Finance-Every once in a while, a company comes around that transforms an industry

| January 30, 2017

Question
9-112-006
REV: JANUARY 6, 2012

FRANCOIS BROCHET
JAMES WEBER

LinkedIn Corporation
Every once in a while, a company comes around that transforms an industry in such a way that investors
have difficulty grasping just how big it may one day become […] We believe LinkedIn can be one of these
companies.
—Morgan Stanley Research, June 28, 2011
On the evening of July 7, 2011, the price f or LinkedIn’s shares closed at $94. This closing price
gave LinkedIn a market capitalization of $8.9 billion: 37.5 times its 2010 revenue and 592 times its
2010 earnings.1 LinkedIn, the 100 million member social networking website for professionals, had
gone public seven weeks earlier. After an eventful first day of trading where trading volume had
exceeded 30 million shares and the trading price had reached at one point $123 before closing at $94,
LinkedIn’s price had gradually fallen to $64 per share over the following month. However, the price
had subsequently recovered to reach the $94 mark again in July. (S ee Exhibit 1 for LinkedIn stock
price chart.)
LinkedIn observers wondered if the company could possibly be worth that much or whether hype
had overtaken reality. Market participants were excited because IPO activity had been slow in recent
years and because no major social networking website traded as a public company. There was pent
up demand for nearly any major IPO, but particularly for one in the s ocial media sector. While little
information had been available throughout the 40 -day mandatory “quiet period” during which
company insiders and IPO underwriters were prohibited from making public statements, providing
forecasts, or issuing research reports, new information was starting to come out about the company.
In particular, Morgan Stanley and JP Morgan—who had underwritten LinkedIn’s IPO—issued
reports on June 28 with “Overweight” recommendations and target prices of $88 and $85,
respectively.2 In contrast, Capstone Investments initiated coverage on July 6 with a “Sell” rating and a
$45 target price per share.3

Company Background
Reid Hoffman and four cofounders launched LinkedIn in May 2003 in Mountain View California
as a web-based site for career management and professional networking activities. 4 Within a month
of its founding over 4,500 members had joined LinkedIn. 5 The company began earning revenue by
accepting advertising on its site in 2004 and by posting job listings and selling premium subsc riptions
________________________________________________________________________________________________________________
Professor Francois Brochet, and James Weber, Senior Researcher, Global Research Group, prepared this case. This case was developed from
published sources. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endor sements, sources of
primary data, or illustrations of effective or ineffective management.
Copyright © 2011, 2012 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1 -800-5457685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be
digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

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in 2005.6 In early 2007, LinkedIn had nearly 10 million members when Hoffman first announced that
the company had reached profitability in March 2006.7
LinkedIn attracted significant venture funding in its early years. This included $4.7 million i n
Series A funding from Sequoia Capital in 2003, $10 million in Series B funding in 2004 from Greylock
Partners, and a combined $12.8 million in 2007 from Bessemer Venture Partners and European
Founders Fund.8 In June and October 2008, LinkedIn raised anot her $75.7 million from several
funders including Bain Capital, Goldman Sachs, Bessemer Venture Partners and others. 9 The June
infusion valued LinkedIn at $1 billion. 10
To attract new members and retain existing members, LinkedIn continued to add new servic es
and capabilities to its site. In late 2007, it introduced its Intelligent Applications Platform which
enabled web content developers to create professional-focused applications which allowed business
partners to embed LinkedIn applications onto their si tes and also business partners to embed their
applications onto the LinkedIn site.11 By early 2010, LinkedIn had introduced applications to enable
members to access its services through mobile devices including iPhones, Palm, and Blackberry. 12
Since its early days, LinkedIn had attracted members from around the world. The company
promoted its global nature by offering its site in six languages: English, Spanish, German, French,
Portuguese, and Italian.13 In early 2011, LinkedIn had offices in Australia, Canada, India, Ireland, the
Netherlands and the United Kingdom.14
In early 2011, LinkedIn, already the largest professional oriented social networking site, was
growing fast. The company had 990 employees (524 in engineering, product development and
customer operations, 313 in sales and marketing, and 153 in general and administrative), 15 double the
amount of one year earlier. It had over 100 million members 16 in 200 countries and was adding over
one million new members every 10 days. In 2010, the company earned $15 million on sales of $243
million; up from a loss of $4.5 million on sales of $79 million in 2008. First quarter 2011 sales doubled
over the first quarter from the prior year. Over 50% of members and 27% of revenue came from
outside of the U.S. LinkedIn membership included executives from all companies listed in the 2010
Fortune 500.17 (See Exhibits 2, 3, and 4 for annual LinkedIn financial statements and Exhibit 5 for a
summary of its quarterly financials.)
LinkedIn was a social networking website. Its members tended to be individuals looking to build
their professional networks to advance their careers. Like social networking sites generally, LinkedIn
members created profiles of themselves in which they posted personal information they wanted to
share with other site users. On the site, members could also look for new clients and business
opportunities, communicate with existing contacts, reach out to potential new contacts, join industry
groups, and learn more about organizations.
LinkedIn had conducted several small acquisitions designed to bring in talent and technology. Jeff
Weiner, LinkedIn’s CEO, explained that the company was growing fast enough that it did not need to
acquire another social networking site. 18

