The Pinterest IPO

Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

Ben: Welcome to season four, episode five of Acquired, the podcast about technology acquisitions and IPOs. I’m Ben Gilbert.

David: I’m David Rosenthal.

Ben: And we are your hosts. Today, we are talking about a company that is not a social media company. Or is it? Pinterest. For context, this is a company that has more users than Snap, though a little bit less than Twitter, is used by 80% of moms in America, and is actually a pivot of an early failed mobile shopping app. But we will get into that.

David: Indeed we will, as always here in Acquired.

Ben: This is episode two of the A+ IPO saga. We are proud to be coming at you two days after trading. We started trading on Thursday and then yesterday the stock market had the day off. We’ve got one day of data here and we’ll be talking about the entire story of Pinterest, but had a nice little pop in the market as well that we’ll touch on.

David: Yeah. So far, we have the P&L of the A+.

Ben: Indeed. Listeners, today we are talking about a company’s exit, and really that’s what we do on every episode of this show. There are lots of company creation topics that David and I can’t help but discuss. As many of you know, we have a second show for that, the Limited Partner Show.

Last week on the LP Show, we spent an hour diving into a required topic for every entrepreneur: the term sheet. We went through line by line, analyzing each term of a standard series seed term sheet and offering our editorial on each one. If you are interested in hearing us, two non-lawyers try to put it is as plain of English as we possibly can, you should definitely consider becoming an LP.

We have a big announcement today, big news on that front. We have heard from a lot of you that you wanted to listen to the LP Show but you weren’t sure how it worked. We decided to change the sign-up and offer every new person who joins a seven-day free trial, just so there’s no need to take the plunge blind. You can listen right here in the podcast player of your choice and sign-up in two taps—yes, only two taps—by tapping the link in the show notes or going to glow.fm/acquired.

Yes. Note the new and official name of the company: Glow. As the person who works on the product behind the LP Show, I am selfishly very excited to see how well the new trial feature works. So, please do not be shy to check it out.

David: Yeah. Big things. Big congrats to Ben and team for getting that all out.

Ben: Thank you, sir. Lastly before we dive in, I want to thank the sponsors of all of season four, Perkins Coie, counsel to great companies. We have with us today, repeat all-star guest and Acquired listener, Kara Tatman, a partner in the M&A and public companies practice.

Kara, people pay a lot of attention to the IPO, but then move their attention elsewhere afterwards. You do a lot of work with companies after they’ve gone public. What is something that newly public companies have to start doing that we may not be aware of other than doing their quarterly earnings calls?

Kara: That’s a great question. First and foremost, it’s really about establishing a culture of compliance. A public company needs to have things like a disclosed code of conduct and whistleblower procedures. Employees at all levels need to be engaged in this new culture of compliance. For example, certain actions like signing a material contract may trigger the need for SEC filing and folks could end up in a fire drill if the right people aren’t in the know.

In addition to filing financial reports like you mentioned, public companies file an annual proxy statement for stockholders, new public companies are usually excited to talk with professional stock analysts and major stockholders about the company’s future. But companies need to avoid selectively disclosing what we call material non-public information to those folks under fair disclosure rules.

Public company directors and execs are subject to certain trading restrictions and reporting obligations for their stock, and our government’s requirement like having a majority independent board. Having strong legal support is key for new public companies to make sure they can really focus on business growth and avoid regulatory missteps.

Ben: Fascinating and thank you, Kara. If you want to learn more about Perkins Coie or reach out to Kara specifically, you can click the link in the show notes or in Slack.

David: Today, we start our story in the mid-1980s–early 1990s. Special time for me, probably it was a little bit later for you, but it [...] too, all of us millennials growing up. There was another Ben, Ben Silbermann who was growing up in the middle of the country in Des Moines, Iowa around this time.

I remember growing up, my parents used to joke whenever they talk about shipping me off to somewhere random when I was being bad growing up. They’d say, “We’ll send you to Des Moines.” Apparently, Des Moines is a really great place. Anyway, Ben Silbermann talks about how it is a really great place and it’s going to play a big part in the story here.

Ben: Have you ever been to Des Moines?

David: I have not, no, but it looks beautiful.

Ben: It’s awesome. It’s actually really is awesome.

David: Is it part of the quad cities?

Ben: That is deeper than my knowledge.

David: Yeah, on Midwest geography. Anyway, regardless whether it is or isn’t, Ben Silbermann is growing up there around this time and he’s a middle child. He has two sisters, an older sister and a younger sister. He comes from a family of doctors, of MDs. Both of his parents are doctors; they’re ophthalmologists in Des Moines. His grandparents were doctors and both of his sisters would go on to become doctors later in life.

Ben thinks this is basically his destiny; he can’t escape this. He’s a quiet kid and he actually says at a talk later that he wants to be known in life for the things that he makes, not the things that he says. Quite in contrast to your typical Silicon Valley unicorn founder. This is going to be a theme here.

Ben: I was going to say to listeners, David and I were chatting before the show. It actually takes quite a bit of research to find a lot of the best stories about Pinterest because they’re a very sort of ‘do the work and let and work speak for itself’ company rather than beating a drum that many other companies do to attract talent, share the spotlight, and be in the news a lot. Pinterest just never really had that in their personality.

David: No, totally. This is probably the most work we had to do researching the history of a company and founders in a long time. Not because there aren’t great stories here. There are and we’re going to tell them. But unlike Airbnb or Lyft or Uber, the founders, Ben, Evan, and Paul just don’t talk about them. We found them nonetheless.

Ben’s growing up. He’s a quiet kid, likes to let his work do the speaking, he’s very good at work, he’s a very good student as you would imagine coming from a family that he comes from. He also supposedly collected stuff. Hard to verify if this is true or this was added as part of the lore later. I’m feeling like I know Ben after watching basically every talk he’s given over the last 10 years in the last couple of weeks. I actually believe him.

Famously, he supposedly had a bug collection, where you have a board and then you would pin bugs onto it. I think there was a Calvin and Hobbes series about this. So great, so Midwest. Love it.

Ben Silbermann is a great student. Ben Gilbert was probably also a great student in high school. Silbermann goes to Yale and he does pre-med as he’s destined to do. He majors in political science and does pre-med on the side. I remember I had tons of friends. I was in college around this time, too. Also do that same, be pre-med but major in something else.

One day, Ben wakes up. It’s his junior year. He just has this feeling that he’s been doing pre-med and he’s doing well, of course, but he’s just not sure that medicine is right for him. It’s not his destiny that he might have thought it was. He’s interested in other stuff and in particular—I can so relate to this because I was in basically the same moment in my life, in history when I went to college—when he went to college, it was the first time he had his own laptop and his own dedicated broadband high-speed connection to the internet

He basically fell in love with it. He was like, “This is so cool. This is the industrial revolution of our time.” Every young person I see this and he gets access to it in school for the first time. He just starts tinkering. He builds a bunch of what he calls toys with friends while he was in Yale. He builds a website where you can try on eyeglasses. Remember his parents are ophthalmologists, so he’s in college, he builds this website where you can virtually try on eyeglasses. I don’t even know how he did this at the time with whatever web technologies were.

Ben: Yeah because in 2014 or whatever when Warby Parker rolled it out, it was like, “Woah, it’s incredible.”

David: Yeah. He basically invents Warby Parker. Just a little bit ahead of his time. He’s tinkering around with all these stuff and he decides, “You know? I think I’m not going to go to med school, at least not right away.”

He goes and he talks to his other friends who were at Yale and also liberal arts majors but weren’t pre-med, and asked them, “What are you guys doing?” They’re like, “We’re going to all of these consulting interviews and investment banking interviews,” because that’s what you did. Ben says, “Oh okay, cool. I should do that, too.”

He does the whole consulting interview circuit, he ends up getting an offer and joining a consulting firm, which I think been has been acquired now. I remember these guys, Corporate Executive Board. They were based in Washington, DC. He joins them. He moves down to DC after school and two big things happened there, really important things that are important for the future of Pinterest.

One, he gets assigned randomly, I believe, to the IT consulting practice within CEB. He’s like, “This is great. I love the internet anyway, I’m going to work on IT consulting related projects.” He’s gets really into it and he starts reading TechCrunch, which had just come out around then. Of course, I remember these, too. He’s reading about all these startups out in California like Digg, Yelp was just getting started. This is the dawn of the Web 2.0 era and he’s like, “Yeah, I really want to be a part of this.”

The other really important thing that happens during his couple of years as an analyst at CEB, he meets his girlfriend who would become his wife, Divya, and Divya worked also at CEB in the HR consulting group. Ben’s in the IT consulting group, Divya’s in the HR consulting group. As the story goes, one night they’re watching a movie in DC. They watched the Pirates of Silicon Valley. I still have not seen it. I need to watch this movie. I’ve heard it’s so great. It’s like a crime that I haven’t watched this movie.

Ben: I’m not sure if it’s more cringe-worthy or more legitimately awesome, but it had so much of both. I can’t believe that it was only ever a TV movie.

David: I know. It’s about Steve Jobs and Bill Gates, the rivalry between them, and Microsoft and Apple.

Ben: Highly dramatized in whatever 90s or early 2000s camera angles and lighting. It’s just so utterly dramatic.

David: And there’s this ridiculous line in there. He gives that talk that I’ll reference later where he literally has a slide and he has this line, this quote on the slide. There’s this super cheesy line in there that I think Bill Gates’ character says, “There might be something going on in California.”

