public. Spotify raised $233 million. Uber raised $307 million. Last but certainly not least, Twitter raised $1.16 billion.

Why? Interest rates are too low. Fed funds—and by extension every other USD funding rate including repo—doesn’t function properly because it doesn’t discount the future in any meaningful way. The future actions of companies and their CEOs and potential investors matter more that the basic building blocks of valuation like a balance sheet. In the bubble world when funding costs are nearly zilch, it is plausible to make investments that are frankly reckless and stupid.

People can afford to dream about what a company will look like 20 years from now when funding cost is almost negligible. The world is a sequence of self-fulfilling prophecies. That explains row upon row of incubators, angel funding pouring out the gills, and deals structured that allow entrepreneurs keep outsize shares of equity in startups. This is nothing more than a reincarnated internet bubble circa 2000. They will be calling it the “social media” bubble soon enough.

When interest rates move even a few basis points down in repo and wholsale funding markets, funders groan, because this is the bilge of capitalism. Further out on the risk spectrum, the rose colored glasses come off even a little bit and the future is discounted in a different way. And then it is all about balance sheets and the weight of history.

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