But LinkedIn is performing a lot differently than its social-networking cousins. The business-oriented site means business â€" and revenue. Valleywag reported last November that Nielsen/NetRatings numbers showed LinkedIn outgrowing Facebook between 2006 and 2007. Even though it doesn't have as many members, it has people who apparently are willing to pay real money, as the NYT linked above notes:
LinkedIn will get only a quarter of its projected $100 million in revenue this year from ads. (It places ads from companies like Microsoft and Southwest Airlines on profile pages.) Other moneymakers include premium subscriptions, which let users directly contact any user on the site instead of requiring an introduction from another member.A third source of revenue is recruitment tools that companies can use to find people who may not even be actively looking for new jobs. Companies pay to search for candidates with specific skills, and each day, they get new prospects as people who fit their criteria join LinkedIn.I don't want to seem like a LinkedIn cheerleader, although I have used the service (disclosure: I have a free full account that I got from the company to test it). But I've put in enough time in corporations, management, and marketing to know that paid subscriptions mean happier advertisers. It's the difference between a free "shopper" and a major publication that has paid subscribers and news stand sales.
LinkedIn is set to undergo a radical shift in strategy to find other sources of revenue. Instead of catering primarily to individual white-collar workers, the site will soon introduce new services aimed at companies. It is a risky move that could alienate members who prefer to use the networking site to network -- without their bosses peering over their shoulders.
People who put money down are considered better prospects by advertisers, because that's what experience and testing has consistently shown over decades of market research. And the worry about companies seeing what employees are doing is likely a non-starter, because chances are that some managers at any given business already have accounts and can see what their employees are doing.
These numbers also aren't out of the blue. Let's take a quick look at the recent past. The Linked Intelligence blog, which covers LinkedIn but is independent of the company, reported some of the reaction to the company's $13 million venture round in 2006. At the time, LinkedIn projected revenues of $45 million to $60 million in 2007 and $100 million in 2008. Sound familiar? Since the company is private, there's no sure way to compare the numbers, but assume for a second that they're telling the truth (at least as much as private companies do when it comes to announcing revenues). Management is showing that it can make aggressive plans and still hit them.
Blogger Om Malik did some "back-of-the-envelope" estimations and came up with a market valuation of $1.04 billion, which on a per-subscriber basis made him think that LinkedIn "seems a tad overvalued, especially considering that their traffic is range bound, and the number of active uniques is showing a slight slump." TechCrunch is working on a social networking comparative valuation model that puts LinkedIn at about 6 percent of MySpace's value, also based on what other social networks have done.
I'm usually a cynic. Many of the valuations you see tossed about are built on the greater fool theory, that you can pay X, find some bigger dope who's willing to pay Y, then sell off and pocket the difference. Hey, buying low and selling high is capitalism. But it's only sustainable if you can really create enough value, and not just valuation. Eventually, if a company is to make it in the long run, it has to demonstrate that people want what it offers and that there's a revenue stream somewhere.
Consider Amazon. I'll admit it: When the company went public, I spoke with a consultant friend and the two of us laughed uproariously. How could it be worth $1 billion? I'm happy to admit this, because I still think we were right. Yes, the market decided what it thought the company was worth, but people were essentially paying $1 billion for a company that was losing money. To invest a billion, you might reasonably want a billion in annual revenue with 10 percent before tax profit, and even then it would take you a decade to recoup your money. That's the difference between looking at stock value â€" which is as impulsive and capricious as the nerves of investors â€" and the actual value of the company.
But unlike so many of its dot com peers, Amazon had something real going on. In its annual reports, it showed sales of $511,000 in 1995, $15,746,000 in 1996, and $146,787,000 in 1997. That's a faster ramp-up than LinkedIn, to be sure, but it wasn't until 2003 that it became profitable. In contrast, LinkedIn said in 2006 that it became profitable. Profitable with revenues ascending this quickly and a business model that will expand into new lines of income? Maybe a billion isn't so out of line after all.