According to Ben, this inspires him and Divya. They’re like, “What are we doing in DC? We got to move out to Silicon Valley be where the actions,” so they do. A little while later, this is 2016, I believe, they move out to Silicon Valley, out to Palo Alto, Ben ends up getting a job at Google in ad operations and Divya gets a job—she wants to work at a startup—so she gets a job at a cool startup right off Cal Ave., in Palo Alto, you may have heard of it, it’s called Facebook. She joins them in 2006. She’s the first HR. Remember, she was doing HR consulting at CEB, she becomes the first HR person at Facebook which is pretty awesome…

Ben: I didn’t know that. It’s awesome.

David: …and is also going to have a huge impact on Pinterest, we shall see. Ben works at Google for a little under two years, I believe. But he really wants to do a startup. He’s obsessed with TechCrunch; he’s tinkering with all sorts of stuff on the side and every night he’s talking to Divya. He’s like, “What about this? I want to work on this.” And again, supposedly, they’re having dinner one night and Divya is just sick of this. She’s working at a startup and she’s like, “Ben, you know, you might want to just either do this or just stop talking to me about it.” I could so imagine this. Jenny and I have had many versions of this conversation. Ben’s like, “You know what, you’re right.”

So, it’s Fall of 2008, at this point and he decides he’s going to leave Google. He’s going to launch his own startup; he’s going to live the dream. He has an idea and he’s got a couple of friends that he’s going to work on this company idea with. He wants to build a website that stores your family’s medical history, so not like an EMR but a place where you can store, “What is your grandparents’ family medical history? Your parents’ medical history? Your siblings?” Actually, it seems really relevant. It’s Fall of 2008, he goes off to do this, he quits Google, he walks out and then a week later, Lehman Brothers collapse. We’ll get back later in the show to how impactful that event was on so many things in the world but…

Ben: I think there’s probably four or five episodes now where that’s been a turning point in the history of each of these companies.

David: Yeah, totally. The most direct impact that has on young Ben Silbermann and the company that would become Pinterest is nobody else who he was talking about doing with this ends up leaving and joining full-time. I think some people might have been in Google, some people might have been friends. He’s talked about they were in PHD programs. Everybody is like, “Nope, the world is falling apart.”

Ben: Super hard to…

David: Yup. “I’m keeping my job and my salary.”

Ben: “…everybody, go to cash, keep your job, don’t do anything risky.”

David: And so, Ben’s out there, he’s all alone, he’s quit, he’s gone, and he goes out and he tries to raise money. He has this idea of this website he wants to build but no angel investor or early stage VCs at that point who are investing at anything let alone some random ad apps guy from Google who’s a solo, non-technical founder. Even though he was…

Ben: Come on, the bottom’s the best time to buy. This is when you should be investing.

David: I can’t wait to do the Airbnb episode hopefully later this year where we tell their version of their story which is also very similar. He can’t raise any money, he has no co-founders, no ability to build a product, he does a bunch of things just to pay the bill and get by. Fortunately, Divya is working at Facebook and doing pretty well so she keeps the fledgling family afloat.

Ben: They’re still, well pre-IPO at this point. I mean, they haven’t found mobile yet.

David: No, this is 2008.

Ben: Facebook is doing well but it’s doing well on venture dollars, not on its real business model.

David: Yeah, totally. Ben ends up moonlighting. He helps design a product in a company called Mighty Quiz which is a Y Combinator company. I think within the first batch…

Ben: Not the first.

David: It wasn’t the first.

Ben: But it was in early batch.

David: Very early batch. They might have been in the same one as Dropbox.

Ben: Was Dropbox in the Reddit batch? Because Reddit I think was the first.

David: I can’t remember.

Ben: It was first two or three…

David: It was definitely early on. They powered trivia games for other websites out there. It doesn’t, of course, but that’s how he gets exposed to YCombinator. I was wondering. Ben goes back and he does talks at YC startup school. I was [34:32], “Pinterest, did they do YC?” But that’s how Ben became involved with YC. He’s doing this and he’s looking for something to do. He comes upon and he realizes he loves this iPhone and the iPhone SDK had come out earlier that year, in 2008, and they just started to open up to third party applications. Because remember, the first year, year-and-a-half of the iPhone, it was only apps from Apple. There were no third-party apps out there.

Ben: iPhone OS 2 that had the app store and SDK.

David: Yeah. Famously, Steve Jobs was against the idea initially of having third-party apps on the iPhone.

Ben: But he Bezos-style disagreed and committed and they shipped it anyway.

David: How different history would have been if that had not been the case. Ben sees this and is like, “Okay, this might be the wave that I can ride. I missed the Web 2.0 wave, but this might be the wave that I can ride to build a big company.” He hooks up with another friend from undergrad from Yale, named Paul Skiera. Very random that Paul would end up being his cofounder because Paul lives in New York, is also not technical but Paul had a very important aspect to his background and skill set.

Ben: He knew investors?

David: He had been an associate at a venture capital firm called Radius Ventures in New York. He knew investors. What was one thing that they needed? Money.

Ben: Money.

David: And Paul of course also saw the opportunity that the opening of the app store would unlock. He’s like, “Okay, great. We’re going to build a company. We’re going to build iPhone apps.” They decide to call the company Cold Brew Labs because it sounded cool.

Ben: Listeners, we try and pour over what’s the origin story.

David: Pour over, I like what you did there.

Ben: What is the company espousing. This is all we could find that it sounded cool and they just rolled with it.

David: I think that was the actual story. Although because they need to raise money and Paul has all these investor relationships, they decided it’s natural he should be the CEO of the company. He’s in New York and Ben is out in Palo Alto and he’s the CEO. First, they decide what are they going to do to build iPhone apps. Ben has this idea, I actually don’t know who whether it was Ben or Paul, they come up with this idea for a product that they will call Tote.

Ben: We should pause here before diving into what Tote is. This was aha moment number one for me doing the research that Ben Silbermann was not the initial CEO of Pinterest. David, you even texted me like, “Woah, did you realize this?” I think that this is just one of those things that ends up buried in the lore that’s sort of super fun when we’re diving in and trying to figure out what’s going on, that Ben, while the visionary and the person that we chose to start the story with and his upbringing, was not the CEO of the company.

David: Despite his job at Google early and been searching around for a company to start. They decide that they’re going to build this app called Tote and release it on the app store. How did they get the idea for this? I don’t know. The idea is that you get all these paper catalogues—direct mail catalogues—sent to you in the mail for all sorts of things: fashion, home décor, pottery barn, what have you. “Wouldn’t it be interesting instead of getting those in the mail, you could get them on your new smartphone device?”

Ben: David, that is just what I want. Just what I want.

David: Man, I can’t wait to read more catalogues. They decide they’re going to do this but there’s no API for getting products in catalogues from companies, so they start getting catalogues and just, by hand, ingesting the product data into the app. Typing in like, “Oh, here’s this dress at Forever 21. It’s priced at this…” Take a picture of it, “Here’s the picture.”

Ben: Wild.

David: Talk about doing things that don’t scale.

Ben: This is 2008. There was zero evidence that anyone wanted to do anything that resembled shopping on mobile yet.

David: End of 2008, beginning of 2009, completely. They think, “Okay, we’ve got this great idea, we’re working on this product now. We’re going to go out. We’re going to raise money with our new great VC connections.” Everybody turns them down. They meet with everybody in Silicon Valley and people more or less laughed them out of the room, rightly so at that point in time. They get so desperate; this was later on in the Spring of 2009.

Ben: Actually, David, I’ll push you on right so because if they had invested, they would have been the first investor on Pinterest.

David: Well, right.

Ben: It is interesting. It’s like, “Rightly so actually on the idea but…”

David: Rightly so for this idea. Well, that’s the art of early stage investing which we’ll get into more as we go here. They’re so desperate for money to pay the bills that they start applying to business plan competitions at colleges that they didn’t even go to. They’d just do anything to try and get some money. Presumably, also some money to pay off some developers to actually built this because they can’t build this.

They go to one, according to Ben they go to several, they go to one, I believe this was NYU, I couldn’t verify but I believe this was NYU’s business plan competition. They end up getting second place in the competition, so they don’t get any prize money but what they get for coming in second is a meeting with a VC. That VC happens to be a VC in New York, a brand-new firm that has just gotten started at this point in time which, side note, must have been incredibly difficult to start and raise a first-time fund in the middle of 2008, 2009.

Ben: My god, yeah.

David: It was hard enough doing it that way in 2017, 2018.

Ben: David, to double down on that, imagine how hard that is, you’re an early firm, you’re making one of your first new investments and it’s Pinterest.

David: Exactly. These guys, First Mark Capital, which is now a much larger VC firm based in New York, they’d just gotten started and they were the second-place door prize in this competition. They meet with Paul and Ben and this app called Tote. For whatever reason, they take a [shying 41:51] to them and they say, “Okay, great. We’ll throw you guys a couple 100K. Let’s see what you do with this.” First Mark becomes the first institutional investor in Cold Brew Labs. You can read the Form-D that gets filed. Paul signed to this, the CEO of the company, they invest a couple 100K.

Ben: We do this part later but just to sprinkle some numbers on this, Pinterest, their IPO price was at $19 a share and when they opened trading it was at almost $24 a share. These shares were bought for 1 cent per share.

