Pinterest (PINS) — OMD Ventures

A first look at Pinterest, company living on making inspirations come true, and the world of digital advertising.

I’m not a Pinterest user. Just putting it out there. Though, I did try using it once and didn’t understand what the point of it was. Over time, as I saw the business grow, IPO, and even expand into Toronto… I got curious on how this could be.

Before tackling the advertising giants like Facebook and Google, it also seemed like a prudent approach to look at the single-product advertising businesses. Enter Pinterest.

I should also add that the company may always have been in the back of my mind because I previously learned about its Co-Founder and CEO, Ben Silbermann, in the past. I learned that he came from a family of doctors (parents and sisters too).

A Glance at Origin

Ben started Pinterest in 2009/2010. It seems the origin year might be a little uncertain because Pinterest was a company that resulted from another failed idea. He had left Google to start a company in 2008. He had tinkered with building various products throughout his career but thought ‘a lack of commitment’ was the big issue. So, he took the leap in 2008.

A few things I related with Ben is that he uses ‘parallel processing’ to solve problems. He uses Tim Urban’s mortality chart to be cognizant of his own mortality and to live a meaningful life through that knowledge (i.e. memento mori). He also has a view that learning from failure is overrated because if you want to succeed, you don’t go buy books on people who failed. You learn from people who succeeded. Having grown up in a family of doctors, he is somewhat programmed to expect things to take 12 years of hard work before you get to reap any rewards. Ben says it’s how he can naturally think about things in 5-10 year increments.

Transition to Culture

There’s a notion (popular or not) that 80% of the company’s culture is set by the founder. Not taking it too literally, the founder is important. This is a truth.

When digging around DuckDuckGo (not Google) for Pinterest’s culture (because their annual report/letters don’t talk about it)... a common criticism I hear about the organization is that it moves too slow. Apparently, people might leave or feel disgruntled because the people who work there are ‘too nice’ and decisions will get made after requiring too much ‘consensus’ and meetings and that slows down the process. Apparently, this is an issue Ben has acknowledged as well as he has urged people to make decisions at lower levels.

But I wonder if the slow pace is a result of looking at things with a long term view. I’m not saying you can’t iterate fast while having a long-term view. But being methodical can have such impacts.

What is Pinterest?

To start, its mission is: to bring everyone the inspiration to create a life they love.

It’s free. It’s a platform with both mobile and desktop functions.

Founders refer to it as a ‘media-rich utility’ where people come on to discover ideas (i.e. content via images/videos) and make inspiration ‘boards’ with various ‘pins’ (the content pieces).

You know those ‘vision boards’ where you cut out pictures from magazines of things that represent what you want in life so you get inspired and stick em all onto a giant poster board? PINS is that but digital.

But people use it for all kinds of inspiration like tattoo ideas, interior design, plants, vacation, food recipes etc… Anything that you can collect things that you like as ‘inspiration’ for the future.

Unlike Instagram or other social media tools, PINS is not about getting followers or following celebrities. It’s all about the single user building boards for themselves. An environment where they can be themselves and not get judged. Silbermann’s also noted how the goal of PINS is to push their users offline so they actually go out and do the projects they’ve created boards for. Unlike products that try to keep people hooked, PINS doesn’t focus on that.

Making Money

Users don’t pay PINS. Advertisers pay PINS for access to its users. It’s the same model as Instagram (the mix of image/video content makes it a close enough comparison).

Advertisers will buy ad inventory on PINS as images and videos that look like pieces of user-generated content. All ads are bought via auction system: "our advertisers can optimize their campaigns around four different types of user activity depending on their objectives: impressions ("CPM"), video views ("CPV"), clicks ("CPC"), and conversion events ("oCPM") such as checkout or add to cart.

Per management, performance ads (I assume CPC, oCPM) make up ⅔ of revenue with brand ads (i.e. CPV, CPM) making up the remainder.

Geographically, 90% of sales are from the US despite only 26% of MAUs from there. PINS is in their early innings of monetizing and management has noted the skew is because of a focus on US advertisers.

Consequently, the average revenue per user (ARPU) for the US is $4 vs. $0.21 for international.

Who Advertise with PINS?

Per management, revenue is concentrated to a small number of advertisers in specific verticals of CPG/retail companies. Most would be categorized as large CPGs or large ad agencies/media companies that represent retail companies.

What’s evident is that because PINS is working with a few large companies, they may have leverage over PINS. These are also relatively new relationships as well: "Many of our advertisers only recently started working with us and spend a relatively small portion of their overall advertising budget with us"

There are a couple of thoughts here. One is that because they only take up a small amount of ad budget for their client base, does that mean they can take up a larger portion in the future? Possibly.

After a couple of conversations with friends in digital ad agencies and performance marketing careers, I learned things could go both ways but there are some barriers for PINS. Overall, PINS is considered an inferior product for advertisers when compared to FB and GOOG. Take everything I say with a grain of salt as I didn’t speak to a large data set.

