"Every new beginning comes from some other beginning's end"
-Closing Time, Semisonic
In case you live under a rock or you died this past Saturday because of that whole
end of the world thing, LinkedIn (NYSE:LNKD) the online resume site-or as I like to call it Monsters.com meets Facebook-went public and lead to one of the craziest IPOs in recent era. Some, like CNBC magnate Jim Cramer, believe it was reminiscent of the dot-com boom when theglobe.com went public. In 1998 the company and its freshly minted Cornell graduates started selling at $8/share and eventually reached $94/share at one point during opening day. Two years later they were bankrupt, along with about ten to fifteen other dot-com start-ups, and the rest as they say is history.
LinkedIn has a chance to re-write history, as do their VC investors, their CEO, and everyone involved with this interesting social-media company. LinkedIn, unlike Facebook, Groupon, or Zynga, did not get much publicity two weeks to two months prior to the IPO, until that IPO finally came and the financial world seemed to blowup. Both from an investor standpoint-where the company's shares were supposed to open Thursday trading in the $25-32 range (reached as high as $121.97 and closed at $94.25)-and from the bubble talk standpoint. Private trading outlets like SecondMarket and SharesPost have been home to many of these private companies. Including many you probably haven't heard of but are doing well like Etsy, Yelp, and Gilt Groupe. But those who had access to these exclusive (and potentially reclusive) outlets were primarily the VC investors themselves who wanted to buy and sell shares of the company's they stake (or individuals who have $1mil in assets or make at least $250,000 a year).
Point being, just because LinkedIn, a company which was valued around $3 billion on the private market, ended up getting a valuation of roughly $9 billion on the public market, doesn't mean there's a bubble. It's no Pets.com or Webvan. Those were two dot-com companies in the late 90s that went public and then bust two years later. They had nice IPO openers as well. But what they did NOT have was a concrete business model. Pets.com had incredulous debts to pay because they were spending so much on delivery and supplies and not enough demand. The idea was cool for like two weeks, nothing more. Webvan tried 30 minute grocery food delivery to your front door, what they didn't think about was that people would want food delivered to their houses at night. Webvan spent $1 billion on gathering various business needs to keep them running while their profits and revenues were inching closer and closer to the negatives.
LinkedIn, ladies and gentleman, was profitable last year for the first time with a yearly profit margin of %6.32. And, revenues are expected to increase for the third straight year by a substantial margin. From 2009 to 2010 the company went from $123 to $243 million and is expected to be in the $400-500 million range after this year. Oh, and they've been around for eight years. Reid Hoffman their co-founder is the real deal. Having lived through the dot-com boom and come out having a piece of one of the biggest companies in PayPal, Mr. Hoffman knows a thing or two about building multi-billion dollar businesses.
Moreover, LinkedIn has a legitimate business/revenue model. 45% of their business comes from recruiters, companies, or head hunters as some may call them, setting up shop on the site to search for qualified job candidates. An online resume that was easy to access without all the PDFs and downloads and email sending hoopla, what brilliance! If you look up the word "networking" in the dictionary, you should see LinkedIn there. What better place to meet former classmates, get in touch with recruiters or employees of a company your interested in, or find about new job opportunities? You can do that contacting employee thing on Facebook too I guess, but that's a bit more creepy and a bit less professional. Another 35% of the business comes from display and text advertising, something they can still improve on. And the last 20% comes from premium subscriptions.
So, what has caused this gi-normous valuation for a company which was approximately the 5th or 6th most popular on the SecondMarket?
Two things:
1. SecondMarket/SharesPost
2. Innovation/Maturity
SecondMarket has been in the news for the past six months at least three to five times a week in just about every major news outlet. From Bloomberg to the WSJ to the NY Times, you get the point. All this hype around private companies being valued at $85 billion (Facebook) and $25 billion (Groupon) has made investors both antsy and hungry to pounce on the next internet company to go public. Sorry, the next social media company to go public. The hype around social-media sites was evident when "the Facebook-of-China" went public aka RenRen a couple weeks ago on the NYSE. It's shares soared 28.6% on opening day and ended the day trading around $18, above its starting $14.
LinkedIn has 100 million users, one-sixth the amount of Facebook users, but it's
been growing both financially and now technologically with the recent money they made in the IPO. They don't NEED the money, but it's nice to have when they decide to make an acquisition to help propel them even further along the social resume food chain. Remember Monsters.com? Yeah well they're still around, but I wouldn't be surprised to see LinkedIn buy them up in the near future.
The #2 reason why LinkedIn's shares blew up faster than Andy Roddick (after the umpire makes a "bad" call) is because of innovation and maturity. Innovation from a technological standpoint: programmers and investors have come a long way since the dot-com boom. As a result, they have matured and grown from their previous start-up failures to become a lot more intelligent with how they use money and how they assess which type of company or market will be successful next. Fifteen years ago there were barely any metrics to calculate how well these internet companies were doing private or public. Now there are various different revenue outlets and metrics. Moreover, Wi-fi didn't exist fifteen years ago and the most popular type of internet was dial-up. Labtops weren't around, desktops weren't as powerful, and tablets like the Ipad and Xoom (lol) were nowhere to be seen. Aside from Minority Report that is.
We are clearly going through a social boom where privacy is the last thing people are worried about. Pictures of our friends (and sometimes us) hooking up with their girlfriends, our online work experience and GPA, and letting people know where we are and what we're doing at least three times a day. Privacy you say? What started out as AOL chat rooms, email, has evolved into Facebook. I can't imagine what Facebook's valuation will be when it goes public next year but let's just say that $85 billion valuation on SecondMarket isn't a bad guess. Remember that Facebook has 600 million users and $400 million in profit, not revenue. That.is.big.time
Wrapping up, LinkedIn is run by some very smart people including the aforementioned Reid Hoffman and CEO Jeff Weiner. Silicon Valley is booming with talent and thanks to the internet and creativity people are getting smarter at a much faster pace. What would we do without the internet? The internet was in the early stages of the monster it has become today. To quote Gilt Groupe CEO Kevin Ryan: "When you see companies being valued at 10x their revenues, that's a bubble." I couldnt' agree more. What this is NOT, is the end or near the end of the tech-boom. LinkedIn has a great business model, a large user base, and it's profitable. The dot-com bubble and eventual bust was caused by ridiculous companies going public and then going bankrupt two months to two years later because they just wanted a ticket to the party, not a ticket to get invited back year after year. The companies you'll see go public in the next 2-5 years won't all be successful in the long run but some like Facebook or Zynga, may be mainstays for several decades to come.
Next topic: Why Microsoft & Skype are like peas and carrots.
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