Is LinkedIn Worth $1 Billion?

55 Comments

 The big news tonight is business social network LinkedIn raised $53 million in Series D funding at a valuation of $1 billion. The new round is led by Bain Capital (the same genius investors who also funded Vonage) brings the total money raised by the company to about $80 million. I wasn’t going to write about this, given everyone had already jumped on the story.

Anyway the valuation of $1 billion -not as insane as the valuation placed by Microsoft on Facebook – was jaw dropping. Sure, LinkedIn has more value than plain vanilla me-too social networks but is it really worth a billion dollars? I ended up doing some back-of-the-envelope calculations while watching Boston Celtics celebrate their 17th NBA Championships.

The question of over-valuation had first popped up when I read about this round in May 2008 on Venturebeat . Techcrunch then reported that Allen & Co, the New York bank was helping Reid Hoffman’s company raise fresh capital at the $1 billion valuation.

So I decided to do a back-of-the-envelope comparison with XING with some of the publicly available data on XING, a European Social Network that is publicly traded in Frankfurt. It is a pretty good proxy for a business-focused social network, such as LinkedIn.

It has a market capitalization of about $300 million. It has has 5.71 million subscribers. XING had revenues of around $11.6 million at the end of first quarter 2008; about 70 cents per month per subscriber. That works out to about $52.30 per subscriber. For sake of comparison, Facebook’s reported $15 billion valuation works out to $125 per subscriber.

If you use those numbers, then LinkedIn’s rumored 20 million users are worth $1.04 billion. The company is adding about 1.3 million new subscribers a month, so by those estimates it should end the year at around 29 million subscribers. USA Today reported that LinkedIn was on target to do between $75-to-$100 million in revenues this year. Lets be generous and assume that they indeed do $100 million that works out to about 29 cents per month per subscriber (assuming that the number of subscribers at the end of the year is about 29 million.)

My back-of-the-envelope calculations show that if your user the value per subscriber of then LinkedIn’s $1 billion got a market valuation. On per-subscriber revenue basis, LinkedIn seems a tad overvalued, especially considering that their traffic is range bound, and the number of active uniques is showing a slight slump.

What do you guys think?

Update: Connie Loizos of PE Hub is spot on in saying that this video of LinkedIn VCs self-congratulating themselves made her cringe. Me to Connie.

55 Comments

YUvamani

Check out Monsters valuation: 2.65 billion (http://finance.google.com/finance?client=ob&q=NASDAQ:MNST).

LinkedIn may be many things for many people but its main revenue / profit source is going to be head hunters / recruiters and jobs. Advertising is promising, But as most people in this thread have said, they do not visit it regularly enough to monetize it.

Thus as compared to monster, LinkedIn is a source of “higher” quality resumes than monster, but definitely lower volume. Thus the valuation is not completely out of place. Linked In does not monetize like monster does, But then it is still a startup and has chance to experiment…

Facebook and LinkedIn have similar problems in monetizing. I get some good quality job leads from linked in and I assume those recruiters pay linked in .. However the best jobs are usually found because that old colleague is now in this promising new company etc … Activities for which I use linked in but for which linked in got nothing. (I buy products because of friends which may go through a facebook wall or a message or a IM , but facebook does not / cannot monetize that easily especially after the beacon brouhaha)

Adwait Ullal

The *concept* might be worth a billion but does the *platform* perform to merit that valuation?

I think not.

In the last six months, members with large networks (‘000+ connections) could not browse their OWN connections or accept invitations without receiving some kind of errors.

Now that it was raising money, LinkedIn has cleaned up some of it’s act but the experience of the last six to eight months has a left a bad taste. Going forward, members might no longer be willing to invest time on a platform that is suspectible to collapse at any time.

Karl S.

Yeah. It’s definitely overvalued.

The cynical side of me says, there is probably a sale in the works there. Or, that valuation was purposely set high so that no one would try to buy them.

Full disclosure, I use LinkedIn almost daily (professional branding professional). It’s a tool for me and for many sales professionals that I know. And it is a much better business platform than any of the other social networking sites.

However, in the 18 or so months since their last investmentm the quality of the product has gone downhill. Many of the heavy users – the people with 3,000, 4,000, and 5,000 and more people in their network – have started to complain. The number of errors I get is surprising (and LI management claims its because of the size of my 3,500+ network).

