How much is Pinterest really raking in? (Page 2)
Instead of coming up with an estimate average value for these numbers, we estimate the low and high values that we’re 90 percent confident about. To be 90 percent confident about an estimate, we need to have a low and high value such that there is only 10 percent chance that the actual value seeps out of the range.
Here are the numbers I used based on my research. (90 percent sure of these figures)
Number of transactions for each user (yearly): 1-18
Number of active users: 1 to 5.000.000
Sales for each transaction: $2-$18
Affiliate fee: 2%-4%
(Side note: Pinterest has over 10 million registered and approved users. I generously estimated that they have on a low one million to a high five million active users who click on product links and make at least 1 to 18 purchases annually.)
This approach is advantageous in two ways.
First of all, we are estimating a ton of small numbers. Secondly, we are determining the uncertainty in the variables within our estimates. So in other words, we are determining the components within the figure and building up from there. This way we can polish and refine our estimates.
Once we have a determined range for each single component, we can calculate Pinterest’s revenue figures by using a statistical modeling method that is used in almost every IPO estimate for privately owned businesses: The Monte Carlo method. Think of it as being something like imagining living your life 10,000 times to find out how many different lives have certain outcomes (We’re not getting into the parallel universe theory, just bare with me). For Pinterest, we’re trying to discover how many different scenarios yield different stats in revenue.
The results are astounding:
- 33 percent chance Pinterest makes more than $10 million a year
- 25 percent chance it makes more than $12 million a year
- 1 percent chance it makes more than $36 million a year
- Less than a quarter of a percent chance (.25) it makes the $45 million number quoted by Madrigal
- Considering all possible outcomes, the expected value of its revenue is just over nine million US dollars.
A $200 million valuation based on high revenue numbers that have such a low chance of being true is like betting on a crippled horse. Clearly, the VC firms focused on the most optimistic scenario —even if the chances of it happening were slim— and didn’t account for the entire range of scenarios. But that’s just how business runs in Silicon Valley.