The IPO Offering and Voting Rights
For the IPO, LinkedIn and insider shareholders had offered 7.84 million shares (out of 94.5 million
shares outstanding) for $45 per share. Approximately $ 200 million of the proceeds went to the
company to be used for general business development purposes while the remainder went to selling
shareholders and underwriter fees.

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LinkedIn had both Class A shares and Class B shares. Class A shares came with one vo te per share
while Class B shares had 10 votes per share. All shares sold as part of the IPO were Class A shares
while all remaining shares were Class B shares. Class B shares were held by company officers,
employees, directors, early investors and other i nsiders. Thus while the IPO made public 8.3% of
issued shares, 99.1% of the voting power remained in the hands of company insiders. Under most
circumstances, any future sales of Class B shares would result in the automatic conversion of those
shares into Class A shares such that only individuals who were company insiders at the time of the
IPO could hold Class B shares. (See Exhibit 6 for LinkedIn beneficial owners.)

Business Model
LinkedIn earned revenue from three segments: hiring solutions, marketing sol ution, and premium
subscriptions.

Hiring solutions LinkedIn enabled recruiters to search through the profiles of members who
were either looking for jobs or willing to consider jobs even if they were not actively pursuing a new
position. Recruiters could search using a variety of categories including industry, job function,
geography, experience, and education. Recruiters could also post job listings on the LinkedIn website
for $195 per posting or $1,250 for 10 job postings. 19 LinkedIn employed a field sales force to sell its
services to recruiters and companies. Alternately, companies could buy through the LinkedIn
website. The services were sold for a subscription period during which the purchaser could access
LinkedIn data.20
Marketing solutions LinkedIn sold advertising space on its web pages and enabled
advertisers to target ads to members using similar categories as hiring solutions. 21
Premium subscriptions LinkedIn provided basic level service to all members at no charge
and offered advanced capabilities on a subscription basis. Premium subscribers could be either
individual members with profiles or business representatives. Advanced capabilities included
enhanced search tools and results, the ability to communi cate with recruiters or be connected with
individuals who work at a company of interest, and improved customer support. Additionally,
premium subscribers looking for new positions appeared at the top of recruiter search results.
Individuals paid either $19.95, $29.95, or $49.95 for one of three levels of premium subscriptions
while business paid $24.95, $49.95, or $99.95.22
In recent years, the percentage of LinkedIn revenues had shifted from premium subscriptions
towards hiring solutions and marketing solutions. (See Exhibits 7a and 7b for LinkedIn’s revenue by
segment and Exhibit 8 for LinkedIn’s revenue recognition policies.)

Key Metrics
LinkedIn tracked five primary metrics as measures of its performance.

Number of registered members Growth in membership depended on LinkedIn’s ability to
create an attractive and useful site for professionals around the world. A larger membership base
itself made the site more attractive to individual and corporate members. LinkedIn had grown its
membership 64%, from 55 million to 90 million, from the end of 2009 to the end of 2010. (See Exhibit
9 for worldwide registered member data.)23
Unique visitors and page views Unique visitors and page view counts were standard
measures of internet traffic. The first counted how many different users visited a site in a measured
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LinkedIn Corporation

time period while page views measured the total number of site pages visited by all users in the
period. LinkedIn’s unique visitors increased 81%, from 36 million to 65 million , while its page views
increased 97%, from 2.8 billion to 5.5 billion, from the fourth quarter of 2009 to the fourth quarter of
2010.24 Data from comScore, an internet traffic monitor, showed that unique visitors to LinkedIn were
increasingly coming from outside of the North American market. (See Exhibit 10 for comScore data
on regional growth in LinkedIn traffic. See Exhibit 11 for unique visitor data on U.S. social
networking sites.)

