Locking in on LinkedIn

I read about the recent $53 mln Bain Capital investment to LinkedIn and I was prepared to write an article again questioning the valuation of another social/business networking site. Like many, I'm not particularly enamoured with the current $15 billion valuation of Facebook, so my initial reaction to the $1.035 billion valuation of LinkedIn was - "here we go again..."

Because LinkedIn is a private company, their financials and revenue sources aren't available. I did some scouting on the site and they make money in a few ways:

1. Advertising via their Large Budget and LinkedIn Direct Ads to provide targeted advertising to its members.
2. Subscriptions to Premium Services that allow the user to directly contact people out of their network with "InMail" and send "Requests for Introduction" emails. These services range from $20-$200/month.
3. Perhaps some others such as data analytics based on membership statistics and activity (though this is only my conjecture...).

Johnathan Richards wrote an article following the June 2008 venture investment and estimates LinkIn revenues to be around $80-100 million, with "about a quarter" of the revenues coming from subscription services. At first, I was a bit surprised to read that subscription fees could be so high, until I considered the number of recruiters that have contacted me via LinkedIn, as well as my own activity. (I personally subscribed to their $20/month plan when searching for a job a while back, and was able to link up with a great recruiter at Russell Stephens as a direct result of an InMail.)

With the current $1 billion valuation based on revenues of $100 mln, that's 10x revenue valuation, without any knowledge of their profit margins. The News Corp acquisition of MySpace for $580 million back in 2005 supplies some relativity to the $1 bln valution. Though a social site, not a business site, MySpace does parallel LinkedIn in terms of its ability to focus on a large market segment, it's networking component, and the fact that the business world has placed a valuation on it. Since the acquisition, MySpace has reportedly been a boon to the New Corp's Fox Interactive Media Group. (According to the most recent 8K report from June 2008, News Corp reports that Fox Interactive Media grew revenues 57% and increased "operating profits five-fold on strength of advertising and search revenue growth at MySpace.") Two years after the aquisition, things seem to be looking rosy for New Corp according Murdoch in this Wired Magazine article.

Considering the virtual aspect to LinkedIn's product and the scalability of subscription services, I suspect that their profit margins are healthy and growing as LinkedIn acheives a greater lock-in effect with users - becoming the main destination site for business networking. The caveat to acheiving this lock-in effect will be the quality of service and networking effects. However, by providing the ability to remove connections and requiring a subscription for the ability to directly contacts individuals outside of one's network, LinkedIn drastically removes the diluation and spam factor to their networking functions. Additionally, LinkedIn boasts (as they should) that their audience has an average household income of $109,000, about 2.5x's the median US household income of $48,200 according to the 2007 US Census (though I'd like to know the median LinkedIn income to see how much top executives on LinkedIn skews this average figure).

Looking LinkedIn's development, they've taken a deliberate and apparently successful approach so far - develop a user base, find a way to quickly monetize activity with premium subscription services, and then analyze the user base to leverage it for targeted advertisers. From this perspective, LinkedIn is now completing the foundation of its business with the Series A, B, C financing of about $30 mln, while this most recent $53 mln should be intended to move the company into a mature state with specific long-term goals for continued rapid growth.

The most compelling part of LinkedIn's situation is its $1 bln valuation based on $100 mln in revenue. It's high, but justifiable given the apparent success of others in the networking space, and the unique niche of its business and professional membership base. Like everyone, I'm interested to see how quickly it can convert the valuation to practice, or to see if it can utilize its valuation to grow by:

1. Acquisition of higher-end job sites such as TheLadders.com or Vault.com
2. Targeted content partnerships such as their recent NY Times agreement
3. Integration of specific industry content and membership groups such as BAFT, VCExperts, or others to serve as a clearinghouse of industry information for its users.

So here I am at the article's end, completely reversing my initial reaction to the valuation - seems to be okay after all...