With start-up funding tightening, many high-flying unicorn start-ups have seen investor focus shift from growth to profitability in recent months. After all, even with companies staying private for longer, any sustainable business must make money eventually.
Tech investors can rest assured this focus on monetization is alive and well at social media unicorn Pinterest, which hopes to establish itself in the rarified air of social media giants including Facebook (NASDAQ:FB), Instagram, Twitter (NYSE:TWTR), and Snapchat as the new media order.
Pinterest business model: How does Pinterest make money?
Like its unicorn brethren Snapchat, Pinterest's business model is still evolving. However, it appears the company has developed a core monetization strategy to leverage its novel product and torrent growth to eventually support a large, sustainable business.
Similar to now-public social media unicorns Facebook and Twitter, it appears Pinterest's primary means of generating revenue will be through advertisements. Though the company has flirted with e-commerce via its Buy button program, it appears Pinterest is now intent on competing for a greater share of the same ad dollars as Facebook and Twitter via what it's calling "promoted pins."
Behaving much the same as Twitter and Facebook's promoted ads, sponsored pins appear to be the central focal point as the company builds out its advertising operations team. This February, Pinterest hired longtime Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) sales executive Jon Kaplan to help scale its promoted pins ad business. According to reports at the time of Kaplan's hiring, Pinterest employed only 300 ad-sales people in total, far below the massive sales teams within Facebook, Twitter, and Google. However, this will surely change if Pinterest ever hopes to live up to its $11 billion valuation.
What about Pinterest's market potential?
If you couldn't tell, Pinterest will have to compete with some of the most dominant social media companies in the world in order to realize its potential. Thankfully, the overall growth of the social media advertising space offers plenty of room for another incumbent.
According to market researcher eMarketer, total social media spending will reach nearly $30 billion in 2016, up dramatically from only $11 billion in 2011. The bulk of that spending should go toward a single company -- Facebook -- whose projected $26 billion in revenue for its current fiscal year speaks to its utter dominance of the business side of this budding advertising medium.
More broadly, social media advertising will continue to gain prominence as smartphone adoption and global cellular networks and Internet access continue to expand in the coming years. The rise of social media is certainly one of the reasons eMarketer sees digital advertising -- which encompasses advertising forms like search, social, display, and more -- will surpass TV as the largest category of advertising spending in the world in 2017.
Early indications show Pinterest is well on its way to creating a valuable platform to tap into this trend. The company surpassed 100 million active users last fall, a milestone they hit faster than Twitter. The company also continues to aggressively pursue international expansion as well, and those efforts have been promising thus far -- international users increased 135% in 2014 according to The Wall Street Journal. According to fundraising documents, Pinterest expects its ad business to generate $2.8 billion by 2018.
Perhaps most encouraging, Pinterest users also demonstrate a high degree of engagement while on the platform. According to one report, roughly 70% of Pinterest users either save a Pin to their own profile or click through to view third-party sites, a particularly favorable metric for a budding marketing platform.
To be sure, Pinterest's $11 billion valuation seems steep at first glance -- at least it certainly did to me. However, in digging deeper into how Pinterest actually makes money, its favorable audience dynamics, and the growth tailwinds of its entire market, the company appears it can indeed make good on its lofty valuation.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Andrew Tonner has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A and C shares), Facebook, and Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.