Before the IPO: How LinkedIn Got It Right
Karen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
LinkedIn (NYSE: LNKD) isn’t sexy. It’s not hip or trendy, either. But it is a professional and social network site that manages to make money. A lot of money.
Before going public, LinkedIn had its business model in place. Acting as a world-wide on-line employment agency, the company brings employers and employees together on a user-friendly website. As testimony to the soundness of that plan, LinkedIn currently reports it has over 100 million users in over 200 countries. The company adds approximately one million new members every week to the LinkedIn ranks.
Well before their IPO debut, the company had already answered the primary concern of potential investors and stockholders: how would this internet company make money?
Its surprising how many companies fail to adequately answer this basic question or don’t have a contingency plan in place. Remember the dot.com era? Many companies, including pets.com, bled red ink starting with their initial IPO until their final demise. But companies like Cisco (NASDAQ: CSCO), who successfully weathered an 86% decline in their stock price when the tech bubble burst, survived because their management team had answered the question: What if things go wrong?
LinkedIn has developed diverse sources of income to insure the company remains financially strong during difficult economic periods. Just as Apple (NASDAQ: AAPL) generates income from various sources, including devices, software, and services, LinkedIn also earns income from multiple sources: user subscriptions fees, display and text ad fees, and fees from hiring solutions. Of the three, the hiring solution fees, known as “LinkedIn Corporate Solutions” is their largest source of income. LinkedIn Corporate Solutions allows businesses to filter potential employees based on their education and experience, the job requirements, job location and other criteria. Corporations can also post job listings to reach any potential candidates on the site. This feature has proven highly successful with over 5 million businesses using Corporate Solutions as of March 2012.
LinkedIn operates a world-wide sales force selling ad space along with promoting its Corporate Solutions package. Advertising is the second largest source of revenue and the company is smart enough to target small business owners as well as business professionals. Pay-per-click revenues have predictably fallen in response to the difficult economy, but Corporate Solutions revenue has made up for some of that shortfall.
User subscription fees, understandably, is the smallest source of company revenue. Charging job seekers a fee for the privilege of joining the site would dramatically reduce the pool of employee candidates available to LinkedIn’s corporate clients. Job seekers can, however, sign up for premium services that are designed to increase their chances of being hired.
LinkedIn’s business works because the company started with a strong business model that was designed to materially benefit members of the workforce. In sharp contrast, Facebook (NASDAQ: FB) seems more like a throwback to the dot.com days when businesses sprang up without having a solid business plan in place. LinkedIn relies on multiple sources for income to better weather economic downturns and has seen their stock price increase from their IPO despite the bad economy. Facebook depends on click advertising for their income and their stock price has steadily declined since their ill-fated IPO. On May 17th, LinkedIn’s IPO stock price was pegged at $45 and quickly shot up to $83. Today’s stock price is around $92.
Even Jamie Dimon would be proud of LinkedIn’s success.
Fool blogger Karen Rogers does not own shares in any of the companies mentioned in this entry. The Motley Fool owns shares of Apple, Facebook, and LinkedIn. Motley Fool newsletter services recommend Apple and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.