LinkedIn IPO: peeling back the onion

Just when everyone thought the IPO market was lulling away, LinkedIn – the professional networking site – pulled it out from slumber and how. LNKD, ticker symbol for the new kid on the block, gained over one hundred percent on debut, making Reid Hoffman (founder chairman) and venture capital firms like Sequoia Capital and Greylock Partners several times richer, besides providing spectacular returns to those who got IPO allocations. Hardly had the confetti settled down that rumblings began if this was a signal of another impending consumer internet bubble in the United States

Experience cautions the temptation to call out bubbles because a bubble is seldom a standalone occurrence. It implicates a whole industry or sector. And like Keyenes had professed about the difficulty of prediction – especially that of the future – I shall eschew likewise. The standalone question however remains – what about the performance of LinkedIn (I’ll stick to LNKD hereafter). Is it that hot a business to justify such a premium over the IPO price?

In the past I have often written about social networking – both casual and professional – and LNKD has featured in almost all of them. Till now my task was easy in that as an user and analyst, I did not have to create a price-value exchange in my observations because LNKD wasn’t listed. I enjoyed the service, I criticized them for taking Facebook-like steps but there was no valuation benchmark that the market put to what LNKD stood for. Current changed circumstances merit a second look at where LNKD ekes its values from (and what could be right or wrong with that model)

Employment ecosystem

LNKD had – and still does – the potential to ‘own’ the employment ecosystem. Currently it sells itself slightly cheap by staying on primarily as a digital resume service. There are standalone services like glassdoor that look at employment and workplaces from a different perspective altogether. It can be argued that LNKD, by the strength of its professional social-graph, could have been the best glassdoor service (not to mention international compensation/cost-of-living calculator services like Expatistan). The same argument goes for surveys related to employers, preferred sectors (which I am told is a good leading indicator of both investment banking activity and excess stock market returns!) and other workplace related user generated information. LNKD shied away from these, leaving white spaces in their strategy

What does LNKD bring to the table?

Hiring services and Job Postings contribute about 48% to LNKDs revenues. They compete head on with firms like Monster in this space (Trefis estimates LNKD to have 300K job postings in 2010 compared to 2 million on Monster). It can argued that hiring has local elements to it that a global platform like LKND finds itself at a disadvantage to – against say firms like Naukri.com. LNKD was not able to make LinkedIn Answers a success wheres standalone Q&A platforms like StackExchange and Quora were able to build great franchises off the same theme. This is vital because such platforms allow both the job giver and job seeker to bridge the reputation-information asymmetry at the time of hiring (I would definitely check a prospect’s work on StackExchange if I were hiring a top-notch Ruby-on-Rails developer).

Peeling back the onion, it is a reasonable conclusion that the professional social-graph that LNKD has, thanks to the 90 million registered users, is its crown jewel and the firm needs to find ways of monetizing that. LinkedIn for Developers, a related initiative, though in its infancy has great potential especially if LNKD opens the kimono a crack and allows organizations that depend on (professional) social consumption of content to use the service in a manner more involved than just the standard interfaces.

The IPO gives LNKD some funds (public equity is almost always less draconian than its private counterpart) that the firm could use to pursue initiatives that deepens its presence in the professional social-networking and employment space. LNKD needs to create a strategy to understand professionally relevant content its users are creating outside of its platform (blogs, tweets, quora answers etc) that it needs to somehow bring into its ecosystem. It shall not come as a surprise if some of the IPO proceeds are used to buy capabilities in such areas

As for the consumer Internet bubble, what is troubling is not so much the bubble per se but the fact that not even three years has elapsed from when the financial world was poised at the other extreme of the abyss. Anyone wants to go long on Economic Activity volatilities?

Asides

  1. Does the LNKD IPO breaks the Zuckerberg effect? In other words, will high profile social networking sites no longerlonger shy from IPO’ing. Single swallow does not the summer maketh and I hold on to my opinion that Zuckerberg shall do a Bloomberg and stay private.
  2. Top 10 IPOs that went in excess of 100% on first day. 50% of them have gone *poof*

About the columnist: Subrata Majumdar heads the investment and advisory division, South Asia, at Thomson Reuters. He has spent over a decade leading initiatives in corporate treasury management, investment banking, consulting and software development in companies such as IL&FS and Oracle Financial Services (formerly i-flex Solutions).

Image Courtesy: Subrata Majumdar

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