So, what exactly is LinkedIn good for?

It may not be worth $8 billion, but the social network has potential

The social networking site LinkedIn must be suffering from a serious case of performance anxiety after last week’s Initial Public Offering. Shares priced at US$45 were trading above US$100 shortly after the offering, and the company’s market valuation now stands at around US$8 billion, or roughly 520 times its net earnings in 2010.

While there’s no shortage of warnings that this is yet another sign of a tech bubble in the making, even the critics admit there’s something more to LinkedIn than meets the eye. “You can make some reasonable assumptions that the company will be successful and profitable in the future,” says Josh Bernoff, a social media analyst at Forrester Research. In part, that’s because the number of LinkedIn’s members is growing, and there aren’t competitors on the horizon to woo them away. LinkedIn currently stands at over 90 million registered users, almost double as many as it had only two years ago. If that seems small compared to Facebook’s 500 million-strong network, it’s because LinkedIn appeals to a very specific kind of user: White-collar office dwellers. In a online entry for Business Insider, marketing consultant Byrne Hobart calls it “the place for things you’re willing to brag about, which are not fun.” It’s the social network where people job-hunt, and schmooze—a niche that has little to do with Facebook, which is all about vacation pictures and updates about kids and pets.

The amount of time LinkedIn users are spending on the website is also growing. And the bigger the network gets, the more useful it becomes for its members, who are then more likely to become active and engaged. Faiyaz Dossaji, for example, joined LinkedIn about four years ago, but didn’t initially see the benefit of it. “I joined because I was job-hunting at the time, …but I hadn’t thought too much about it because nothing came of it,” says the 31-year old analyst at BAE Systems, a defense, security and aerospace systems firm. Last year, though, Dossaji, who was again searching for job opportunities, heard of a former boss who’d found a job through LinkedIn. That spurred him to devote more energies to the site, joining groups of other professionals and alumni networks and asking for recommendations from former employers. Not long afterwards he received an inquiry from an employer–the very BAE Systems he now works for.

If job hunters are rapidly warming up to LinkedIn, headhunters are already unwavering loyalists. Byron Tarboton, head of research and operations at Archer Mathieson, a U.K.-based management recruiting firm, calls the social network “a primary tool” for his job. “About 90 to 95 per cent of the individuals I place in roles are through LinkedIn,” he says. That’s because the website is an ideal search engine for resumes. It allows Tarboton, for example, to look for a human resources director in the fast-moving consumer goods industry, working in a company with a client size of 500 to 2000 individuals, and living within a 25 miles radius from the new, prospective employer. A search like that, he says, would normally turn up anywhere between 50 and 500 potential job candidates. LinkedIn charges a fee for this type of service, but the price tag is easily justified. For about $80 a month, Tarboton can reach up to 50 potential candidates a month; if only one of them is hired, he pockets between $40,000 and $50,000.

Users like Tarboton make up the backbone of LinkedIn’s business, which last year, according to Business Insider, derived over US$100 million of its US$243 million revenue from its recruiting services. A much smaller part of that comes from premium subscriptions, which, for example, allow members to reach out to other users outside their network of contacts. Finally, a sizable slice of the money comes from advertising. The three-pronged revenue structure is another factor that sets LinkedIn apart from Facebook, whose business relies almost exclusively on marketing—and another trait appreciated by investors.

But whether LinkedIn is worth US$4 billion, as the initial IPO pricing suggested, or $8 billion, as the market seems to think, it will need to continue to grow fast. LinkedIn will have to find a way to increase ads while maintaining their characteristic unobtrusiveness. And it will have to find new members beyond the North American market, which is close to saturation, says Bernoff. In Europe, that means taking on the local online professional networks: France’s Viadeo, with its 35 million members, and Germany’s Xing, which counts over 10 million. In China, there’s the problem of heavy regulation and government interference with the Internet, something that tripped up even Google. Elsewhere in Asia there’s the question of cultural barriers. Facebook hit a wall in Japan, where people tend to engage in online social networking using pseudonyms rather than their real names. In LinkedIn’s case, Japan and Korea’s corporate culture means that employees don’t switch jobs very often, and they might not feel the need to network professionally, says Bernoff.

None of this, of course, spells doom for LinkedIn’s prospects, but it probably indicates that, even if the US$8 billion valuation is no bubble, the market might need to let out some hot air soon.

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