October 27, 2008, 3:24 PM — During the past two years, Facebook became the darling of Silicon Valley, watching its user base grow exponentially as its founder bombastically turned down billion dollar acquisition offers. But as the sobering realities of a tightening economy set in, it turns out LinkedIn, the social networking site for professionals, might be on track to build a more stable and immediately profitable business model that, unlike Facebook, doesn't rely solely on advertising and never-ending injections of venture capital.
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LinkedIn has thrived this year, and it did so without deviating from its plain user interface, devoid of the pictures and playful applications that embody the Facebook landscape. Just this week, Dan Nye, LinkedIn's CEO, announced that the company had taken US$22.7 million in funding from SAP Ventures, Goldman Sachs, and The McGraw-Hill Companies. This is on the heels of $53 million in series D funding LinkedIn received back in June, valuing the company at $1 billion.
Dan Nye, LinkedIn's CEO, says the social network has been profitable since 2006.
Even if LinkedIn's value falls short of that figure, and many believe it does, analysts say the service has undoubtedly kept a loyal user base (29 million) that will give the site unique opportunities to monetize in the coming years. That prospect has impressed investors, especially as they watch other social networks, namely Facebook, struggle to find the ideal method for displaying ads.
On Wednesday, Nye told Techcrunch that LinkedIn, a privately held company, has been profitable since 2006. That stands in sharp contrast to Facebook, whose founder and CEO, Mark Zuckerberg, recently said he hopes to see his company come up with a profitable business plan in three years.
Facebook's CEO, Mark Zuckerberg, doesn't expect his company to be profitable for another three years.
LinkedIn has won the confidence of investors by showing a variety of ways in which it can generate revenue. In addition to advertising and gathering cash from premium accounts, the recent investments in LinkedIn, especially by SAP Ventures, indicate that the company could get involved in the business software market, a sector that has largely failed to capitalize on social technologies to meaningfully improve their products.
The loyalty of LinkedIn's users has proved important to the company's success too. Analysts say that their devotion isn't just predicated on the service being well-designed; they are simply beholden to legacy. Since LinkedIn was the first successful business social network, many people built their contact (or "connections") list there. Even if Facebook or another competitor wanted to make a play in business social networking, users might not bite.
"[LinkedIn] users have been loyal because there is a switching cost," says Jonathan Yarmis, a VP and analyst with AMR Research. "For someone to go and duplicate what they're doing, and even if they came up with a superior platform tomorrow, they wouldn't necessarily switch because they've built their business network. In many ways, the connections can be worth more than the platform."
Of particular interest to analysts and social media followers this week was the investment by SAP Ventures. SAP's investment in the site could signal that the old guard technology vendor is thinking of ways to make its software products more social and leverage the huge base of business contacts in LinkedIn.
As an example, customer relationship management (CRM) software, a staple SAP product, allows salespeople to track their customers and keep tabs on their transactions with the company. But most CRM applications suffer the problem of not helping salespeople connect with new customers, forcing them to seek them out in traditional means or (worse) cold calling.
Since LinkedIn allows someone to connect with another user by getting introduced through a mutual connection, tying such a function into CRM software would be immensely valuable for salespeople, AMR Research's Yarmis says.
"If they could expose that data and provide context for sales people, that would be huge," he says.
Jeremiah Owyang, a senior analyst with Forrester Research, believes LinkedIn could get involved in the Enterprise 2.0 space - the market of software vendors who take Web 2.0 technologies such as blogs, wikis and social networks and makes them palatable for business use.
"Already, LinkedIn looks more like a corporate intranet homepage rather than a networking site for finding your next job," he says. "LinkedIn is ripe to make a play for the Enterprise 2.0 space by acquiring a community platform vendor, or developing features for the enterprise."
Despite the injection of capital LinkedIn has received, the service will walk a tightrope with users if it decides to explore these types of revenue streams. A user, for instance, might not be thrilled to learn that salespeople are digging around their resumes and looking to pitch them products through a mutual connection.
"There is a risk that users go 'whoa, that is not what I signed up for,'" Yarmis says. "There is a risk of backlash."
Facebook provided a cautionary tale with its Beacon Advertising fiasco, when it began broadcasting the buying activities of its users to their friends without seeking their permission. It caused the company to backpedal in the form of an apology from Zuckerberg. Facebook also offered users the ability to opt-out from social ads.
Though LinkedIn will pour more money into its platform, don't expect the company to become more Facebook-like in its look and feel, says Yarmis. Critics of LinkedIn have long contended that it would lose out in the social networking wars because its interface is nowhere near as social and engaging as Facebook. In actuality, the fact that LinkedIn isn't as sociable could be the reason its users like it.
Anecdotally, Yarmis says, LinkedIn's older, professional audience appreciates the site's sparse feel. They aren't social media insiders or cheerleaders drunk on the idea of a social revolution as facilitated by Facebook or Twitter (the microblogging service). They merely want to connect with business contacts and utilize its "question and answer" forum to solve their professional challenges. As a result, they likely have little desire to see that environment muddied by applications that offer you fake martinis or to view someone's vacation pictures.
"The fact that Linkedin doesn't let them do all that stuff and that it's very focused is part of the appeal," Yarmis says.
Even if LinkedIn doesn't become more like Facebook, analysts say LinkedIn should use the money to invest in making the platform agile and ready for changes, especially to integrate with other technologies and applications.
"LinkedIn needs to respond faster to the market needs, innovate, and not rest on their laurels of profitability," says Forrester's Owyang. "The economic downturn provides them with a window of opportunity, as long as they stay fast and flexible."