If I were LI, especially with that new cash, I’d be reaching out to those heavy users to ask them what they need and want, otherwise they’ll be looking to go elsewhere.

insider

hmmm. $1 billion valuation is 10X forward-12 month-revenues.

i would never call that a bargain

Hell, Google currently trades at about 6X forward-12-month-revenues!

(That is, assuming 1) today’s $180 billion market cap, and 2) that revenue grows 1.5X in forward 12-months, as has occurred over trailing 12 months.)

This is VC portfolio management pure and simple — a relatively small amount of dough allocated to big-bang “momentum” play –not value or analytics driven investing. This is bubble money betting on the bubble, and on a return to frothy internet IPOs.

Stuart Meyler

It is clearly overvalued, as are all social networking sites at this point. That said, I will say LinkedIn is an attractive platform as a marketer (full disclosure: marketing agency executive). We have run several programs on LinkedIn and the audience is really, really worthwhile for premium segments. Great response, very efficient. I cannot say the same for other social networks, and their inability to secure advertiser dollars speaks to others experience there as well. Oh, and spare me the widgets/applications pitch.

Most social network members are suffering a severe case of “applathy” at this point. When was the last time you installed something on Facebook?

Om Malik

@ Andrew,

Amen to that, but for some odd reason, bankers continue to get away with stupid high valuations for tech companies.

Om Malik

@ Hussein…. LOL. I like the Pets.com analogy. Anyway it cannot be P/E because it is not clear how much money (profits) they are making. Price-to-sales might be more accurate way to look at it.

@ Others. I forgot to mention that the 29 cents per subscriber was their per month number.

Salman Munir

Great analysis. From all the me-to professional social networking sites, LinkedIn is the best and works best in my profession, Recruitment / Head Hunting.

I was very excited about the Open Social initiative taken by LinkedIn but nothing so far has came out. There are so many add-ons like the facebook platform which can be added to further enhance the user experience and make it more practical/responsive to user needs.

I do visit it regularly beyond accepting invitations, the answers section is a great tool.

Jeevan

It is highly overvalued. It is not worth that much given its user base and growth and revenues. It is useful for SOME folks and USELESS to others. This article is perfect. Great read.

Sai

The whole social networking phenomenon is quite over-valued. Your analysis using XING as proxy makes a lot of sense but what is to say that XING itself is not over-valued. Is a multiple of 26 (Market Cap/Revenues) justified for such companies? I personally do not know of anyone who pays for a subscription to Linked In except HR and recruiters. So, do you think that XING will eventually be able to increase revenues per profile by 26 times?

It will be interesting to see the path Linked In will take in the next few years i.e. sell off or go public?

Recruiter

This is a massive valuation.

LinkedIn is taking the professional networking and online recruitment industry by storm. Thumbs up!

Jose Miguel Cansado

How LinkedIn is going to generate earnings that justify that valuation?
Some can argue that Google did not have a business case when they started their search engine, and later they found a great way to monetize it. And the switching cost for social network are in theory higher than for a search engine…

But as someone mentioned, how many of you visit LinkedIn regularly, other than to accept invitations?

Good luck for the new investors!

Cade Roux

Yes – but value to whom?

Not to the shareholders right now, since they do not have a way to monetize it for return. When you judge on an future earnings multiple, to meet that valuation, they will have to improve monetizing the value beyond what they can actually achieve – they have to get from $.29 revenue/per user per year (presumably -ve earnings/user/year right now) to what earnings per user per year?

Not going to happen.

dave

they just need to put out a real blackberry app like facebook, then i’ll be really happy…

Om Malik

Reid wants to IPO in 2010 – hopefully they got revenues of around $200 million by then. I think it makes a lot of sense for them to do this deal and get this valuation.

pwb

+ $100m in revs and continuing to grow rapidly
+ profitable
+ incredibly valuable data set of US business people, their resumes and their connections
+ has barely begun to expand internationally

Reid’s former company IPO’d at $1b on $32m in quarterly revs and that was during the doldrums.

gregory

say you bought it for a billion …. without selling it, how would you get your money back? in, say, one lifetime …

but mba’s don’t think that way

duffymo

If I understand this correctly, I think you have a problem with units. $100M in revenues for 29M subscribers works out to $3.44 per subscriber, not the 29 cents that you quote. The millions in numerator and denominator cancel, which leaves you with $100/29 ~ $3/subscriber.

