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Pinterest's $5 Billion Market Valuation Is Not Absurd

NEW YORK (TheStreet) -- Someday, Pinterest will prove the world wrong with its potential to scale. For now, investors will just have to close their eyes and envision the social scrapbooking site turning itself into a profitable company.

Startups such as Pinterest with astronomical valuations are being poised as the next leaders in tech.

Pinterest is just in its initial stages of potential ad revenue by recently selling ads, despite it having next to no revenue. The company is valued at $5 billion thanks to raising $200 million last week from existing investors. Pinterest was previously valued at $3.8 billion following its last round of funding in October.

The four-year-old, San Francisco-based company raised $764 million from investors SV Angel, Bessemer Venture Partners, Fidelity Investments, Andreessen Horowitz, FirstMark Capital and Valiant Capital Partners.

Pinterest is part of an elite club of over 30 U.S. startups having valuation of $1 billion or more.

"Pinterest has a vision of solving discovery and helping everyone find things they'll love," Chief Executive Officer Ben Silbermann said in an emailed statement. "This new investment gives us additional resources to realize our vision."

While $5 billion valuations in smaller companies like Pinterest could contribute to reviving the Silicon Valley tech bubble, current market risk indications might also prove dangerous on the next big thing.

For instance, David Tepper, the outrageously successful hedge-fund manager of the $20 billion hedge-fund Appaloosa Management firm, who earned $3.5 billion last year, is now bearish on investing in equities.

At the annual SALT conference at the Bellagio Resort in Las Vegas, Tepper warned, "Don't be too fricking long right now. There's times to make money and there's times not to lose money."

Let's get real: Defining bubbles and billion-dollar startups can be tough to do.

Investors look at the high value of Pinterest and are skeptical about and questioning the company's expectations to generate revenue.

"Today's valuation inflation is largely regional -- concentrated in the biggest VC-backed companies in Silicon Valley," says Mark Glennon, managing director at Ninth Street Advisors whose firm provides advisory services to emerging companies and their investors. "It's driven largely by the proximity of mega-VCs needing to deploy massive sums. The strategy for some of them seems to be just to front-run what promise to be the most hyped, high-profile IPOs"

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