Thursday, 26 May 2011

LinkedIn - $10 billion

So LinkedIn is now traded on the stock market and the current valuation is some $10 billion. That's a mere 600 to 1,000 times its earnings, depending on who you listen to.

To be fair LinkedIn makes a profit. I use it daily to network and it no doubt is very useful. It is the recruiter's godsend in terms of a quality repository of current players in various industries who want to be seen and approached for potential new roles. It is very good in reverse, and I know several people who have got themselves very swanky new jobs after being approached by a recruiter on LinkedIn. Even highly paid boutique Headhunting companies use LinkedIn as a base for their research which brings into question their fee sustainability but that is subject of an earlier blog by me.

There is no doubt, also, that LinkedIn has merit in building 'private networks' for either Corporations or institutions like the IOD to create Groups of like-minded or connected individuals. There is also a growing revenue stream for advertising both generic and job related. These are all revenue generating activities which are sustainable in the long term, so LinkedIn has a definite money-making strategy for the future. Like other largely B2B sites like Ecademy, the question is what percentage of the millions of LinkedIn users would be prepared to pay a regular fee for the 'services' as the vast majority of users are at the basic, free level.

Of course, this the $10 billion question. Can LinkedIn ever generate the kind of profits over the long term which would sustain this kind of market valuation?

Reading the Forums on LinkedIn this morning shows a general opinion that such predictions are not based on reality. Many compare the valuation to those in Web 1.0 but some point out that at least LinkedIn is currently delivering profits which is more than can be said of Twitter. LinkedIn users generally are not amenable to paying a fee for just posting their profile on the site. After all, there should be a quid pro quo here - the profiles and users themselves have created the value within LinkedIn for which they have gotten zero return while the shareholders of LinkedIn are creaming off their share of the $10 billion right now. Rather like Twitter, charging users generally may be killing the goose that lays the golden egg.

As with Web 1.0, it is the potential that everyone is speculating on. LinkedIn has two options - either it tries to extract a great deal more revenue from its current users or it continues to accumulate users and hype its value by appending potential value to each user. This latter strategy will undoubtedly achieve the potentially more satisfying goal of having someone bigger acquire LinkedIn - much like Microsoft has just acquired the long term profitless Skype.

This kind of strategy is very convenient for the founders and the Venture Capital guys in at the start who stand to gain most. It means there is no requirement to have any real sustainable business plan other than to accumulate users, make the services generally cool and innovative, consume plenty of cash and then sell the whole shebang to someone else who can inherit the problem of what to do next to release all that 'potential value'.

Like Skype, it could become a 'musical chairs' to see who is left holding the shares when the cycle of sales stops. If it is someone with deep pockets and who buys into this whole 'untapped potential' ruse like Microsoft, then so much the better. But the reality is that the original investors and founders are now happy as sand boys. Their job is done and they have their rewards. there is no longer a requirement to ponder the problem of the future - someone else will sort it out. Some time.

As a LinkedIn user, I see its merits. But I also see its pitfalls. Scams and ruses are on the up, spam is increasing and the Forums are getting dominated with agendas. And like Twitter, the general noise level of the banal is increasing - with people telling us where they are travelling to, what they are Tweeting, posting irrelevant slideshows and more. It had to happen, I suppose. Whether there is an appetite to take LinkedIn to a new level by the existing management remains to be seen. I dare say though that it would be at a price to the loyal freebie users.

Until then, LinkedIn will bumble on its merry way as the recruiter's dream. Fill your boots while you can.

- Posted using BlogPress from my iPad

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