David: They do pretty well. I believe, First Mark still owns about 9-ish% of Pinterest. Man, the art of early stage venture capital and betting on teams. Great investment there. With these resources, they hire some developers, they ship the app, but nobody really uses it because again, who wants to really be shopping catalogues on your, at that point in time, 3.5-inch iPhone screen?

Ben: What’s interesting, yeah, there’s a few things there. It’s like, no one was conditioned to that behavior yet. Phones weren’t rich enough in their functionality that give you the confidence that doing things like shopping or booking travel or anything on them was actually going to work. You had sort of the richness of the software required to do those things.

David: At this point in time, you had 3G. I think we were past the Edge days of the iPhone but loading high-quality images still took a while.

Ben: Totally. I also think that this was the era where trying to update your apps took weeks. Anytime that anything was wrong, it’s not like we have sort of the, number one, the update speed that we have today, but number two, the ability to change a lot of stuff on the server. Apps weren’t that sophisticated yet and had just a lot of really heavy stuff on the client side. I think that not only was there a small segment of people willing to do this crazy thing called shop on their phone but then even more so, it’s really hard to actually iterate on this thing.

David: Hard on all fronts. One day, later on, a couple of months later in 2009, Ben was visiting New York. I assume he’s visiting because Paul was still there. A mutual friend says to Ben, “Hey, there’s this guy here I know, that I’m also friends with, you guys really seem similar. You should just grab a drink. I think you would really like each other and meet while you are in town.” The friend that the mutual friend was talking about is a architecture grad student named Evan Sharp.

Ben: Boy, Pinterest really keeps finding the exact right people for these roles with just the right backgrounds.

David: Exactly. Right people at the right time. As with all of these stories, it’s so fun when you dig into them. The number of just random events that lead to these incredible stories and companies being created. It’s the same thing with the [Letko 45:10] founders, meeting on Facebook.

Ben: Evan was, he had an architecture background but actually had some super applicable skills from tech companies, right?

David: Not yet.

Ben: Was he on Facebook?

David: He’s just an architecture grad student in New York. Ben and Evan grab a drink and they’re chatting and Evan was talking about he’s so into architecture and design and he’s curated, he has thousands of architectural photos and drawings and designs that he saved online but it’s so hard to keep them organized, and he’s got this whole system. They were a [45:52] and Ben is like, “Oh, yeah. I love collecting things too.”

Ben: “I had a bug collection.”

David: Yeah, “I had a bug collection.” And, “I’ve had this idea of, I love tinkering with stuff and one of the things I’d always wanted to build is a product that would let you collect things online and save them and organize them.” They start riffing and eventually, Ben’s like, “Man, we’re really in sync. You should come join me and Paul at Cold Brew. Work on what we’re working on Tote. Maybe we can move the product this direction.”

Evan though, he’s still in grad school and he’s super passionate about architecture and design and he does want to work in tech. He wants to be a product designer, but he’s not super interested in a really early stage startup that doesn’t have a lot of great prospect. In fact, what he’s interested in, I don’t know if he already had this lined up, but when eh graduates from architecture school, he goes, and he works at Facebook as a product designer. But he’s like, “You know, I like you guys. I don’t think I want to do this full time and dropout of school. But I’ll work with you on the side.” If he didn’t have the job at Facebook yet, I imagine this helps him in his interview process that he’s working on the side with a startup that would become Pinterest.

They all start working together and there was, along the same vein, Tote did have this feature that they already had in there, that let people save items for later that they were browsing in the catalogue. The very few people who were using Tote, they all seem to be using that. When they talk to users, they seem to kind of like it. You know it makes sense, I was talking with my wife Jenny about what she uses Pinterest for these days, the analogy that she said to me is, “Pinterest is like the online version of when you’re reading a magazine and you see something interesting and you tear the page out or you fold the page down to save it  for later.” That’s literally what was happening in Tote.

They decide to focus on that and build out this feature a little more and they combined it with sort of this broader idea like, “Okay, let’s get beyond just shopping and catalogues but organizing everything that you come across on the internet.” Evan designs it at his free time, and he comes up with probably the most important unlock that really makes this happen from a product standpoint…

Ben: This is the board.

David: …he comes up with the grid layout.

Ben: Oh, yeah.

David: Now it doesn’t seem all that remarkable. You go to Pinterest and everything is laid out in a grid of images but at the time, this was really novel. The idea of laying out all these images in a grid in front of you but there were a couple of things. One, it was liquid and adaptable. Depending on the size of the images, the grid would readapt and make the images all look good instead of resized, to fitted, to very specific squares.

The other thing that they did, I don’t know if this was intentional or not, but the grid was oriented around vertical photos, not horizontal photos.

Ben: Oh, interesting. To allow sort of more of them to be across the screen at once.

David: I imagine that’s why they did it. At the time, the first version of this, of Pinterest, was only on the web, not on mobile and even despite Tote being coming out of Cold Brew Labs to build mobile apps, they said, “This product needs to live on the web,” wouldn’t even come to mobile until 2011. But then when it did, this vertical image prioritization was perfect for mobile.

Ben: Worked really well, yeah. I remember back in this time, when Pinterest shock the world what is, canonically, the Pinterest layout, there were so many little clones. Everybody tried to add a Pinterest style view to their product. You’d see on Hacker News, “Oh, Pinterest for X.” Pinterest meant that fluid layout; that was sort of the board that was laid out in the adaptable fluid way to lay out images.

An interesting meta topic here, products get shaped using the technology available and what is easy using that technology. It makes sense that on the web, for the longest time, what we saw were tables, and what we saw were sort of articles that had in-line images. It’s not an obvious and easy thing to do in early HTML and CSS to lay something out in this way and particularly to do infinite scroll and a lot of the things where we come to expect knowing that these layout exists now. It’s fascinating to think whenever you’re designing a protocol or a platform or a core technology that you’re really shaping the first five years or whatever, the first several set of use cases of what people actually do with it.

David: It’s so cool too. I mean, Evan, he’s an architecture grad student in New York who designs this and would go on to be one of the most influential internet and mobile UI paradigms in the last 10 years.

Ben: Totally.

David: Super cool. They have this, they’re pretty excited about this new version of the product. It’s now November 2009, Thanksgiving. Over the Thanksgiving, Ben and Divya are at Thanksgiving watching TV and Ben had been trying to think about, “What are we going to call this new product? Because Tote doesn’t make sense anymore.” Of course, talking with Divya about it. They’re watching TV and of course, I assume at least most US listeners are going to remember the commercials—they were all the rage at the time—the Dos Equis commercials with the most interesting men in the world. Those commercials were so great.

Ben: How is this related, David? Where are we going?

David: It’s related because they’re watching TV, a Dos Equis commercial with the most interesting men in the world comes on, and Divya’s like, “That’s it. That’s the name of the company. Pinterest.” Because they were talking about pin boards and the interesting men in the world, and that’s when inspiration strikes.

Ben: No way.

David: That’s where Pinterest is born.

Ben: Wow.

David: I don’t what the moral of the story is there. Like, spend more time watching TV with your loved ones.

Ben: I think that’s it. Spend more time with your loved ones feels like a great lesson to take away from this.

David: Yeah. Great. They’ve got a name for the product, they’ve got this super innovative grid UI, they’re ready to ship. January 2010, they launch. They email all of their friends in Palo Alto, everybody that they know from Google, and Divya’s friends at Facebook, and Evan of course is going to Facebook at this time, and nobody uses it. Everybody is like, “What is this for? What are we supposed to do with this?”

Ben: What’s interesting to me too about this point in this story is, it’s not like they had done an exercise and said, “Okay, who’s our core target user? What is our ideal customer profile?” We all know today, Pinterest is, I believe is two-thirds used by women. They didn’t come up with it and say, “Okay, what product can we build for moms?” It was very much, “Here’s a thing that is very agnostic to who’s using it and what they’re using it for and let’s just see.” It’s interesting to think about—I’m sure you’ll get into this—but how did they find that the right use case and who they’re real target user is.

David: Before that happens though, they’re trying to do everything they can to get their friends to use it, to do growth hacking, just all the rave of this. What they think is going to be really cool, Ben goes to the Apple store in Palo Alto and—I don’t know if he does this everyday or just for a couple of days—he goes to all the computers and he changes the home screen to Pinterest, all the computers in Palo Alto. Has precisely zero impact. They applied to TechCrunch Disrupt and they get rejected.

Ben: And didn’t they pull some strings to get in somehow?

David: First Mark was a sponsor and they pulled some strings and they get them a booth at TechCrunch Disrupt that they’re not part of the battlefield. Things are bad, everybody is pretty down, but there is a ray of hope and that is some of the people that they’ve been trying to get to use it—they were literally anyone they know—were Ben’s friends back in Des Moines that he’d grown up with. These people were so far from Palo Alto techies, but they seem to like it. The other thing they had going for them back in Des Moines was Ben’s parents, Ben’s mom, they’re still ophthalmologists in Des Moines, they’ve all these patients and Ben’s mom starts telling all of her patients to use Pinterest.

Ben: God, this is like the equivalent of the Snapchat story where it was Evan Spiegel’s mom was a teacher at school or something.

David: No, no, no. His cousin, I think.

Ben: That’s right. His cousin was a student and they were using it to message.

