LinkedIn’s IPO price is raising a lot of eyebrows in tech and investing circles today, and it’s setting the company up to have to work extremely hard to prove that it’s worth its lofty valuation.
At the $45 per share opening price, LinkedIn stock traded at 46 times its projected 2011 earnings. Anything above 25 and a company is expected to have unusually high growth projections. Either that, or they're in bubble territory.
LinkedIn’s defenders argue that the company is worth every penny. And certainly, LinkedIn has established itself as the premier online professional networking site in the United States. And online networking—and the ancillary markets it creates for the recruiting and marketing industries—is a space that will only expand in the years to come.
The question, though, is whether LinkedIn can stay on top—and generate the revenues it needs to justify its valuation.
LinkedIn’s entire business model rests on amassing as many users as possible—particularly top-shelf professionals—and getting them to invest the time in keeping their profiles up-to-date. That's because LinkedIn makes its nut from selling services to recruiters and advertisers who want to reach the company’s white collar members. The more professionals LinkedIn has in its fold, and the heavier hitters they are, the better it does financially.
According to the company’s S-1 filing, which was originally submitted in January and then amended on Tuesday, LinkedIn currently has 100 million registered users, up from the 90 million at the beginning of the year. The company says it adds a new user every second, and a million every 10 days. Half of those users, it says, are from outside of the United States.
But while LinkedIn gained its edge as the first significant mover in this space, other alternatives are emerging. There’s no guarantee then that new users will continue to flock to LinkedIn at the rates they do today. Nor is it certain that those already there will stick around in the long-term.
Challenges from Facebook and overseas competitors
Take Facebook, for example. It didn’t even exist when LinkedIn was first created back in 2003. Today, that social network has almost 700 million registered users—seven times as many as LinkedIn—and is on track to hit a billion in the not-too-distant future.
Some companies, like BranchOut, which we wrote about in February, think Facebook is much more fertile territory in which to grow a professional networking service than a standalone operation like LinkedIn. And as more people spend more time in Facebook, it’s reasonable to wonder whether they’re going to want to spend time maintaining and managing profiles on multiple sites.
Meanwhile, while LinkedIn is the clear leader in the United States, it’s not necessarily tops everywhere else. Xing is the leading professional networking site in Germany, and French company Viadeo, with 35 million members worldwide, has been making in-roads in China, Latin America, and India.
In previous conversations with Fast Company, Viadeo CEO Dan Serfaty has said his company has an advantage over LinkedIn because it doesn’t use a one-size-fits-all strategy. Networking practices vary in different parts of the world, and LinkedIn’s model, Serfaty says, a casual and egalitarian one in which anyone can reach out to anyone else, doesn’t necessarily go over well in more formal cultures. Viadeo’s strategy, then, has been to acquire leading professional networking companies in various markets around the world and let them develop culturally appropriate solutions.
LinkedIn is aware of these issues—so much so that when it updated its S-1 filing, it added language to specifically address them. In the section under risks to the company coming from increased competition, LinkedIn added a bullet that says:
[S]ocial networks may choose to use, or increase their use of, those networks for professional purposes, which may result in those users decreasing or eliminating their use of LinkedIn. Companies that currently focus on social networking could also expand their focus to professionals.
And in the section on risks and challenges to its international operations, LinkedIn now calls out its competitors by name:
Expanding internationally may subject us to risks that we have either not faced before or increase risks that we currently face, including risks associated with… increased competition from local websites and services, that provide online professional networking solutions, such as Germany-based Xing and France-based Viadeo, who may also expand their geographic footprint.
The company's game plan
LinkedIn’s filing doesn’t spell out exactly how it plans to address these challenges. But it does include signs that LinkedIn is aware that it needs to focus on ways to become professionals’ preferred place for networking.
It notes how the world of work is changing. Few people will have one employer for life, it says. Because of that, “professionals need to be constantly preparing for, and aware of, new opportunities.”
Plus, the speed with which business moves today means professionals need to make better decisions faster. “To succeed, professionals need tools and applications that enable them to leverage their professional network and improve access to important information,” it says.
And it folds these objectives up into a single overarching mission statement: “Our vision is to create economic opportunity for every professional in the world."
How to avoid fizzling out
To avoid having a spectacular IPO and then fizzling out, LinkedIn will have to deliver on that vision. It can’t simply be a place for people to post resumes and haphazardly accumulate connections. Nor can it be a tool that only a savvy few use to mine connections and sales leads.
LinkedIn has to transform itself into an indispensable tool for planning and managing careers. It must provide services so compelling that users willingly exert themselves to keep their profiles up-to-date.
The company is moving in that direction. It’s released clever tools like InMaps that let you see a visualization of your professional network. And it’s developed a platform strategy in the hopes that third-party developers will create powerful tools for workers and companies.
But as a whole, LinkedIn is a still a long way off from where it needs to be.
Don’t believe us? Go up to your five best friends—or favorite coworkers—and ask them: Do you have a LinkedIn profile, and how important, on a scale of 1-5, is it to you to keep it up-to-date? Until every one of them answers “Yes” and either “4” or “5,” the folks at LinkedIn won’t have the raw material they need to generate the revenues from recruiters and advertisers necessary to justify the $45/share and $4.3 billion valuation they claimed as rightfully theirs today.
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