Number of corporate solutions customers This figure counted the numbers of corporate
customers under contract for at least one service type from LinkedIn. This measurement was critical
to LinkedIn’s success because it was a significant source of company revenue in its Hiring Solutions
segment. The number of corporate customers increased 144%, from 1.6 thousand to 3.9 thousand,
from the end of 2009 to the end of 2010, and reached 4.8 thousand by the end of March 2011. 25
Sales channel mix LinkedIn sold products online and through its field sales force . Online
sales were primarily premium memberships and lower priced/non-contract-based hiring solutions or
marketing solutions products with payment received upfront while the field sales force typically
made higher priced, longer-term, contract-based sales to corporate customers with payment received
either over time or at a later date. In 2010, LinkedIn earned 56% of its total revenues though field
sales with the remained through online sales; up from 53% in 2009 and 47% in 2008. The company
expected future sales to increasingly come through its field sales force. 26
Different LinkedIn members used the site with different frequency and duration. For example,
members actively looking for a job tended to have heavier site usage patterns than other members. At
the end of 2010, the average U.S. LinkedIn member spent 13 minutes per month using the site. 27

Competitive Landscape
Social networking emerged in the 1990s and in the following decade it became popular with the
growth of well-known sites such as MySpace (founded in 2003), Facebook (2004), and Twitter (2006).
Dozens of other sites had also formed in markets around the world.
Social networking typically involved individual users creating profiles of themselves. Profiles
could include a user’s name, home location, family members, friends, schools attended, employment
information, personal photos, videos, hobbies, interests, or almost anything else that could be posted
on a web site. After creating them, many users frequently updated their profiles by adding or
deleting content. By setting privacy filters, users had some control over who could access selected
parts of their profiles. Because the purpose of participating in social networking for many users was
to both engage with current contacts and to seek out new contacts, such users frequently allowed
their basic information (name and contact data) to be seen by anyone on the network.
After creating a profile, social networking users used the site to share content with people on their
network, seek out new connections, or comment on the activities of other users. Users could also join
subgroups of users, for example people who graduated from a particular school, followed a sports
team, worked in a certain industry, or worked for a certain employer.
Social networking was part of a broader category of online activity referred to as social media. In
addition to social networking, social media included activities such as blogging, file sharing,
consumer reviews, and sharing other user generated content. 28 Some observers referred to social
media as Web 2.0 in the sense that in the early days of the web, users typically viewed content found
on web sites, but seldom had two-way interaction with a site where they generated content of their
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own. In Web 2.0, sharing and genera ting content becomes a primary motivation for using the
internet. By 2010, social networking had become one of the most popular internet related activities: in
the U.S. 135 million individuals, 60% of all internet users, visited a social networking site at least
monthly. Usage was expected to increase to 164 million individuals and 67% of internet users by
2013.29
In 2011, social networking was primarily a “social” activity where site members interacted around
issues involving family, friends, interests, or social/political issues. There were, however, segments
of social networking focused in other areas. One major area of focus was professional —employment,
career, or business related social networking. The economic crisis, recession, and generally slow
economic recovery in the 2007-2011 period helped drive growth in the professional segment. 30 In
addition to LinkedIn, the two other leading sites in the professional social networking segment were
Viadeo and XING.

Viadeo
Founded in Paris in 2004, Viadeo was the second largest social networking site for professionals
worldwide, and the largest in Europe, China, and South America. At the end of 2010 it had 35 million
members in 226 countries31 including 8.1 million in Europe, 5.0 million in North America, 1 1.3 million
in South America, 5.5 million in China, and 3.0 million in India. Viadeo was adding over one million
new members per month. One-third of its members visited the site at least once per month. The
company had offices Europe (France, U.K., Spain, and Italy), the Americas (U.S. Canada, and Mexico)
and Asia (China and India), and a global staff of 240. 32
Viadeo had grown primarily through acquisitions. In 2007 it acquired the leading professional
networking site in China, in 2008 it acquired a site in Spain, and in 2009 it purchased the leading site
in India. Its largest acquisition occurred in 2009 when it purchased the Canadian social networking
site UNYK and its 16 million members. To help fund its growth, Viadeo had raised a total of 15M€
($19.7 million33) in three rounds of venture funding in 2006, in 2007, and again in 2009.
Viadeo members could create personal profiles about themselves, connect with other members to
build relationships, share information, and build their own professional brand and reputation online.
They could look for jobs and make themselves known to potential employers looking to fill positions.
Members could also conduct business development activities by looking for suppliers, clients or
partners.34 In contrasting Viadeo with LinkedIn, Viadeo founder and CEO Dan Serfaty stated that
Viadeo was “much more business-development oriented.”35
Viadeo based its strategy in part on the belief that professional networking depended largely on
local cultures and customs. To that end, it did not integrate its acquisitions into a single platform, but
rather tailored each site to its local market. The local sites, however, were connected such that site
members could network with other members around the world. To further enhance cross -border
networks, Viadeo enabled individual profiles to appear in multiple languages. 36 Serfaty believed that
LinkedIn was “failing” in China, Brazil, and other countries because “They do not take into account
the local way of networking may not be the American way of doing things.” 37
Viadeo was a privately held company. In early 2011, Serfaty indicated that he expected the
company to have 2011 revenues of $65 million, up from $2.6 million in 2006. Revenue was
approximately evenly split from subscription fees, advertising, and recruitment services. Serfaty
further indicated that 8% of its users paid subscription fees compared with less than 1% for
LinkedIn.38 Viadeo was profitable.39