David: Yeah, because iMessage and other apps were banned; messaging apps were banned. It was so great, but they all had their iPads. This is like the Pinterest equivalent. They start seeing this and they’re like, “Ahh, okay. Interesting.” I’m not sure if this is related or not but, on a whim, Ben goes to a conference in Salt Lake City that January called the Alt Summit which is a big women-focused design and blogging conference. I think a friend had suggested that he go there. But I don’t think he had really that much intention of, “Oh, this could be the promised land of our user base.

He goes there, he’s talking to everybody about Pinterest, gets a bunch of people signed up, they start using it. At the conference he meets a woman named Victoria Smith who’s a blogger, who lives in San Francisco. She has a blog called SF Girl by the Bay. She’s actually moved to LA now which of course, breaks the heart of San Francisco people but at the time she lived in San Francisco. They kind of hit it off and they were on the flight back and they decide, “Hey, let’s do a collaboration together.” Pinterest is going to work with SF Girl by the Bay and, “We’re going to do this thing called pin it forward,” where Victoria will create a pin board with all the things that ‘mean home’ to her, things that inspire her of home, and then they’re going to tag another blogger and ask the next blogger to do the same thing for them and then just pass it around to all of the bloggers that are in this network and had been at the Alt Summit and they do it.

Ben: Sounds like a growth hack.

David: Sounds like a growth hack. The blogger really gets into it and they of course all have their small but rabid fan bases of their blogs. Their audiences love it, they start using Pinterest, and lo and behold, things start to turn around. The company starts to work—this is 2010. A couple of years later, 2012, Pinterest is now a hot startup in the Valley. I’m starting business school at GSB at Stanford. In my electronic business class, we have this great professor, Haim Mendelson. He’s a total legend.

Ben: That’s an amazing name for a class.

David: I know. Electronic Business. He’s an old school guy but he’s super smart. The first week in class, he made us do the same thing in Pinterest. I never understood why he had us do this random assignment on Pinterest and now, I know, this is why.

Ben: What, the pin it forward exercise?

David: Yes, the pin it forward. But he didn’t tell us it was the pin it forward exercise. He was just like, “All of you guys, go create a Pinterest board of your hometowns and what home means to you.” Only now, years later, do I see where he got the idea for it.

Ben: It’s interesting thinking too about why it made so much sense for bloggers because for them, whether it was part of their own process as a tool, you can imagine it’s difficult to go and collect good links and good images and put them somewhere if you’re trying go look at a hundred different websites and then write a blog post about, sort of a synthesis of all this stuff. It’s both an interesting tool there. But then also, it’s probably the best way to showcase, at that time, a set of things that you want your fans or followers to go and look at, much better than making a separate WordPress blog post for each thing that you want to show off.

David: Totally. Ben goes back to the Alt Summit in 2012, and that’s where he has the slide that has the, “There might be something going on in California,” in that talk. But one of the questions from the audience is this woman who says, “Pinterest is something like the best thing that has happened to my business and my following and the worst thing that has happened to my actual blog because I now do everything on Pinterest.”

Ben: Oh, interesting.

David: It’s so much a better vehicle if you’re a design blog and you’re sharing ideas and products that you find with people to use a service like Pinterest than it is to use a blog.

The site starts growing between 40%–50% month over month at that point. It’s still really small but it really starts taking off and it sustains that growth rate for years.

Ben: That’s a magic number for startups. If you’re growing 10% week over week or 40%–50% range month over month, you are a high-growth startup. That is how you know you’re onto something.

David: Yeah. All these angel investors that two years ago would barely even take a meeting with Ben, start to notice that something’s going on here. In May of that year, Shana Fisher, who was the Head of M&A at IAC, started using Pinterest, probably heard about it in a blog, and she loved it. She emails them and she’s like, “Hey guys, I want to invest.” Their minds were blown.

Ben: What year is this? This is after they were out of private beta?

David: They’re still in private beta and they would be in private beta for the next two years. If you had invites, you can invite your friends. Their site is still growing like crazy and a lot of the invites were distributed via these blogs.

Ben: Interesting.

David: So, Shana invest and then she introduces Kevin Hartz, who’s the CEO of Eventbrite, co-founder of Eventbrite with his wife Julia at that point, and also a prolific angel investor in Airbnb and others, he invest. Friend of the show, Scott Belsky, invest and there’s serious momentum behind this company.

This is a fun aside but also part of the story. July, a couple of months later, they do the first real-life Pinterest meetup with Victoria, with the SF Girl by Bay Blog, at a store in Noe Valley called Rare Device, which is now moving to Hayes Valley. It’s right down the street from where Danny and I live now in Noe Valley. Too funny.

That’s the first physical Pinterest meet-up and all these people come out. It’s not a huge amount of people but they’re all so engaged, they love the product so much, and they’re talking about how all the things that each other’s pinning about their homes and about everything else on Pinterest is inspiring them to go do these projects. They’re supporting each other and working with each other on these projects. Ben is like, “This is it. We have figured out what Pinterest is, who it’s for, and we’re going to double-down on this.”

Ben: At this point, Ben is doing things like giving out his personal phone number, giving out his address, saying, “Hey, please reach out to me anytime you have any feedback,” and he really started doubling-down on building this wildly intimate relationship with the Pinterest users around this time.

David: Yeah and meet-ups start happening all over the country. Remember, Divya was the first HR person. I don’t think they’re married yet but girlfriend-soon-to-be-wife Divya is the first HR person on Facebook. Ben is so inspired about how fast they have to move here. He gets a poster of Facebook’s ‘Move Fast and Break Things’ motto and he makes that the Pinterest motto. They redesigned it in Pinterest font and red lettering, and they posted it all over the office.

Ben: That’s so the opposite of Pinterest’s actual mantra as a company years and years after that.

David: Yup, but in these very early days, this was when he realizes, “Okay, we’ve got something here and we’ve got to move fast.” They’ve just raised this angel round, they keep growing, and then the next spring, they end up raising $10 million which was Series A led by Bessemer, which was a very large Series A for the time.

Ben: Which closed in May. I want listeners to pay attention to the timeline here. This round closed in May. Just to continue tracking the share price here, that’s 17 cents a share.

David: Yeah, 17 cents a share. Sarah Tavel, who was a great investor and now a GP at Benchmark, was an associate at Bessemer at the time. She had heard about Pinterest. She have found them and she had lobbied the firm to do it. Jeremy Levine, the partner who ended up leading the deal, was coming out to San Francisco one day to meet with the [...] he write to BlogPress to meet with Minted, another company. She convinced him like, “Hey, we’ve got to go down to Palo Alto. We’ve got to meet these Pinterest guys.” Jeremy had 10 minutes before his flight and is like, “Okay, fine. I’ll go down,” and then ends up canceling his flight, staying, and do the deal. It was totally Sarah who found it and lobbied it.

Ben: It was supposed to be a longer meeting, then there was traffic because it was raining or something, and by the time he got down there, there was only 10 minutes for the meeting. Of course, it’s interesting enough that you just skip your flight. But yeah, I think we should put a stake in the ground right here and say, “Just let’s notice a trend of amazing women doing things like naming a company, pounding the table to make the investment.” I think Sarah should get a huge amount of credit for this for spotting it super early.

David: Exactly. It’s Divya who comes up with the name, it’s Victoria Smith in the Alt Summit—an all women-focused bloggers and designers—that lands the product market fit for the company, it was Shana at IAC who was the lead angel investor to recognize the potential of the company and want to invest, and then it was Sarah who found them and pounded the table to do the Series A.

At the same time—this is super fun—SV Angel, Ron Conway’s firm, had passed on the company during the angel round. A great friend of ours, Leslie Kincaid was working as SV Angel at the time here in Silicon Valley and Kevin Carter who was also there at SV Angel, was like, “Man, I think we might have missed this,” during the angel round that it happened with Scott, Kevin, and Shana the past summer, “and maybe we should not really do Series A but we might want to really try another look here.” So, Leslie and Kevin lobbied within the firm that, “Okay, we’ve made a mistake. We should try and push our way into this round, too.”

Ben: Kevin specifically was like, “Leslie, what do you think? This is a female-focused site or at least that seems to be the user base.” So, Leslie pulls together a focus group of three women at the firm and basically went back to him and said, “Yeah, I know we passed but there’s no way we can miss this.”

David: SV Angel ends up coming into this Series A as well and then—this is great—both Sarah and Leslie—Sarah leaves Bessemer, Leslie leaves SV Angel—go and join the company as early employees.

We have to give a shout out to Leslie, too. She’s helped us with a bunch of these stories and research here. She now runs the office and is Chief of Staff to the CTO at Convoy up in Seattle, which is another great company that will be in an Acquired episode someday.

Ben: Thank you, Leslie. Thank you for the stories that are coming in this episode. Listeners, you can find links to some cool post from Leslie’s Instagram over the years from 10 employees onward at Pinterest.

David: It’s super fun. Go look at these pictures that Leslie has documenting all this. This is the first time we’ve had actual visual accompaniments to the stories that we tell here.

Ben: Yeah, across three different offices.

David: Super fun. We’re now in July of 2011, they hit a million users. Remember, it’s still not open to the public. You still have to have an invite to join. In August of 2011, they’re listed as one of Time Magazine’s 50 Best Websites, which actually meant something back then; now, probably less relevant.