Good back of the envelope estimate, wrong result. Do I have this right?

Alfan

I do not get all this buzz about linkedin. With so many social networking sites competing for attention, and users are so willingly switch to latest , coolest site, the lifespan might be just months, or max 2-3 years.
Is it enough time to recover the investment within this short time?

Harish Agrawal

Most users have clearly segregated business contacts on Linked in and personal contacts like friends and family on Facebook. I am very regular at Linked In. I check / login to Linked In around 2 -3 time a a week and this is 100% more often than Face Book( I know I might be an exception). I now know that I will be using only 2 social networking sites for coming few years i.e. Facebook for personal networking and Linked In for business contacts.

Given that its tough to monetize social networking site, Linked In still might be in better position to generate more revenues because of its utility for business development, hiring etc. Any service that is useful for business can be monetized..

Kemp Mullaney

I check LinkedIn at least twice a week. Their recommendations based on former employees make it easy to reach out to former coworkers and their ‘People you may know’ section has been eerily accurate.

I think their real value is in recruiting and job posting, a la craigslist. The site helps eliminate some of the more tedious tasks when it comes to matching the right candidate to the right job. It also makes it more difficult for those who may be less honest to fool future employers.

Job placement is a tricky business and LinkedIn helps to ease the process.

Mehmet Subasi

Linkedins’ value can be even much more than 1 billion. Where they lack is a strong marketing campaign where Premium Membership is transformed into a status symbol. Also the heavy users (500+ people) should be granted free access to some kind of a status and free extra services (with their earned status). There should be a schema similar to Credit Card business.
I am sure Linkedin has plans in these areas. I think these things are really hard to implement but doable in right hands. Hopefully, they will reach the right talent to make Linkedin the major player on social networks.

Shankar Saikia

The only value I get from LinkedIn is the ability to see a LinkedIn member’s professional history, assuming that the member decides to share that information. I am unsure of how valuable this information is. The most valuable aspects of a professional that I care about are honesty, quality, humility, reliability, productivity, ability to work well in a team, flexibility and creativity – LinkedIn does NOT help me evaluate these aspects and I do not believe that the Recommendation feature in LinkedIn gives me insight into these aspects of a professional.

Samuel Araki

It took me over a year from the time that I actually created a profile until the time that I finally came around to it and actually started adding folks and from there it’s been great to re-connect those I had previously lost contact with. It’s a great tool, and so far I haven’t found the need to pay anything, and don’t see the need for doing so in the future, either.

I think per member Linkedin is far more valuable than Facebook. With Facebook it’s just about gargantuan volume.

One problem I’ve always had is the number of folks who have duplicate profiles up there. I don’t know if this has changed but profiles need to be able to be deleted fairly easily otherwise Linkedin is just padding its stats.

Robert Kingston

That audience is one of the most sought after audiences advertisers are looking for. If they offered a social ads like network, the company I work for would spend thousands of dollars advertising on there. It would be an incredible place to advertise and get small business leads from.

Sebastian

LinkedIn is worth the money, because of the audience, that is (partly) wealthy and willing to pay for the service. I think LinkedIn for some time (rightfully) feared Facebook, that could have become a free alternative. Now that people realize that Facebook (unwillingly) developed itself in the direction of MySpace, not LinkedIn, they will again be able to monetize their audience more efficiently.

Once they push their subscriptions and sell better ads (themselves, not via ad networks), they’ll be able to monetize their audience very efficiently.
I in fact think that LinkedIn could end up being more valuable than Facebook, if they can work monetization out. (Facebook grows like weed, but LinkedIn has a more valuable audience.)

Esme Vos

I understand that Linked In has a lot of people with profiles on the site. But how many of those people visit the site everyday, every week? Everyone I know who has a Linked In profile has not been to the site in months. When I ask them what they’ve gotten out of it, they say nothing. How is Linked In supposed to make money out of that? I used to have a Linked In account but I closed it last year because people kept bugging me for endorsements and I was not getting anything out of it.

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