But, it seems that FB is THE place for digital advertising. You will either see ad agencies invest entirely on FB or if they do spread it out, it will be something like 50% FB, 30% GOOG and 20% for the ‘rest’. Performance marketing is very much like investing. It’s all about ROI. Hence, advertisers will gravitate to a platform that generates the greatest ‘bang for the buck’.

It’s not about going for the ‘low cost’ platform. FB is considered pricier than other platforms like Twitter (I think the CPC was 3x in Asia a few years back). But, FB (and GOOG) have a much better ad ecosystem. They have far more tools and data for advertisers to work with than other platforms. This is probably a mix of 1) the amount of data they collect on each user and 2) time.

On the effect of time…. People have built careers as marketers on various platforms and like learning excel or code, it requires a certain level of familiarity. If an agency has built a reputation for success, it probably did so on a few platforms (probably FB or GOOG given their dominance and reach). If a new CPG client were to come to an ad agency, they will probably default to the systems they know. They aren’t going to mess around with client money trying ‘new platforms’ like PINS or Twitter if they can’t confidently generate high ROI on them. It’s a matter of reputational risk for ad agencies.

I initially thought advertising on PINS would be a better ROI for retail/CPG than on Instagram/FB because I thought PINS users would be more likely to convert to a purchase because they aren’t there to just ‘browse’... I hypothesized that PINS users were more purpose-driven than Instagram users who are more driven by boredom. Apparently, the ROI on FB is much higher than PINS. Not only does FB have much more data/tools for various A/B testing…. It has a larger user base (MAU matters) and there is greater familiarity with the platform for advertisers.

Now, there is a ‘diversification’ element for large companies. Big companies have big budgets and they don’t want to spread it around with TV, billboards, digital… and in digital to spread it around on various platforms. This probably means that digital advertising won’t be dominated by FB and GOOG alone but leave enough room for players like PINS and Twitter to exist.

So, in one way… PINS having a small portion of the total digital advertising budget of large CPG clients might make sense. At least, given how advertisers do not see PINS as a superior advertising platform compared to incumbents.

This would also mean PINS’ strategy of targeting SMB businesses downstream could be challenging. Those companies have less in ad budgets and are more risk-averse in ad spending. A few of my small business owner friends exclusively use FB/IG because it is slightly better than GOOG/Youtube. No way, they are moving over to PINS unless it’s exponentially better. Not marginally better.

Then there is the international market. Which is a big question mark. My knowledge of digital advertising in Japan and South Korea is outdated by a few years but with large regional incumbents like Yahoo Japan and Naver…. It won’t be an easy battle.

Market Overview

Who are the players? How big is this advertising market anyway?

https://www.emarketer.com/content/global-digital-ad-spending-2019

Forecasts aside, in 2019, GOOG and FB own 51% of the digital advertising market. PINS has 0.3%. Now, yes the market will probably continue to grow… the world is coming more online, print is dying blah blah. We all get that. But will the billions spent on TV, billboards etc.. all move over to digital? Who says the conversion will be 100% from physical to digital?

I don’t want to make any predictions or go deep into the market dynamics because I don’t feel I know enough… BUT if I were to inseminate an idea… it’s that advertising as a total industry may shrink in spend. Digital advertising is much cheaper and more efficient than traditional advertising and this has had a deflationary effect on advertising as an entire industry. This might create a reallocation of capital. Maybe to internal product development (i.e. R&D).. who knows. But to blatantly assume digital advertising will be massive and traditional ad money will all go to digital is naive.

Also, let’s not forget that Alibaba, Tencent and Baidu own one specific market and others probably won’t get a piece of that pie. But that doesn’t go the other way. If a EU or NA company wants to attract Chinese customers, you bet they will look at advertising on those platforms. But I doubt the CCP will let PINS advertise in China (at least in some material way).

Reliance on Others

PINS competes with GOOG, AMZN, FB (i.e. the big internet companies) and specific companies in verticals (i.e. Allrecipes, Houzz, Tastemade). But PINS also relies on the big giants. PINS relies on AWS as that’s where the entire business is on.

It also relies on GOOG for 1) customer acquisition (majority of traffic comes from either direct or search engines) and 2) browsers (Chrome can limit third-party cookies acquiring user data… making PINS advertising platform less valuable

It’s a situation where PINS relies heavily on the fair/good-graces of their competitors to let PINS compete. At least, until it can command everything on its own platform like Instagram.

Back to Products

So, what about the product itself? We know that there is a significant userbase of 335M MAUs worldwide. Growth is expected to come from the international segment as the US segment seems to have teetered off. Is 26% of a population the saturation point? Possibly. 88M MAUs in a population of 333M will give you that approximation.

I’d also note that ⅔ of users on PINS are females. Though I do see a use case in my own future and I may contribute to the male statistic. PINS would need a larger adoption from males for their US numbers to grow.

But what is the value of this product? Does it make life better? Does it solve a crucial/important problem? How many of its users would miss it if it didn’t exist anymore?

I’m sure the 0.1% of power users on PINS (the 0.1% is an estimate based on Sarah Tavel’s interview on Invest Like The Best) would miss PINS because people actually build their business on PINS. Stylists and creatives use PINS to create boards that contribute materially to their work and this does create a stickiness to the product itself.