Remember, it was May when the Series A got done, we’re still in August, and Jason Horowitz, spearheaded by Connie Chan who is on the deal team at the time there, had gotten wind of all this great stuff that was going on at Pinterest. Jeff, Jordan, and Connie come in and lead the Series B just a few months later in the company. There is $27 million out of $200 million valuation.

Ben: For those keeping track at home, share prices are now up to 72 cents and in that time from May to August, the valuation goes from $40 million to $200 million.

David: This is what happens when you hit that exponential growth curve. They now have tons of resources. A couple of months later, though, in April 2012 a transition happens and this really was, at this point, a long time coming and probably had de facto already happened, if not officially. Ben Silbermann finally becomes the actual CEO of Pinterest in April 2012. Paul leaves the company very amicably, ends up doing a few things, and he is now actually the chairman of an EVTOL company—vertical take-off and landing—flying cars company called Joby Aviation.

Ben: That’s awesome.

David: Yeah. Super fun.

Ben: It’s an LP Show prediction from our 2019 predictions.

David: Yeah. EVTOL becomes a thing. The growth just continues on undeterred. The 2012 presidential campaign is in high gear at this point in time. Obama’s running for a second term and Mitt Romney’s running against him. First, Ann Romney, Mitt Romney’s wife, and then Michelle Obama joined Pinterest, on the campaign trail building pinboards of their life and inspiration. It is huge for the company.

We’re now one year from when the Series A had happened, the Bessemer and SV Angel Series A. We’re now in May 2012. Rakuten, the Japanese ecommerce company comes in, leaves $100 million investment in Pinterest at a $1.5 billion valuation.

Ben: Think about when you’re raising money for a company and you’re selling 20%–30% of it. The leverage that they had to have at that point to say, “Sure, we’ll [...] $100 million, but it’s going to be on...

David: For 1/15 of the company.

Ben: Yeah. Wild.

David: When Leslie had joined, she had joined in November of 2011, so just a few months before. She was the 10th employee. They were only 10 people at the company.

Ben: Is this a good time to talk about the really forward-looking investment in general administrative [...] infrastructure?

David: Absolutely.

Ben: Okay. Listeners, if you remember one thing from this episode to take away it’s Pinterest thought so far ahead on a lot of things that most companies say, “We’ll think about that later.” Think finance, think HR, think people ops, think workplace, think culture. It was amazing starting really very early on from a company that Ben wanted to build and also in bringing Leslie, an employee 10, really starting to invest ahead of their growth, rather than a ship that’s burning down and you’re trying to patch it when it’s on fire.

David: I feel this is really where the story of Pinterest and the history of Pinterest diverges from a lot of your typical kind of Silicon Valley hyper growth company. They’ve done the A, then they have this crazy growth, they’ve done the B a couple of months later. Your average Silicon Valley company at this point would have been like, “Great, let’s pour all this money into growth and go.”

To Pinterest and Ben’s credit, I think in the long term—this has really impacted the trajectory of the company—they said, “Now is the time to pause and build the foundation, to support this hyper growth that we know we’re going to go through.

They brought in Leslie as Site Operations Manager. They got really serious about hiring executives. Again, remember Divya was the first HR person of Facebook. They started bringing over some great people from Facebook to come in and build out all the infrastructure around the company.

A guy named Tim Kendall comes over. Tim had been an early Amazon guy and then had joined Facebook also very early with head of all monetization within Facebook. He joins Pinterest in March 2012 at first running product. He then eventually runs product engineering and builds the whole ads business for the company. He becomes president of the company.

They bring up Barry Schnitt, who was running marketing and communications at Facebook. He comes and joins Pinterest. Don Fall who is running operations at Facebook comes and does the same at Pinterest. Really a whole suite of them. I remember I have lots of friends who also were at Facebook and moved over to Pinterest at this point in time and they start really building out a lot of the senior management and functions to scale up the company. All these people end up staying a really long time. Tim is now CEO of a company called Moment but he stayed about six years and built out all of these things at Pinterest.

The other thing that they started really investing and employing to their strengths is women engineers and women on the engineering team. This becomes a huge asset. This is well ahead of all of the things we’ll cover in the Uber episode.

Ben: Philosophy was our team across all functions should reflect our user base or trend much closer to that than most of the industry.

David: An early Pinterest engineer named Tracy Chao really becomes an absolute leader, recruiting for the company, diversity in engineering, and in Silicon Valley more broadly. Pinterest has way higher percentage of female engineers than your average Silicon Valley company and it’s a huge asset to them.

Ben: It’s interesting. I was looking before this. It hovers around 25%–26% of their engineering team right now.

David: Fun story too around all this time, and [...] Leslie was joining the company. They’ve been in Palo Alto and their first office there—you can go and look at all their photos and they’re great early photos—they end up moving to San Francisco and this was a huge moment at the time. I remember this because Palo Alto was still headquarters of Silicon Valley and where startups were. There were very few companies that were in the city and Pinterest moving up from Palo Alto to SF was really the center of gravity shifting up to San Francisco. It happened because Tim and Kendall had just joined and they were looking for a big office space to support all this hiring they’re going to do.

They had a friend who knew about an abandoned chicken factory in Selma in San Francisco, right next to the Caltrain station, like perfect location. So, they jumped on it and the core of what’s now the Pinterest campus right around the Caltrain station there started in an abandoned chicken factory.

Through all this time and all these fun stories, there’s no revenue. There’s no business model. The product is seeing tons of usage, engagement, and growth, but they’re not making any money, not a dollar revenue.

Ben: And they’re even making noise about the fact that they’re not. They’re getting press for this, Ben Silbermann is getting asked at conferences and his party line as we really want to be thoughtful about this. We want to have something like measured growth or a thoughtful growth and we wanted to do monetization we feel that is right for our users, which they towed for years after you would think they would start experimenting with monetization.

David: Which is too and also fits their personality. But also, they have a very traumatic experience with this right after the Series B but before Tim Kendall joins to come in and ultimately built out the ad and monetization platform.

One of the things that started happening on Pinterest from the early days and especially coming from the blogging community, is people posted pins and they put affiliate links in them. When you click the pins, there would be an affiliate link to whatever the retailer was that was selling the product, and then the bloggers or whoever posted the pin, they make a cut on that transaction.

Pinterest definitely saw that this was going on. They thought, “Well, this is pretty interesting.” It was probably designed as an experiment from the get-go but where too the company called Skimlinks in early 2012, without warning, they pulled all of the affiliate links, rewraps them with Skimlinks-powered Pinterest affiliate links, and Pinterest took over all those affiliate links that were running through the site. It caused a huge uproar and to Pinterest’s credit they pulled the plug on it immediately and they apologized.

Actually, later on in 2015 the would kick all affiliate links, period, off the platform and just banned them totally. But it was so powerful and demonstrated the monetization potential and Pinterest’s place in the commerce flow, that for years afterwards, they were still getting checks from that week or two that they had affiliate links on. They were still getting affiliate checks and it was a very powerful way to prove the potential here. But then, they bring Tim on and they don’t do anything. Ben has alluded to for the next two years around monetization after.

Ben: 2014 is when they started?

David: Yup. It was May 2014, they launched Promoted Pins. By this point in time, they had built all the product, engineering, ad sales functions, and organization to do this right. They launched Promoted Pins. The first Promoted Pin was from Vineyard Vines, the East Coast fashion retailer. It goes well, they worked just like we talked about with Emily White on the Instagram episode. They worked with a few select partners to start.

Then in December 2014 they opened it up to everyone and it starts working really well. So much so that in March of 2015, there’s so much hype around the company, they were about to hit 100 million users, they’ve just launched this advertising platform, Promoted Pins, that’s going well. They raised an $11 billion valuation. They had raised a few times at successively higher valuations from the $1.5 billion earlier. But this is a massive jump up.

Ben: This is a pretty firm commitment to ‘we’re going to be a public company.’ It’s really hard when you raise money at higher than a $10 billion valuation to say, “We’re a modern acquisition track,” of some sort.

David: Yeah. Not just as a public company but this is the next Facebook. There are all these people that have come over, great people from Facebook, there’s all this potential, the ad platform is working super well, user growth is going great. Think about this. $11 billion valuation March of 2015 and we’ll get into the IPO just now.

Ben: That’s been four years since $11 billion valuation.

David: Things so continue to go well. However, user growth at this point, right after this basically flat lines and they have just hit 100 million users. But, as I’ve been alluding to, they started having a huge problem. They saturated most of their core target market in the US. They do start eventually going internationally starting in 2016–2017 and that [...] growth. But they just can’t get men to use the product and it’s still a big issue to this day.

Ben: Yeah. But to flash forward to some number from the S1 listeners. Today, there are up to 250 million users globally but in the US here it’s 82 million. If you go and you look three years ago in Q1 of 2016, that was 65 million users in the US. When you look at their very nice user growth, albeit not monetization growth internationally, and compare it to the United States, international looks like, “Oh great. A high-growth company.” In the US it looks like, “Okay, it’s been pretty flat for a while.”

David: When they did that big fund raise, the vision, like we were saying, was this is going to be the next Facebook. I think what happens over the next couple of years is the market realizes this is going to be a great company but has a very specific target market that is not every person in the world.

Ben: A very specific target market and a very specific time and place for use rather than ‘all day, everyday’ like Facebook.

