Milestone Group Quarterly: October 2006
Articles
Face to Face:
Reid Hoffman, CEO and co-founder of LinkedIn
Milestone: Can you give us a brief history of LinkedIn?
Hoffman: The company was founded in January 2003. Like most Web companies, the rules favor speed. Thus, we launched the product by May of 2003 and have been growing ever since. Of some interest, LinkedIn has played out differently than many of the current Web 2.0 companies. Usually Web 2.0 companies hit an oil well and get an initial huge spike soon after launch – Friendster, Facebook, YouTube are some that come to mind. In contrast, LinkedIn has been more of a steady progression. Now we have about 7.7 million people registered, and growing at a rate of about 400,000 new registrants per month. Plus, we are profitable. Our goal in 2003 and 2004 was to grow the registered base – LinkedIn only starts to be useful once there are sufficient people in the system. (Now there are 7.7 million reasons to be using LinkedIn.) Our focus in 2005 was to add revenue, so that we can control our own destiny and we’re profitable now. And 2006 is about building useful features for the everyday professional to use each week – our first serious feature will launch in January.
Milestone: Are you where you expected to be since the start and what has surprised you most along the way?
Hoffman: Our growth among the professional market has actually been a little slower than we anticipated. We knew that sites like Friendster, Facebook and Myspace grow at a dramatic pace because teens, college students, and those in their early 20s have a lot of disposable time. With their disposable time, we also knew that the teens and twenty-somethings would experiment and be tech early adopters. So, we knew it would be slower because of the audience; we just didn’t know it would be this much slower. Fortunately, absolute speed of growth is not our key metric. We are building a tool for a professional’s entire business life. Probably the most surprising fact has been roughly since the sixth week after we launched, the geographic distribution of the people in LinkedIn is 50% in the US and 50% outside of the US. And week by week the maximum variance was 1%. Sometimes 51/49, sometimes 49/51. It looks like a rule of nature, but it can’t be that of course. Hence, we’ll be launching international next year.
Milestone: Some say Web 2.0 is going to be followed by Bubble 2.0. How do you respond to that?
Hoffman: There is definitely kind of more of a frothy investment market in the Web these days. Venture has always had a faddish and trendy “this is a hot sector, now it’s not a hot sector” point of view. When I started both LinkedIn and the investing in Web 2.0 stuff, (late 2002 and early 2003), VC’s thought the consumer Internet was dead. That was great; it left me with my pick of interesting things to invest in. The market will probably get too frothy at some point. However, there is huge systemic value on the Web. The consumer Internet is actually just beginning to unfold. Traditional media companies are seeing that its time to get on board or die. You see it in the decline in newspaper circulation rates, or at TV’s inability to reach a younger generation. Then when you look at the increments in Broadband and time spent on line, the Internet and its mobile extension is a hugely growing part of people’s lives. It almost doesn’t matter if there is another correction, long-term value is sound.
Milestone: There are a lot of businesses that call themselves Web 2.0 companies because it’s trendy. How do you tell the players from the “wannabe’s?”
Hoffman: I think there are two significant components to a real Web 2.0 application or platform. First, what happens when you have millions of publishers? You can also look at that as a flip way of saying user-generated content. When millions of people are leaving reviews, or just a star rating, that’s still publishing, or writing to other people. With Wikipedia, for example, even though there are a much smaller number of people actually editing, there could be millions of publishers. That is one major trend that I think says this is a real Web 2.0 application. The next component, which is related to the first but not the same, is empowering networks. The social network trend is essential to Web 2.0 because it results in applications built on top of the intelligence taken from networks.
I don’t think people appreciate the importance of Google as a very early – and enabling – Web 2.0 application. At the time, Alta Vista performed search ranking based on what words that were on the page – the content and metatags on the page. In contrast, Google uses intelligence from the network to deliver search results: i.e. PageRank. Rather than just indexing search results by the words on one page like Altavista, Google indexed the searches based upon words in the network of pages pointing to the target page.
This is a version of essentially using the network in order to build a better application. The genius of it all is in knowing that, when human beings type in 2-3 words to search, they are looking for what other human beings are looking for when they type in the same 2-3 words. That is what makes the application much more powerful.
Milestone: Social networks are certainly a distinguishing factor from Web 2.0. What distinguishes the social networks from one version to another?
Hoffman: In 2003, I said that, ‘there are at least two social networks – one that is social and one that is professional and the two won’t overlap.’ The social network is where you demonstrate that you’re a fun person, or that you might attract a date. Facebook has grown huge, in part, because college students entire world are all the other people at the college. College students are immersed in their local social world, and incidentally also happen to be attending school. That is one of the reasons that Facebook has achieved an intense regular usage and loyalty among students.
The professional network needs to be separate from the personal network. Consider the profile. Most people will not want the profile describing them as a fun date next to the profile that their professional colleagues can see. In fact, over the long term a professional profile will be the one that you will actually put your name to. A social profile will likely be a pseudonym so that when a prospective employer or business partner does a Google search, they find the professional profile and not the pictures of you having rowdy fun at a rock concert.
Each type of network connects you to the type of people you want to meet. In the social space, it’s about introducing friends, helping them date one another, and promoting events you’re attending or holding. When you are in the professional space, you look for experts to solve problems, referrals for making deals happen, hiring, job finding, and finding services like attorneys and consultants. The professional network is about managing your career and accomplishing professional tasks; it is a whole different network and a whole new approach than social.
