Posted by Late last week, LinkedIn became the biggest U.S. Internet IPO since Google back in 2004.
Everyone from investors to start-up entrepreneurs and media pundits have looked at this deal sideways. The commentary mostly revolves around this being either a sign of the new apocalypse or what is to be the next great Internet stock market bubble (in some business circles, these are the same thing). Beyond the hype (the stock doubled in price on its first day of trading) to confusion (The Atlantic ran a Blog post titled, Did Bankers Scam LinkedIn Out of Over $130 Million?) to speculation (the International Business Times published an article titled, LinkedIn IPO: What Does This Mean For Facebook?), there is no doubt (just take a look at the market) that LinkedIn‘s IPO continues to rally tech stocks. It’s just hard to imagine that an online social network specifically targeted to the business professional suddenly has a valuation that rivals brands like Tiffany & Co., Hormel Foods, Electronic Arts, Hyatt Hotels and Hertz Global Holdings. It’s even harder to imagine when our media is filled with brands like Facebook, Twitter and Zynga (all of which get much more media attention than LinkedIn, and all of which are still not public companies) and we’ve rarely heard much public excitement about LinkedIn and their growth.
The big question is: is LinkedIn just hype or is this the real deal? The lesser-hyped question is: is this the sign of a second dot com bubble.
I joined LinkedIn very early on. In fact, I am member #23,540 according to my profile information (as of March 2011, LinkedIn has more than 100 million members in over 200 countries and territories, according to their website). For years, I’ve Blogged about the merits and quality of LinkedIn over other online social networks. It was (and still is) a fairly private experience (you have to approve every person who would like to see your profile, and only a limited amount of information is made public prior to that approval of a LinkedIn connection). On top of that, if you would like to connect with an individual, you have to either know that person’s professional email address (that person is then asked if they would like to allow you to connect back to them) or you have to be introduced to that person through someone who is a direct contact (one degree of separation). Beyond that, LinkedIn boasts a premium service that members can pay for (the premium service offers features like the ability to message anyone on LinkedIn – whether you’re a direct connection or not and the ability to see who has been snooping on your profile). Their advertising model may not be any more unique than other online spaces (display and text advertising solutions), but the information and targeting capabilities are second-to-none as members of LinkedIn tend to spend a lot of time ensuring that their business profiles are up-to-date (this information includes the type of specific data that advertisers drool over). The company has other revenue channels as well (recruiting solutions, etc…), and it has been focused on monetizing the platform since it first launched in 2003.
So, while it’s easy to see and follow what any one individual is tweeting about over on Twitter, LinkedIn connections don’t come so easy.
As people add friends on Facebook as if they’re collecting baseball cards, LinkedIn always focused and catered to those who were looking for the quality over the quantity in their business-focused online social networking needs (many people ignore other people’s invitations to connect). On top of that, LinkedIn is a business… a real business with multiple revenue models that is sadly being confused and clumped in with other Social Media darlings who haven’t yet figured out how to make money or where that money is going to come from. And, while the platform has many people who are still trying to game it and spam it with nonsense, the average LinkedIn user takes this online social network seriously. Investors, journalists and media critics should do the same.
The dot com bubble and crash (1995 – 2000) happened primarily because investors were speculating on the potential of businesses that few of them truly understood.
In all fairness, the technology and connectivity wasn’t even advanced enough for anyone to really know how this would pan out. That being said, for every sock puppet selling pet food, there were still companies like eBay and Amazon who had a clear vision of how commerce and business would change in the not-so-distant future. Sadly, the serious businesses got lumped in together with those who presented a business model that was nothing more than a beautifully wrapped gift that had nothing inside of it. Times have changed. Serious money is being exchanged in these digital channels and consumer usage is off charts if you look at Web, mobile and touch experiences. And, while we still have certain geographic regions that do not have blazing connectivity speeds, it’s getting better as we move towards a hyper-connected society. Beyond all of that, the Internet has now been commercialized for over twenty years and Social Media is over a decade old. LinkedIn could well be validating something that many of us have been saying for a very long time: this is not a fad. This stuff works and people are using it (it’s also getting easier and easier to use with a lowering barrier to entry for newbies).
The businesses that are still ignoring this digitization of everything – from how we buy and consume our media to how we network – may well be the ones who will have their bubbles burst first.
The above posting is my twice-monthly column for the Montreal Gazette and Vancouver Sun newspapers called, New Business – Six Pixels of Separation. I cross-post it here with all the links and tags for your reading pleasure, but you can check out the original versions online here:
Never another podcast episode or article 
There is a very significant difference between the macro argument about the sea-change that is social media and LinkedIn’s leadership position in this market and the specific issue of valuation analysis.