David: That said, the monetization engine starts really working. By 2016, two years after they launched it, they did $300 million in revenue. In 2017, that grows over 50%. They do $472 million in revenue. 2018, that grows usually. Again, they do $755 million in revenue, which is a serious amount and speaks to the power, like they saw with the affiliate link test, the power of where they sit in the commerce flow, that even though they have a relatively smaller user base compared to other big social networks, there’s incredible monetization potential here.

Ben: Yup. If you think like a porter’s five forces, since they have a tremendous amount of power in this value chain from when the user sees something they’re interested in, into where Pinterest can steer their attention and how they can derive monetization doing that.

They go into great detail in the S1 but this isn’t just a point of purchase. It’s awareness, it’s reminding people about the product, it’s steering them to a purchase, then it’s actually executing the purchase. It is all across the lifecycle of you buying something.

David: On the back of all this, just last month in March of 2019, two very big things happened from the company, two very big announcements. First, Leslie Kilgore joins the board. Do you remember Leslie Kilgore, Ben?

Ben: I do but I was trying to remember from where. I went and looked her up on LinkedIn. I thought it was something wry, may have known her personally or something like that. Then I looked up on her LinkedIn and I was like, “Oh, previous Acquired episode.”

David: Yes. It’s almost like we know her personally. The Acquired superhero with the writing shotgun and alongside Barry McCarthy from our Netflix two parter. Leslie Kilgore, who is the CMO of Netflix and...

Ben: Now on the board at Netflix.

David: Yeah, I think that’s right. She just joined the board of Pinterest which is awesome. I love it when the heroes and [...] can come back into these stories. Then of course, second on March 22nd, Pinterest publicly files [...] to go public. And then, over the next week-and-a-half as we covered on the Lyft IPO episode—the Lyft IPO happens, we’ll talk about that in a minute during narratives—when Pinterest sets the range for its IPO on April 8th, this is after the dip in trading from Lyft, they set it at $15–$17 per share, which equates to about a range of $8½–$11 billion valuation below the last private round. They have done another private round in 2017. They value the company at $12.3 billion. This is pricing below.

Ben: It is. They’ve done a Series D, Series E, F, G, a G1 or something like that, and then they stopped counting the letters. But there are six rounds that are in this $200–$300 million range of amount of money that they’re raising. They had that rapid acceleration in valuation and then continue to raise hundreds of millions of dollars over and over again, somewhere around that price point for a while.

David: As the user growth, especially domestically, was flatlining, on this past Wednesday, April 17th, the price, the IPO, $19 a share above the range, and that equates to a $12.6 billion market cap, very slightly above the last private valuation. Then on Thursday, they start trading and they popped up 28% close at $24.40 a share or $16 billion dollar market cap. So, nicely above the last private round but still not as 10X here.

Ben: The share price is now above where every shareholder bought. We’ve only had one day of trading and I think we can discuss this but we saw what happened with Lyft and a couple of weeks after they started trading. But from what we know so far, it looks like the strategy of pricing modestly, being below the last round, and then letting the pop happen in the market has worked.

David: Yeah, as opposed to Lyft, which we saw increased its range during the red show several times, then priced above the red show, then popped big time on the first day, and then of course has been down since then.

Ben: If there’s one thing we should probably learn for ourselves on Acquired is it’s very likely we’ll see a pop on the first day no matter what and then in the weeks and months that follow that we should really be paying attention.

David: Yeah. I think we and everybody were very excited and still are very excited about Lyft and their IPO. But there’s a lot of euphoria that has been tempered over the last several weeks.

Ben: Let’s go into narratives here. Listeners, what we’ve decided to do in these IPO episodes is walk through what the bulls are saying and what the bears are saying. That way, as we’re getting into our discussion, we can have a baseline representation of both sides.

On the bull case, I think their growth rate relative to their comps of Twitter and Snap is really encouraging. They’re growing much faster than Snap or Twitter. To put some numbers behind that, Pinterest grew its user base 23% last year. Twitter and Snap saw user numbers decline. When you think about this tier of ad-based internet social, I think we can leave social out for Pinterest, but social-ish ad-based business platforms, very interesting to compare there and very promising.

The other thing is—this is from a great financial summary on Seeking Alpha that we’ll put in the show notes—if the growth rate for both revenue and expenses stays the same in 2019 as it did in 2018, Pinterest will be profitable. They’ll earn pre-tax $65 million because of the way that the business is monetizing well and user base continues to grow especially internationally. More monetization domestically and then growth internationally, there’s really going to be a business here.

I think you’ve got to really whip out your discounted cash flow models to try and understand is it worth $13 billion over some time frame? But contrasting this against other IPOs that we’re seeing recently, where there may not be profitability in sight, it wouldn’t shock me if it happened in the next year or 18 months.

David: Well, Pinterest is a classic case of the historic technology company and business model of very high fixed cost and basically zero variable cost they get leveraged over a large user base, once that user base passes a point where the revenue from per user is covering the fixed cost, everything above that is basically pure margin.

Now, that is definitely not the case with marketplaces, especially real-world marketplaces as we saw with Lyft and will talk about soon with Uber. It doesn’t mean that they’re bad businesses. It’s just a very different business structure.

Ben: Right. Anything else in bulls before we go into bears?

David: The bull case we alluded to this earlier, I think Pinterest actually does a really nice job in the S1 laying this out and Ben Silbermann has always said this about it. You were joking about is it a social network? Is it not a social network? Here in the S1 they say, “Pinterest is the productivity tool for planning your dreams. Dreaming and productivity may seem like polar opposites, but on Pinterest inspiration enables action and dreams become reality. Visualizing the future helps bring it to life. In this way, Pinterest is unique. Most consumer internet companies are either tools or media. Pinterest is not a pure media channel, not is it a utility. It’s a media-rich utility that satisfies about the emotional and functional need, et cetera. We call it discovery.”

I think that’s perhaps one of the strongest bull cases here is that for product discovery, there is nothing quite like Pinterest in the funnel. For Google, Google serves demand fulfillment better than anything known to man. Facebook also serves discovery to a certain extent, but I think it’s not quite in the same way or as effective as Pinterest is. Pinterest is where you go to specifically look for something. Facebook you’re being shown products are you’re looking at other things.

Ben: The Facebook Newsfeed is like the best ad format of all time but it can be a little disruptive.

David: Yeah. It’s like ads in the newspaper. Whereas to bring it full circle, Pinterest is like browsing a catalog where you are intending to get inspiration and then act on that inspiration.

Ben: The biggest bear case, at least to me, is that they will not be the only ones to own this market for long. We’ve seen Instagram before tried to get into both commerce and a Pinterest-style functionality of discovery. Both of them have not gone well. There are recent effort in the commerce as much more serious and they’ve launched collections, which is going to look a lot like Pinterest boards.

If Instagram can do to Pinterest what it did to Snapchat with stories, they’ll be in big trouble. But I think—it’s a flipback to bull real quick—it’s a reasonable argument to make that Pinterest actually fulfills a much different emotional need when you open that app than Instagram does. Instagram may not be able to offer the same solution to that job to be done of getting inspired and collecting things in its format that Pinterest has been able to do by really solidifying its brand and this is what you go to Pinterest for.

David: Yeah. Totally too, having gone and watched all these talks by Ben Silbermann over the last few years, to his total credit, if you were to listen to the narratives leading up to the IPO, he and Pinterest are talking about how Pinterest’s goal is not to get you to spend more time online. It’s to inspire you to do projects offline and take action in the real world.

That sounds like a sound bite he came out with to market Pinterest in reaction to everything that’s happened with Facebook, Instagram, and the rest of the internet over the last 24 months. That’s not true. He’s been saying that since 2012 and Pinterest has always been about that.

Yes, the potential mitigation to Instagram is like, Instagram’s cultural DNA and Facebook’s business model is about the attention suck and that is neither the cultural nor the business model of Pinterest.

Ben: The biggest reason to be a bear here isn’t that it’s not going to be a good business or whether or not they’re going to be able to maintain the size of the business. Unless, of course, you think that Instagram is going to come eat all their lunch. Frankly, it’s just the smallest of these online ad platform companies. When disruptive markets are created, the biggest opportunities tend to get filled first, and then the smaller ones tend to get filled over time.

Let’s take marketplace businesses for example. In the sharing economy. If you look at what people spend in the GDP, they spend on their house, they spend on transportation, then they spend on food. You look at Airbnb and then you look at Uber and Lyft and then you look at…

David: DoorDash and [...].

Ben: … DoorDash and Instacart, when you see a new paradigm like online advertising, you see the biggest ones that are taken are intent-based search. Then there’s, what we didn’t realize was going to be such a big market, but social media advertising. And then there’s this new thing, discovery-based, or inspiration-based, or curation-based advertising, which is just smaller, it’s just not a bigger thing.

I was going to wait to make this point in grading, but since we’re already here, I want to make the point that when I first started researching, I was thinking there’s basically two distinct online advertising markets: there’s social-based and there’s search-based. But Pinterest is really somewhere between there with the curation- and discovery-based. Now, I’m thinking about it more as a spectrum. If you think about it as sort of a smiling curve where there’s way more value with creation if you go pure search or pure social. There is less in the middle because frankly, you’re not spending as much time there and you’re not doing mission critical things there as much as you are during search. But it’s still a super sticky product, a super useful product, a product that monetizes well, it’s just not one of the other two.