Milestone: How does a Web 2.0 business make money? There are some wild valuations out there right now. It’s not clear that a lot of folks have a business model and understand how to achieve capital efficiency. Related to that, how do you reconcile open source content with a businesses need to capture revenue?
Hoffman: I look at those two questions separately. One of the things that I think people frequently underrate is advertising as a revenue model on the Web. A lot of the social networks drive a huge amount of page views, and the last time I looked the average Facebook user logged in six times a day. This would make a TV executive green with envy. But they can’t deliver on what drives this behavior – interacting and connecting with other people.
Back in 2001, everyone was saying that Internet advertising was dead. Then along came a product called Adwords (e.g. contextual advertising) and suddenly Internet advertising again had huge revenue models. Adwords are not the last of its type, there will be other applications created and innovated, especially on the social networking side
It’s a bit different for LinkedIn because we power business applications. By charging recruiters and by job listing, we don’t sell based on the time spent on site, or raw number of page views. It’s the high value business transactions where we make money: recruiting, expert finding, deal making, services and clients, even sales. As powerful as both of these business models are, I also think the business models on the Internet are still evolving in order to create orders of magnitude better economics on the Web.
On the open source side or the open content side, there are obviously different kinds of business models. Redhat does not sell Linux but sells support contracts. There are things like Wikipedia (non-profit) and Wikia (the for-profit cousin.) If Wikia can approximate a tenth of the pages of its counterpart by generating content, it will be massively profitable on the basis of advertising. There’s no need for a secret sauce. You can base effective business models on all this, but the rules for determining and maintaining assets, as well as a competitive position are different in this new market space.
Milestone: What is the preferred revenue model for a Web 2.0 business? Is it subscription, ad based, licensed, combination of all three? Related to that, what knowledge do businesses need of their customers to make these kinds of trade offs in terms of revenue models?
Hoffman: I think it comes down to two types of value proposition. One is, are you extremely mass market, e.g. like entertainment applications, like YouTube and the like, where tons of people are looking at the content you have. In that case, an advertising play is the better strategy. If you can get 10 times the people using your service by not charging subscriptions, it’s a simple decision to go with advertising. On the other hand, if your value proposition is limited in breadth but very deep and valuable, you go with fee for service. One of the reasons LinkedIn charges for its subscriptions is, as an example, we’ll have a recruiter looking to hire (worth tens of thousands of dollars) or a hedge fund findings experts for insight that will direct millions of dollars of investment. The value is very deep for the very active users. In that case, a premium services business model is actually much more effective. LinkedIn blends both subscriptions and advertising: subscriptions for those users who need the crucial value; advertising for those users who are just staying in touch with former colleagues.
Milestone: Is the Google/YouTube the deal that launched a thousand acquisitions and do you suppose that Google is more interested in YouTube as an entertainment or advertising channel?
Hoffman: I am not sure I would distinguish between entertainment and advertising channel. Though I have no inside knowledge of Google’s strategy, I am quite certain that part of the acquisition of all of the video publishing continues to be bringing all the world’s information to the fingertips to every individual. A lot of people gasped at the $1.6B price. However, I’m sure that the folks at Google reasoned out how much advertising revenue Google could generate in the first two to three years. Then they deducted that from the cost of the acquisition. E.g. they figured out they could make $1.2B in advertising dollars and then figured “Oh, that moves the price down to $400 million.” This is definitely a good strategy; it depends only on how much revenue they can drive off the acquisition.
The thing that I have found most interesting is that the traditional media companies are on the ropes (even though their current revenue numbers are decent) and a lot of them don’t have very good plays on the Internet. When does the pattern of “I have to do something in order to survive” get triggered? I thought it was going to be triggered by Fox’s move with Myspace and that would wake them all up but very little has happened thus far.
Milestone: If you had to come up with another name other than Web 2.0, what would it be?
Hoffman: I am trying to think of something pithy. It could be something like “power to the people,” it could be ‘the democratization of media,’ it could be ‘everyone is an author. Empowerment theme, people coming on the Web connecting with each other, that sort of thing.
Milestone: What would you tell any other startup just getting going in the Web 2.0 space today? What is the one mistake they can’t afford to make?
Hoffman: The key challenge now is differentiating yourself and being truly unique, which means a big risk by the way. It’s a real risk of will users like it? Will your service achieve strong distribution? Is the market really there? Consumer Internet always comes down to a play for distribution. One of the questions I ask as an investor is how do you get your first million users and how do you accelerate past that? Basically, if you don’t have a certain amount of raw distribution on the Web, it’s impossible to buy any traction through advertising.
Reid Hoffman is CEO and co-founder of LinkedIn. Prior to LinkedIn, Reid was Executive Vice President of PayPal. At PayPal, Reid was in charge of all business relationships: business development, corporate development, international, government relations, and banking/payments infrastructure. During his tenure at PayPal, Hoffman was instrumental to the acquisition by eBay and was responsible for partnerships with Intuit, Visa, MasterCard and Wells Fargo. Reid also has held management roles in large technology companies, including Fujitsu Software Corporation and Apple.
Currently, in addition to LinkedIn, Reid serves on the Board of Directors for SixApart and Mozilla Corporation (Firefox). Reid graduated with distinction from Stanford University with a B.S. in Cognitive Science and from Oxford University with a Master’s degree in philosophy. |
