How LinkedIn Broke Through

LinkedIn is a 3-year-old social networking site for grownups. The sector is dominated by sites like MySpace (NWS) and Facebook, where teenagers and young adults trade messages on home pages loaded with photos, profiles, blogs, and more.

Those sites make money by amassing a huge audience that attracts advertisers. LinkedIn, on the other hand, appeals to professionals in the broad 25-to-65-year-old category. While some features are available for free, it's designed to be a subscription service (see BW Online, 4/10/06, "Socializing for Dollars").

Co-founder Konstantin Guericke spoke with BusinessWeek Online senior writer Steve Rosenbush about the business model. Here are edited excerpts from their conversation:

Why is social networking taking off right now?Over the past 10 years, the media have become so noisy; it's hard for advertisers to break through unless they can afford something like a Super Bowl ad. And even companies that can afford them sometimes question whether it's worth it.

Word of mouth cuts through all that. That's one reason blogs and social networking are taking off. People are relying more than ever on recommendations from people they know, [not from] machines or editors who don't know you.

The Internet made things more efficient. Now we have information overload. The next stage of the Web is to integrate people and trust and personalization back into the Web.

Are you folks making money?

We turned cash-flow positive, which is significant for a startup. It means we don't have to go out and do another round of fund-raising.

So you won't be raising more money?

At least not for operations.

How does the business model work? How does it differ from Facebook or MySpace?

We're here to build a business, not to create something cool. MySpace and Facebook have done really well. And I think they can monetize what they have built, probably by adding in more e-commerce. But I think the opportunity on the business side is ultimately larger.

Do tell.

People who have been working for at least 10 years have a network. It doesn't come from networking; it just comes automatically, from going to work. But people tend to lose touch.

Those networks are valuable. I see business as a Darwinian enterprise. People tend to hire and make other business decisions by drawing on these personal networks. Is a job candidate honest or hard-working? You can't tell from a résumé or even from an interview. That's why people fall back on trusted relationships.

Before you turn 25, your social needs tend to be in the foreground. You want to be cool, express yourself, focus on your friends. I am in my late 30s. I am married and have two kids. My social needs aren't that great. My professional needs are in the foreground.

It is harder to reach people in my age group than it is to reach younger people, who are much quicker adopters of technology. But once you do, the network effects are stronger. And even though a younger audience is easier to get, it's also easier to lose.

There's also a greater ability to monetize an older audience. Our business is built around premium services. The average user pays $200 to $300 a year, and some pay $2,000 a year.

Who would do that?

Let's say a headhunter goes to LinkedIn twice a month and does five searches and finds 14 people. He shows seven of them to a client, who interviews three and hires one. The headhunter gets $30,000. That easily justifies the cost of LinkedIn.

How many users do you have?

5.5 million.

How many of them pay?

We don't say.

Can you say how fast the site is growing?

Last year we grew two to three times in size. We expect to have 10 million registered users by the end of this year.

How do you measure success?

Ninety-seven percent of our users will respond to a query [from another member]. That doesn't mean they will respond to all of them. But they will respond to one in four. That's important for us.

And as the number of users grows, the service becomes more valuable because you can reach more people. The price remains the same, though.

How does the premium service model work?

We have four levels. For $60 a year, people can post information and be contacted. For $200 a year, they can contact three users a month. You can contact more people as you subscribe to higher tiers of service.

Do you think advertising can work on free sites like MySpace and Facebook?

Yes. The ads should be very effective as advertisers learn how use demographic data to target ads. There are challenges associated with advertising in an environment of user-created content, but that can be managed. More work needs to be done, but it is doable.

Before it's here, it's on the Bloomberg Terminal.