David: I think this is building off the end of history and facts here where we alluded to this. I’m not sure that it’s not that the values, I think there’s a ton of value in Pinterest. What they offer to advertisers in this discovery engine works incredibly well and is very unique. The problem though is just the product itself—the consumer product—is a niche product, a very large niche. But we alluded to in history and facts, there are 86 million-ish MAUs in the US and a very, very high percentage of them are women and men, despite years of trying on Pinterest, [...] just don’t use the product in nearly as the higher percentage. They’ve tried to fix it; I just don’t know that it’s fixable with what the product is. Thus, it’s just a smaller market.

Ben: Everyone is aware that they need to search for stuff and a third of those or a quarter of those people are aware that they need to be inspired and curate stuff based on what inspires them.

David: Yup. Hard to know if it is specifically men or women or that’s just the way the psychological profile of users of Pinterest tend to fall out but there is a huge segments of the population—at least domestically—that despite years of knowing Pinterest, trying to use it, just really isn’t going to become engaged and use it the same way as the other segments.

I think when you really think about it—maybe this is the way to think about it with Pinterest—the market for the core Pinterest product is the same market as lifestyle magazines. If you think about what is the market for Lifestyle magazines, it tends to skew heavily towards women, design magazines, home magazines, fashion magazines. There certainly are men that read lifestyle magazines but just at a much lower degree and that is where there is core fit with the Pinterest product. I think it’s had, and probably will continue to have, a very hard time expanding outside of that.

Ben: Alright. That’s our bear case. Let’s talk how did the IPO go. Despite my pure, burning hatred for this term, under [...]...

David: That’s a terrible, terrible term.

Ben: They effectively had a down round IPO.

David: Flat round.

Ben: Flat round IPO. Well, yes.

David: Yeah, it’s technically flat. The shared price was lower but because there were new shares, it showed the end market capital is higher.

Ben: Okay. This has happened before and we covered it well on the square episode where it was so significant of a down round of the IPO that it actually took, what, a year or more to climb back up to their last private valuation price. You saw people who had stock options at a strike price before the IPO where then they actually had to wait years and years for that to recover from being under water. They actually had a compensation issue across the board at the company. That’s not at all the case with Pinterest. Basically, everyone is in the clear now. Now of course, if you look and see the people bought shares at an $11 billion valuation four years ago—and it’s $13 billion now—that’s not a phenomenal return like it is for any of these early investors but I’m not sure that they could have done anything better. I think it was probably smart of them to not to try to make this an up round for vanity purposes.

David: They obviously saw what happened with the aftermath of the Lyft IPO. They swung the pendulum hard the other way. I’m being conservative here.

Ben: It’s interesting to know that we have another data point here of the public markets valuing companies within range of where their private markets have been. I think there was a lot of fear coming into this wave of IPOs, that those two things were going to be dramatically different, it doesn’t feel like they are.

David: No. It feels like they have been, at the very least, priced appropriately in the private markets, maybe appropriately a couple of years ahead of the curve but not completely mispriced.

Ben: I do think that’s actually a great segue into what would have happened otherwise in talking about, “So, why did they go public? Could they have not gone public? Could they have done a direct listing?” One thing that I found really interesting was that they actually had $600 million of cash in the bank and they’ve raised about a billion-and-a-half over time. They’re not operating loss right now after tax in 2017 was $126 million, and last year was $63 million. You know they’re trending toward profitability. They actually probably didn’t need to raise any money in this IPO.

David: Yeah, this is really puzzling to me. We were talking about this before the show. By those numbers, even if they maintain the same burn rate which they won’t because they’re trending to profitability assuming revenue keeps growing, they have years of runway still in the bank. Why did they just raise all this money and delude themselves? This seems like a clear case for me for doing a DPO.

Ben: Yeah. David, it does feel like they totally could have done a direct offering here. They’ve got cash in the bank, they’re going to get profitable, I do wonder are they…

David: They have less Leslie Kilgore on their board. You know, the access to Barry McCarthy here.

Ben: That went well enough that we’re hearing rumors Slack is going to do a direct listing here in the near future. There could be two things going on. One is, they feel that their ability to raise cash right now is on really favorable terms so it’s great to get that cash into the company for an unknown purpose. The other is, maybe they’re gearing up for some serious spend and they’re going to branch out into something that requires a lot of new cash the same way that Stitch Fix used a lot of their cash from their IPO to actually start retail brands that are first-party brands.

I’m not sure that this international expansion is interesting because it’s growing really fast from a user perspective because they actually started caring about that in 2016 whereas they were very domestically focused until then. But they’re really not monetizing any significance internationally, so it could be to spend aggressively on bringing advertisers into their international funnel, but it’s honestly, a little puzzling.

David: I agree as well. This all would had to be in the works long before the Lyft IPO but the only reason I can think of is just to be conservative as well and make sure things go well because DPOs are still relatively unproven. But again, if you don’t need to cash, which to be clear, Lyft and Uber need the cash and we’ll talk about that on the Uber episode but if you don’t need the cash and companies are [...] so much in the private markets, DPO really seems the way to go. There’s no lock up period, you’re not deluding yourself, you’re not selling more of the company, had a lot of advantages. You can tell I’m at the very Barry McCarthy school of thought here.

Ben: Yeah. We’ve seen one DPO and here we are now, we’re looking at every deal going, “Why not DPO? Why not DPO?” Look, they did the standard thing and they did it pretty well. I think it’s not just because Spotify did it; that’s the thing that everyone feels like is a one of two options they can pursue now.

David: Yet

Ben: Yet.

David: We’ll see on Slack. Okay. We move to our newly retitled next section.

Ben: Yes. David, tell us about this retitling.

David: Okay. This is ordinarily where we would do tech themes. But Ben and I were texting the other day and we love tech themes, it’s one of our favorite part of the show, but we realized that it’s actually something more than that and tech themes kind of sells it short. We’re going to rename the section to Playbook. What’s actually really interesting here is not just what themes and tech this particular company’s story reflects but what are the actionable things that we can learn from this story, that we can all put in our playbooks as operators, as investors, and we think this will be really cool in a good way in the spirit of Pinterest to catalogue all the things we’re learning from this show every time. This is going to be our first experiment with Playbook.

Ben: Alright. We focused on this one, but I just want to highlight it. What makes Pinterest different as a significant focus on building our infrastructure in the company ahead of growth and wild contrast to other unicorn cousins.

David: Yep. I worry a little bit that people will take the wrong lessons from the surface level facts here. This is one of the reasons we do this show. You look at the way Pinterest has carried itself over the last 10 years and then you look at the way say, Uber or Lyft have carried themselves , or Airbnb too, and there is definite craziness that’s going on within those other companies, and their markets are so much bigger and they will probably end up being bigger companies in the long run. Pinterest, the market is smaller. It’s extremely well-managed and will be a smaller company in the long run but I feel like much better managed. The lesson is not don’t manage your company well. The lesson is, target big markets, one. Two, manage your company well such that you’ll have the highest probability of succeeding within them.

Ben: It’s a great elaboration there. Another point that I wanted to—I think this is more of a point of discussion. David, we talked on the LP show about the downsides of being a tools business rather than a platform or a network or a marketplace. Pinterest is kind of a tools business in that it’s much more about me and maybe a handful of other people I’m sharing a board with and it’s much less about communicating with other, seeing what other people are up to. It has, I think, less significant network effects. How do you juxtapose it sort of being a tools business but competing for the very same advertisers that these strong network effect businesses are competing for?

David: Yes. Great. This is one of my entries in the playbook here. You can debate on the network effects aspect and certainly, social network effects in the way that Facebook, Instagram, etc., have them, Pinterest does not. But I think they do have a very strong flywheel. We should do a whole LP episode. We’ve talked about this where we just nerd out on what we think the differences are between network effects and flywheels and what not. But the flywheel is users add content and pins to the site. The more pins there are in the site, the more things there are that new users and existing users can get inspired by and then re-pin. There’s a super strong flywheel whereas people come on and they add content, that content drives more engagement from users who add more content which drives more users within the segment of people who find this whole thing attractive.

Ben: Even if it’s not a super strong network effect, you can still have a super strong flywheel.

David: Maybe we should have an acquired pin board, so in that case, I would care that you’ve been around the service but if we don’t have a reason to collaborate, I don’t care that you or my other friends are specifically are on the service. But I care that a lot of other people are, because then they’re adding content and I care about the content.

Ben: Right. I don’t mean to say there’s not one network effects. I mean, you could imagine a way worse version of Pinterest which is you can’t discover anything that anybody else uploaded, like there’s not a business there. It’s a tool but the backend of that personal tool is powered by the incredible amount of data and work that everyone else in the platform has done.

David: The lesson wasn’t quite don’t build tools, but it was like tools are limited. But if you can figure out how to make a tool that gets better for users as more people are around the service. Certainly, Jake was talking about on with his Coaching Networks, Thesis of Emergence, that can create a powerful flywheel.

Ben: Yup.

David: Do you have more?

Ben: Nope. That’s it.

David: Cool. I had a couple, real quick. One, I was just struck in the history of facts—and we talked about it—2008 and the Recession and the Lehman Brothers collapsed. These massive events that happened in the economy and socially can have such opportunity even in Recessions. Airbnb—and again we’ve talked about this before and we’ll cover it in depth when we do an episode on this someday—what enabled Airbnb was the Recession and specifically the housing crisis, and in a much less direct way, led to the history that lead to Pinterest, and led to the history that lead to Lyft.