I don’t believe many people question that social media is here to stay and that it is already changing the way in which we communicate, consume and transact. Nor, do I believe that many people question that LinkedIn is a solid company that has established itself as an early leader.
The real question is whether the current valuation of the stock is reasonable in relation to comparables and proven valuation metrics. As well, consider the issue of opportunity cost. Should I plow my money into LinkedIn that is trading at an astronomical P/E or double down on Apple that is trading at a P/E ratio of 16 despite 92% growth? I could go on but this article from today’s Financial Post does a good job summarizing the real issue here: http://business.financialpost.com/2011/05/24/why-linkedin-bears-say-plunge-is-inevitable.
This may not be a bubble in the 2000 sense, but it does have a lot of similarities. There are just as many snake oil salespersons making claims about optimizing online channels and leveraging viral networks when all they really mean is advertising, marketing and communications through new platforms. At the end of the day, the bubble will burst and social media will become a no-brainer part of doing business like the web or the phone.
No one has a Director of Phone, and no one will have a Director of Social Media after a time either. The end of the bubble will be when the masses realize that this is an expansion of traditional channels, not a whole new thing.
I’m no broker and heaven knows my grasp of business economics ain’t all that but the questions you raise, Mitch, are ones that have been plaguing me for a while. It seems that the value of Facebook and the like is linked to the potential value it may generate in the future. No doubt the revenue of the sites may be substantial but the millions of dollars attached to their valuations seem skewed and hinge on being realised at a future date.
Maybe I’m just airing my lack of business knowledge here (being a copywriter, things with numbers never really worked for me) but it all seems a little shaky.
As a Recruiter with nearly 3k 1st level connections on Linkedin it is valuable… However like anything else, it is what you “do” with what you have that is the key… Good post..
I just blogged about this yesterday Mitch. It costs $18USD to buy $1 of Apple Profits. It costs $1,312 USD to buy $1 of LinkedIn profits. It’s a pump and dump. But a small one. Facebook is going to be the biggest in history.
Someone bought LinkedIn at $122 and it closed under $90 yesterday so a massive quick loss.
Why? Wall Street bought low sold high and profited. They have been starved of Tech IPO’s which were a huge earnings driver. So Wall street is going to win again. When it is over we will see what technologies become real money makers. Notice Facebook has not improved it’s communication technology for people to people in at least 3 years. Yet Disqus and Livefyre are blazing a huge trail where we might not need facebook soon.
It’s important to distinguish between the apparent bubble in the social media businesses’ stock market valuations and a ‘bubble’ (or not) in the use of social media for personal and commercial use. We see no sign of any decrease in business use of Facebook, Twitter, LinkedIn (and yes, even YouTube) for establishing online business communities, engaging customers and prospects, getting corporate and product feedback, and delivering online sales and marketing messages.
The current and prospective stock market value of social media companies may be questionable, but for the most part these are highly successful and highly profitable businesses. And, contrary to popular opinion, there are significant barriers to entry for competitors. It’s not easy or inexpensive to compete with Groupon by creating a daily deals website that makes it to the top of the Google search rankings, or a nationwide feet-on-the-ground sales force to negotiate and coach local businesses.
I agree. BUT we have no idea in aggregate as far as I can tell if Social Media use per person is growing or falling. Per person use of Facebook per day has dropped over 30% in the last year. And in my view use of Facebook for big business has been one of the biggest failures ever because Facebook bet on Advertising/Brands as a biz model vs a Comm Platform for people and charging for it. 18 months ago many people would of paid for Facebook per month but since the brand and stream pollution/dilution people wouldn’t pay for it today. Huge missed opportunity that will be studied by B-Schools for years to come. Plus new accounts in the US are flat. And even Twitter is growing slowly to only 30 mil users world wide per day using the service.
One thing I do have to note. Everything is secret when a business is private. We have no idea what is real and what is fluff when it comes to Facebook. But when the IPO and it comes out in the open I suspect we see a dying network that fleeces investors and only srviving from lack of an alternative (I have a Finance Degree and I analyze their data often its really weak per person almost zero exhange of info (like watching 0.5 videos per user per month or being active with less than 4 brands regularly or the less than 8 photos uploaded per person per month. In aggregate numbers look massive). And facts based on the Facebook stats less than half of the people logging in do anything but read on the site.
So what happens when everyone sees this? Will VC investment dry up? Will the Stock Brokers salivating on Pump and Dump (they fleeced LinkedIn and the VCs on that one). I see a bubble that will erase the fluff and eventually we can get down to integrating Social into Phones like SMS text is. (BTW for every Facebook update posted today there will be 173 SMS text messages sent!)