LinkedIn Reaches Out

The upscale networking site is trying to expand and introduce new products without alienating its influential customer base

Even as upstarts crowd the online hangout field, and youth-focused sites like Facebook pursue a more professional clientele, social network LinkedIn is swiftly adding customers—and profit—by sticking by its well-heeled user base.

The strategy that's swelling LinkedIn's rolodex of professionals by 100,000 a week will be put to the test in coming months as the company rolls out new features and prepares for an international expansion financed by a $12.8 million influx of financing announced Jan. 29. Bessemer Venture Partners put in the lion's share of the round (LinkedIn's third), and European Founders Fund also took a stake. The venture capital companies join existing backers including Sequoia Capital and Greylock Partners.

The In Crowd

LinkedIn has grown to 9 million members—3.6 million of whom log in at least once a quarter—and attracted blue-chip advertisers like BMW, American Express (AXP), and Virgin Atlantic Airways by catering to an affluent demographic. The average LinkedIn user is 39 and makes $139,000 a year. Of the total, 89,000 are chief executive officers, and nearly half a million others occupy another job in the C-suite, LinkedIn says. In addition, companies including Microsoft (MSFT), eBay (EBAY), Target (TGT), and L'Oréal pay $2,000 to $10,000 a month for the ability to search LinkedIn's profiles for job candidates.

LinkedIn CEO Reid Hoffman tries to keep those influential members around as much with restraint as with the services the site offers. He has shied away from annoying messages meant to increase traffic, says Bessemer Managing Partner David Cowan. "He doesn't send you an e-mail every time something happens," Cowan said. "He's not just trying to aggregate clicks."

So far, the formula has worked. Profit last year reached the single-digit millions and revenue this year will likely be between $25 million and $50 million, and double that amount in 2008, says Keith Rabois, LinkedIn's vice-president for corporate and business development.

New Products

Now, flush with funding, LinkedIn is ready to spread its wings. As it competes with Google (GOOG) and Yahoo! (YHOO) for a bigger slice of the $16.9 billion Internet advertising market, the company will try to capitalize on its users' knowledge base and credentials to develop new products. More money in the bank means more leeway to try new things and see what sticks, Rabois says.

Next month, the company plans to start marketing LinkedIn Experts, a separate site it began quietly testing in December that helps investors and consultants find knowledgeable people in a given field, then arrange hour-long phone consultations for $500. LinkedIn's staff identifies the experts—including some in arcane fields like construction materials in China—and the company splits the revenue with the user whose knowledge is tapped. Each additional hour costs $250.

On Jan. 16, the company launched LinkedIn Answers, which ties users' answers to field-specific questions to their profiles so recipients can judge how much the respondent really knows. That site is due to get an upgrade next month as well.

Room to Experiment

The more experiments LinkedIn can launch without worrying about immediate return, the more data it can collect by watching how users react, says Rabois. "We raised the capital so we'd have the luxury of experimenting," he said. "Having a war chest of capital allows us to take some risk."

LinkedIn also plans to use the new round of funding for expansion in Europe, China, and Japan. Today, the site is only in English, and its search engine for finding contacts relies on Zip Codes—not so useful outside the U.S.

The willingness to try new things while not diluting its audience makes LinkedIn an attractive investment, Bessemer's Cowan said. "That's a critical ability we need to see before we invest," he says. "At this point it's hard to imagine how someone is going to build the same critical mass."

Competitors Abound

LinkedIn's moves come as other social networking and job-posting sites tread on its turf, and new competitors enter the field. So far, News Corp.'s (NWS) MySpace has zoomed in popularity without deviating from wooing an audience of Web users in their teens and 20s. Facebook, which sells ads aimed mostly at the college and post-collegiate crowd, has introduced features that let users link to professional contacts. But questions linger about the continued popularity of the company, which has turned down buyout offers from Yahoo! (YHOO) and Viacom (VIA) (see, 11/1/06, "Facebook's Changing Fortunes").

Meanwhile, Visible Path last fall launched a professional networking site with Dun & Bradstreet unit Hoover's, and has hired executives from Oracle (ORCL) and (CRM) to shore up engineering and marketing teams. Visible Path raised $17 million in a second round of venture funding last year from Kleiner Perkins Caufield & Byers and others.

LinkedIn also competes with the job-posting sites (MNST), Craigslist, CareerBuilder, and Yahoo's HotJobs. CareerBuilder saw a sharp surge in sales last year, and is striking partnerships with newspaper chains to increase its presence in local markets (see, 1/3/07, "Online Job Sites Battle for Share").

Some unlikely candidates are also getting into the mix. Proctor & Gamble (PG) on Jan. 8 launched Capessa, a social networking site for women, where users can discuss health and parenting issues. And IBM (IBM) on Jan. 22 unveiled software under its Lotus brand that can help companies set up profiles of their workers and host discussions among them.

Tricky Road to Growth

LinkedIn needs to navigate other shoals as it girds for growth. The company needs to be careful not to dilute ownership too much—VCs and angel investors including Netscape founder Marc Andreesen and PayPal founder Peter Thiel now own about 45% of the company.

About 45% of LinkedIn's revenue comes from the monthly subscriptions corporations need to pay to send a meaningful amount of messages as they try to plug into other people's networks of contacts. But ads—which account for 33% of sales—are the company's fastest-growing source of revenue, according to Rabois, and the company is spending to hire more ad sales reps.

If four-year-old LinkedIn can successfully expand into new markets while fending off competition from Facebook, Visible Path, and a handful of smaller companies, it could stand the test of time.

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