Whenever these big events happen, it’s always a good idea to just pick your head up and say, “Hmm, okay. What retiling of the soil is this going to enable now?” But as an investor, I’m thinking about starting companies. The other thing I wanted to, that I think this story illustrates, is just the power sometimes of just not stopping, like Ben’s story, and Tote, and Cold Brew Labs, and Pinterest and doing the business plan competition, it would’ve been so easy to just give it up. Not stopping doesn’t mean banging your head against the wall with something that isn’t working. It means not giving up on the idea of building something period. Pivot what you’re doing into something that’s going to work and listen to users and find product market fit but just calling game over means literally game over.

Ben: It reminds me of a great quote. Bo Lu, the CEO of FutureAdvisor, spoke at one of the first startup weekends that I organized a decade ago or something. I remember him saying, “The way to succeed is to just never admit failure.” As long as you don’t shut down, you haven’t lost. That’s not fully truly. That’s a good way that you can have a small business that doesn’t grow at all and just keep going but I think what you’re saying is if what you’re looking to do is build something big and impactful, as long as you don’t give up and build in the direction of what could catch, it’s unlikely that you will do that for your entire life, and to have something that never works. Just keep trying.

David: I think there’s two versions of giving up or failing. One version of it is what we are doing is not working, we have failed at that, we are going to give up doing that, that’s great. When that’s clearly the case, you should do that and do that as soon as possible. But don’t do the other version of giving up which is saying, “…and thus we are going to call game over and shut down the company and go get jobs somewhere.” As long as you still have the desire and the resources to keep going, keep going.

Ben: There’s tremendous value in keeping a team together. This is something, I think that we realize at Pioneer Square Labs, the 25 of us, that all sort of systematically build companies over and over and over again is after you fail on a few things together—or maybe even succeed on a few things together—you know in your small group who’s good at what, you have norms and communication patterns and operations around how you work together, and you get way more efficient at building together. If something didn’t work, keeping the team together and keeping your processes intact and keeping your knowledge of what each other’s competencies are is hugely valuable. I think for anyone considering a pivot, it’s almost like, “Yeah, you bring some baggage when you pivot but you bring far more value from being a team that knows how to work together.”

David: It’s almost like the playbook is, “If you think you need to pivot, you probably should have pivoted a month ago. But if you’re thinking about shutting down your company, and you still have a team you like, and money in the bank or whatever resources you need to keep going, you should definitely not shut down your company.”

Ben: Yup. Alright. Grading. The way that we grade these IPOs is rather than issuing a grade, we discuss what a few years from now an A+ would look like versus say, a C or D or an F. David, I’ll go first. I think an A+ looks like cracking international monetization. I think this company can continue to grow, to become a $20, $30 billion market cap company over time if they can figure out how to continue growth internationally and how to monetize internationally like they do domestically. I don’t think it’s a crazy playbook to do that, but I don’t think there’s a bigger success path than that.

David: It’s funny. I was going to say, the A+ to me is they take this—yeah, I think that’s an A, that’s like an A-. The A+ is they take all these money they just raised in the IPO and they have some vision that they are keeping secret for now and Ben isn’t telling anyone yet about how they’re going to expand the market here and they use this resources whether through acquisition or investment internally to do that. That would be like, “Yes,” that takes them to multi-hundred billion market cap company. I have no idea what that vision would be so, I think that’s hard. Otherwise, the sooner you describe is super solid A- to A.

Ben: There’s a possibility that they won’t be able to monetize internationally like they can with the US or even that people start churning off of them because Instagram manages to launch something that sort of leverages their really close relationship with users to get them to start using a Pinterest like experience and Facebook is a total shark at figuring out whether they have something there or not, and ruling it out broadly. My F there would be if one, they can’t monetize internationally or two, they get their legs cut out by Facebook.

David: Usually, we find these things when we do our research but for whatever reason, we didn’t this time is, do you think Facebook ever tried to buy Pinterest or anybody else tried to buy Pinterest?

Ben: Facebook did not. Not that I found try to buy Pinterest. There actually was a story very early on in the New York where Ben tried to encourage a magazine publisher to buy them, but the publisher declined […] the founders.

David: This was back when they were still Tote, I think.

Ben: Yeah, it’s like 2010 or something.

David: That doesn’t count. I don’t know if that’s because nobody ever did try to buy Pinterest, or their valuation grew so quickly…

Ben: Just never […].

David: … or just like the company is so quiet and introverted that the stories never got the told. But this is a rarity in that there aren’t stories like this out there.

Ben: It’s kind of interesting when you think about can anyone buy them. Maybe Facebook?

David: Their valuation, they’re a $16 billion market cap company, of course somebody could buy them. Facebook could buy them; Amazon could buy them.

Ben: I guess, where would it make sense?

David: Yeah. And also, culturally, I think Pinterest would be very attractive to Facebook right now for lots of reasons, but could it work culturally within the company? I think that’d be hard.

Ben: Yeah. Well, Facebook needs to do something to change both public perception and retain employees. It wouldn’t strike me to see Facebook do something dramatic soon.

David: And so, the C-, D case, I think is that they have fully saturated monetization in the US, they can’t monetize internationally. This is a breakeven $700 million or $1 billion revenue business going forward.

Ben: Frankly, they just raised a bunch of cash. The way that we grade these acquisitions is when you acquire this asset, are you able to do something interesting with it? With this IPO, it’s like they just raised all this money, what are they going to do with it? I’d like to see them take a shot and go with that.

David: Seed IPOs, go spend the money. Alright. Should we move on to carve outs?

Ben: Yeah, let’s do it. Mine is, I’ve done this podcast before but there was just an exceptional episode, Invest Like the Best. It’s a great podcast…

David: So good.

Ben: …really good interview show. Recently, they had an episode with Eugene Wei. Eugene wrote this great blog post, Invisible Asymptotes. It’s an essay; it’s a half novel, and Eugene is super brilliant. There is five or six very interesting takeaways from this Invest Like the Best episode. My favorite of them is applying blockchain theory to social networks. If you think about what makes a blockchain works, there is proof of work and then there is reward for doing that work, and the reward is synonymously proof of work and has an intrinsic value thing and that propagates out over a network.

I had never thought before to use that paradigm to apply it to a social network. When you do something like post on Instagram, you’re doing a proof of work, and you’re putting up that picture, that picture has value and you get likes and follows in exchange for doing that work. The people who are the most successful on that platform are the people who are able to work within the constraints of that social media to basically do the most interesting thing within those constraints.

A successful social network happens when you are able to create a format that where that proof of work is extremely variable, so the breadth of skill is you can  do really crappy things with it and you can also do amazing, wonderful things with it, and also the perception of the value of the proof of work is variable. Not everybody agrees that that is the best picture, and everybody can have a different interpretation of what high-quality is. A new social network can emerge when there is a tool set to do that proof of work, to make that profile, to do that image, whatever it is, and of course, Eugene says it much more eloquently,

David: I’m only even trying to follow along because of my respect for you and you Eugene. Otherwise, you would have lost me at blockchain.

Ben: Anyway, suffice it to say, it’s an interesting fodder if you’re thinking about, how do new social paradigms emerge, and what creates explosive growth in social network and what doesn’t. I think the comparison to blockchain is…

David: A metaphor.

Ben: …it’s an interesting framework. Yeah.

David: So great. Patrick does an awesome job with the Invest with the Best podcast. I love it. If you’re an acquired listener who doesn’t listen to that yet, you definitely are going to love it too, so add it to your playlist.

I want to underscore, Ben, your carve out on the Lyft IPO episode, Bill Gurley talked about running down a dream and finding and succeeding in a career that you love, I did run that walk to go watch it and it is so good. I sent it to so many friends. I have so much respect for Bill in every dimension but so cool of him to do this talk, go do it at his alma mater at UT, that was really inspiring no matter where you are in your career. I definitely want to underscore, if you haven’t watched it, go watch it.

My carve out for the week is similar to somebody who has found a courier that he loves and is succeeding at it is Alex Rodriguez—A-Rod. A-Rod’s interviews on ESPN and on YouTube are so good. I just love watching them whatever you think about A-Rod the baseball player, A-Rod the post-career video and television journalist and interviewer is amazing. He’s so smart, he was so dedicated to his craft of playing baseball and hitting and now, to being an interviewer. Watching him nerd out with other people who are also dedicated to their craft is great.

Every interview is great. One of my favorites is his interview with Astros center fielder, George Springer, we’ll link to that. He also has a great one with Giancarlo Stanton at the Yankees. You can’t go wrong. Watch Sir A-Rod on YouTube, you’ll enjoy yourself.

Ben: Thanks, David. Well, listeners, if you aren’t subscribed and you like what you hear, you should subscribe. We’ll be gloriously covering all of the big upcoming IPOs. If you want to go deeper on what it’s like to build a startup, get interviews with expert operators and VCs and explore some of my personal beliefs and I know David’s as well, you should become a limited partner. You can go to glow.fm/acquired. Seriously, I promise you’ll be overjoyed with how buttery smooth it is to get more acquired right here in your favorite podcast player. As of today, everyone starts with a free seven-day trial. With that, thanks again to Perkins Coie, our wonderful sponsor for all season four. We will see you next time.

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