But the goal of PINS is not to continuously engage the user. It’s something you go to for specific use cases. Which isn’t a bad thing at all. But for advertisers…. That lack of engagement might be a concern. For a product user, this might be a healthy relationship.

I think this is the intriguing thing for me with PINS. It doesn’t play to envy like Instagram does. It doesn’t create various negative vices like FOMO. It’s more about creating your own world and trying to bring it to life. Even the advertisements can be aligned: "The mutually beneficial alignment between advertisers and Pinners differentiates us from other platforms where ads (even relevant ads) can be distracting or annoying. We are still in the early stages of building an advertising product suite that fully taps the value of this alignment between Pinners and advertisers, but we believe it will be a competitive advantage over the long term."

PINS spends some 30-40% of revenue on sales & marketing for both advertiser & user acquisition but most folks come to PINS driven by the brand or through unpaid SEO traffic. The product has a specific use case tied to the brand and I do think there is value in that. This may be my own naivety but I think a product with proper utility that makes a user’s life better will succeed in the long term. Especially if the ecosystem of advertisers and users are harmonized.

Though I can understand why people would use the product… I just can’t put a finger on its necessity quite yet. This may mean that this is a nice to have product that doesn’t need to exist. It may not really do much in terms of adding value to the existing value chain of human flourishing. It’s just not as obvious as a key part that is required to build planes or ERPs that are essential in running a business.

At the moment, it seems to be a mere nice to have for advertisers as an option… for users to find an outlet to build an inspiration board (which someone could replicate on FB).

Fundamentals Quick Take

Revenues grew 50%+ over the last few years. Gross margins are in the high 60s. It has net loss in GAAP terms and Free Cash Flow is negligible. Though, there is a massive skew in the 2019 numbers because of the IPO. Of the $2.5bn in total expenses, $1.1bn (~44% of total expenses) came in Q2 of 2019 from realizing all the stock-based compensation since 2009.

Management & Incentives

PINS publishes a quarterly shareholder letter. In which, adj. EBITDA and MAU are stressed as important KPIs. They also share specific annual guidance and revenue growth…. Which gives me the impression of short-termism. The overall tone of the letter is product focused but overall bland in regards to educating the shareholders on the business. Maybe this will improve as they get older?

In regards to compensation:

The massive payouts in 2019 are part of the special Founder bonus for the IPO. Compensation for execs are base salary and long term equity in forms of RSUs that vest over 4-5 years. The absence of short term/annual bonus targets is a favourable thing for me. It does tilt the scale a little to the long term focus of the business.

I also take Silbermann’s lower salary as a positive signal too. Though, that is indeed laughable with such a fat stock award…. I am not opposed to founders getting wealthy. If I built a multi-billion dollar business I’d like to have realized $100M. 100%. It’s more so, what will Silbermann do with his equity after securing financial safety for him and his family.

Silbermann currently owns ~10% of all outstanding shares in the business. The 50M in class B shares do not include another ~10M that are set aside for his family members (he just doesn’t have control over it). The Bs convert to A shares on a 1-1 basis. The huge VC ownership is also something to keep note of…. I’d imagine many will seek to divest after some lock up period. In this manner, I’d hope to see more voting control move over to the insiders.

In regards to the rest of the management team…. I find the lack of continuity worrying as well. Aside from the co-founders (Silbermann and Sharp), the COO (joined ‘18), General Counsel (joined ‘17), and CFO (joined in ‘16) are relatively recent hires. Yes, they all came from big tech companies like Square, GOOG, Twitter but I don’t really care for that. It doesn’t tell me anything about their competence and ability to build PINS. What it does tell me is that people inside PINS were not seen as qualified enough to take the helm to lead the company.

2030?

Overall…. The culture and management situation is a mixed bag. Some I like and some I don’t. The industry they play in is interesting. I like the mission of the product and that’s the most important factor for me in possibly continuing to monitor the business.

I don’t see PINS succeeding by growing 50% YOY. I think it’ll flame out because it’ll get crushed by the giants. However, if it can slowly build the product and grow at 20% for 20 years… I would see that as a more positive sign… because this isn’t a business about massive use every day… it’s a product that will be in the life of a user one month and not in the next. But it’s about being a product that can become something people can constantly come back to year after year after year. Not some social media site that flames out because it's uncool.

But then again… for it to valuable to advertisers, it needs a certain level of engagement. Maybe this means PINS will never become like FB or GOOG in terms of ad prowess. But could it become a $100bn company in 10 years? Could the market support such a business? At its current sales multiple of 9x EV/S, it will need to generate $11bn in sales. If emarketer’s forecast is off and we get a $500bn market by 2030 instead of 2023… that’s a 2% market share from PINS’ current 0.3% share. Microsoft has ~2% market share right now.

It’s a wait and see situation.

Disclaimer - I’m writing this for myself. For my past, present and future self. Much of what I write is my opinion. If it somehow ignites agreement in you then great, I’d love to hear about it. If it sparks disagreement in you, don’t reach out because I don’t care for it. There always are obvious exceptions and the flawed person in me hasn’t considered them all.