Big Investment Follows Value instead of Profit or Revenue in Some Startups

big investments for startups
 

Investing in Internet startups has begun to follow particular patterns, especially when you view the most recent valuations of and investments in a few key companies.

Pinterest is an Internet message board where users post images of their favorite furniture, clothing, or other items. Although the three-year-old company attracts an estimated 50 million unique users every month, it does not generate any revenue yet. Investors have still put up $225 million in funding to bring the company’s estimated value to $3.8 billion.

Pinterest is not alone. This is not the only company that is benefiting from landing big investments. Fab, an e-commerce site, has increased its valuation to $1 billion by accepting a $150 million investment from Tencent Holdings, a Chinese Internet conglomerate. Alibaba Group Holdings, a Chinese e-commerce company, led a $206 million investment in ShipRunner, which offers unlimited two-day shipping from retailers. That move valued the company at $600 million.

Recently, AllThingsD reported that Snapchat, the Los Angeles-based messaging app is currently weighing a “huge” investment round that would place its value at $3.5 billion. The company also lacks revenue.

A sound investment. The Pinterest investment was made by cash-rich Fidelity, which has more than $1.7 trillion in managed assets. If the company doubles its money when it has invested $200 million, then it will consider that money well spent. In a situation where the investment doesn’t work out, it still has a sizable war chest of cash to draw on.

Venture capital firms don’t work on this type of basis, since they typically promise their backers a return of 10-fold or more on the money they invest into a company. They need to attract investors.

When investors put money into startups, they are looking to turn a profit and learn from the companies in which they are investing their money. In the case of the Pinterest investment, the company is using the money to invest in its core as well as international expansion. Its officials would not offer any public comment on its valuation.

 

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