LinkedIn Pre-IPO Note

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LinkedIn has been rescued by the Twitter/Facebook phenomenon and is now positioned as the ”professional” networking leader.  [This is a brief introduction to our Pre-IPO note linked at the end of this post.]

The company was started in the horse-and-buggy days of online networking way back in 2003.  The first value proposition that stuck with users was the notion that having a professional profile on record made sense, and being able to link with other professionals would be desirable.  So, many people found it worth their time to create a free profile and the company grew.

At the end of the first year they reached 500,000 users.  By the end of 2004 they reached 1.6m members, then 4m at the end of 2005, and 9m by the end of 2007.  Even as the company reached 33m members at the end of 2008 there were some bumps in the road as the credit crisis and economic turmoil forced the company to lay off employees, change their CEO and do some soul searching.

That difficult period has left some scars on the company in terms of both strategy and execution.  The success of Facebook begged the question whether LinkedIn should be a ”Facebook for businesses” or remain more of a professional network.  At the same time, Twitter was growing rapidly among technologists and consumers.  Under the current CEO the company has basically focused on where the money is, which is in recruiting, advertising and premium services.  Since then member growth, revenues and profitability have been excellent.

Where does LinkedIn go from here?  In the short term their strategy should work well as the economy and the job market continue to recover.  More and more members will want premium services and more companies will be spending on corporate, recruiting and marketing services.  Longer term though they may have some more soul searching to do.

For example, although LinkedIn now integrates with Twitter it doesn’t really have a use.  Twitter sits in the middle of the personal and business world so having your tweet stream display inside LinkedIn doesn’t have a clear value.  Dedicated services such as Yammer and the new Chatter product from are the tools business users are adopting for this style of collaboration when people are actually working together.

Another challenge LinkedIn still has to address is their mission to provide ”expert insights and knowledge”. So far they have attempted to tackle this with LinkedIn Answers and LinkedIn Groups.  Providing these tools has been fairly unrewarding.  It may be that the mixture of information along with promotion and advertising just has not worked. In contrast an upstart called Quora has emerged to be an interesting example of what might work in this domain.  However, Quora is still blessed with not having a business model and they too will have to figure out how to make this work within the context of making money.

Post IPO, LinkedIn will stand at a strategic crossroads.  Will they plunge deeper into expert networks and knowledge sharing?  Will they focus instead on corporate information and more B2B services?  Their mission has been to focus on members but in the past two years that has certainly become fuzzy as corporations and advertisers have become the majority revenue source.

There’s also the entire collaboration space, which is already large and growing.  This results in linking professionals for actions, projects, efforts, and day to day tasks.  Collaboration is a more fluid type of application mode and much of what LinkedIn offers is static or more batch oriented.  This works for job recruiting but not so well for projects, virtual organizations, and the rapid assembly of high-performance teams.

Another issue facing LinkedIn is the ”forking” of professional communities over to their own sites.  For example Stackoverflow is becoming the place for many programming types to share ”expert insights” and build their profiles based on what they know and can do.  Most recruiters agree that it’s way better than an online resume.  We see more of these emerging in specialized communities.  That could leave LinkedIn to become the place of choice for only a portion of professionals.

In the short term LinkedIn should be a solid IPO given their 80 percent growth and 20 percent (EBITDA) operating margins.  The preliminary Intrinsic Value in our report suggests a valuation of $2.6B to $2.9B.  After the final prospectus is available and the company begins marketing we will update the report and add to the IV and peer analysis sections with a more detailed business model.   Our Toffee (paying) subscribers can access the report on our Research Reports page.

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