LinkedIn: €642m valuation high but not crazy

LinkedIn, the online resource for professionals, with 23 million members worldwide, last week announced a €34 million (US$53 million) fourth round of funding led by Bain Capital.

The latest round takes the total investment in the company to €51.36 million (US$80 million) and gives LinkedIn a valuation of just over €642 million (US$1 billion). Existing company investors include Sequoia Capital, Bessemer Venture Partners and Greylock Partners.

The valuation of LinkedIn at $1 billion is high for an internet company that was set up in 2003 and is active in the social networking space, where turning a profit is proving challenging. The question is, is the valuation too high‾

In our view it is not and seems almost modest when compared to the recent valuation of Facebook at €963 million (US$15 billion) following Microsoft paying €154 million (US$240 million) for a 1.6% stake in the company. But it is not just a matter of comparing Linkedin to an inflated valuation that makes it look good.

The company has been profitable for 18 months, unlike many horizontal social networks that are still not profitable, and is projecting revenues this year of €48-64 million (US$75-100 million), double that of last year. Its user base of 23 million is small compared to Facebook at 70 million, but it is growing very fast. The number is expected to exceed 30 million by the end of 2008 and year-on-year growth is around 108%. Data from Nielsen shows LinkedIn to be the fastest-growing social network in the US, with year-on-year growth of 146% (to May 2008).

But social networking is no longer just a numbers game. It is the nature and focus of the audience that makes it attractive to advertisers and this is where Linkedin is very strong. Members are professional people who use the site for work-related activity. According to the company there is strong representation from Fortune 500 companies, while 46% of members are decision-makers. The average age is around 41 years and household income around €70,000 (US$109,000). This is a quality, targeted demographic.

When you talk to LinkedIn it is at pains to stress it is not a social network, but instead is positioned as a resource and knowledge-sharing site for professionals. The company thinks that one of the reasons it is growing so fast is because people are realising there is a distinction between professional and social life that needs to be maintained online.

We think it is right and have ourselves predicted a rise in professional networks (see the Ovum report Social networking: competitive differentiation strategies, April 2008). It is interesting that this is the inverse curve to Facebook, which started as a network focused on the graduate community and then went horizontal.

The LinkedIn business model is varied, which is good, and includes free services, premium subscriptions (the minority) and of course advertising. The advertising model is interesting because it comes in three flavours that attempt to maximise the revenue opportunity.

The first is a standard model based on typical online formats such as display. Targeting can be minimal, run of the site through to drill down by industry, job function, geography and so on. The CPM (cost per thousand) rates look good at anything between €29 (US$45) for run of the site to €48 (US$75) for custom targeting.

 

The second model is based on job postings that are purchased for a year-long run or 30 day slots. The final model, introduced at the end of February this year, is corporate recruitment that is more aligned to a head-hunter function with advertising sold on a per-seat basis.

LinkedIn is in very good shape and will use the latest round of investment to grow members across the regions (the US still dominates) and develop new services, particularly around premium subscriptions. It is certainly a company to watch.  

Eden Zoller, Principal Analyst, Consumer Practice

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