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In early 2011, Viadeo opened its first office in the U.S. which it located in San Francisco. Serfaty,
believing that Silicon Valley was key to the U.S technology market segmen t and key to Viadeo’s
expansion in the U.S., decided to move to San Francisco and head the office himself. 40 Viadeo
planned to leverage its international network, particularly in Europe and developing nations, to
attract U.S. members interested in those markets.41

XING AG
XING, founded in 2003 and headquartered in Germany, was the third largest social networking
site for professionals with 10.8 million members worldwide in early 2011. The company had 2010
revenue of €54.3 million, and 306 employees.42
Membership increased from 4.9 million at the end of 2007 to 10.5 million at the end of 2010. The
number of members paying subscription fees increased from 362,000 to 745,000 over the same period.
XING’s largest markets were German speaking countries, which account ed for 4.5 million members,
and Spain and Turkey which accounted for 1.6 million and 1.0 million members respectively. XING
had entered Spain and Turkey through acquisitions. 43 (See Exhibit 12 for XING financial data.)
XING earned revenue from three segments: subscriptions, e-recruiting, and advertising.
Subscriptions accounted for nearly 80% of total revenue. Subscribers received higher functionality on
the site and paid €6.95 per month for a three month subscription, €5.95 per month for a one -year
subscription, and €4.99 per month for a two-year subscription with the full amount due at the start of
the subscription period. Approximately 96% of subscribers lived in its German speaking countries
region due to XING’s strategy of focusing on growth, rather than revenue generation, in its
developing markets. With e-recruiting, XING offered several pricing models to recruiters looking to
post job openings online. In late 2009, XING began to increase investments in this segment to enable
more options and capabilities for recruiters. In 2010, XING similarly expanded its capabilities and
options for advertisers. XING expected its e-recruiting and advertising revenues to grow faster than
subscription revenues in coming years. 44 (See Exhibit 13 for XING segment revenue.)
In December 2010, XING acquired amiando AG, a pioneer in online event registration and
ticketing. Users of amiando could organize events, register attendees, and sell tickets to both business
related and entertainment related events. XING’s purpose of the acquisition was to further develop
its platform to make it more valuable to XING members and to increase revenue. 45 One industry
observer believed that XING had been less focused on increasing membership and more focused on
generating revenue by adding services.46
There were other social networking sites that focused on the professional segment. Ryze, founded
in San Francisco in 2001, had 500,000 members in 200 countries in 2011. 47 Doostang, founded
Sunnyvale, California in 2005, focused on young professional s who were typically recent graduates of
top tier universities around the world. It had 750,000 members in 2011. 48

Facebook
Facebook was the world’s largest social networking site in 2011. The company claimed it had over
500 million active users in July 2010—30% in the U.S.—and that between April 2009 and July 2010 it
was adding 100 million users every five months. On an average day, 50% of Facebook users logged in
to the site.49 The average Facebook user spent 321 minutes per month on the site.” 50
Facebook users created personal web sites and uploaded profiles of themselves which could
include photos, videos, family and friend information, and other content. Users also formed networks

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of “friends”—other users with whom they connected and allowed access to t heir profile.51 Like social
networking sites generally, Facebook created the platform while users provided the content.
Facebook was developing a platform that would take it beyond simple social networking to
potentially become a virtual economy around whic h much of an internet user’s online experience
could revolve. Mark Zuckerberg, Facebook’s founder, stated, “Our goal is to make everything
social.”52 What individuals chose to buy, read, or watch had long been influenced by the preferences
and recommendations of friends. But historically this information was shared by word of mouth.
With the growth of its user base, Facebook was increasingly able to compile the activities and
interests of individuals and then enable the efficient sharing of that information among an
individual’s network of friends.
By the end of 2010, over two million web sites had integrated with Facebook. 53 These included
half of the top 25 retail sites54 such as Wal-Mart, Home Depot, Best Buy, and Target Corp. Facebook
was also looking to become a distributor of online movies and offer discounts and special offers on
behalf of its integrated partners.55 To help consumers’ pay for online transactions, it had introduced a
payment system called “Credits.”56 Facebook’s size gave it impact beyond traditional business
borders. For example, it was a social network, but it had also become the largest photo sharing site on
the internet.57
Facebook was a privately held company. By one estimate it had 2010 revenues of $2 billion which
came primarily from hosting advertisements.58 Revenues, however, appeared to be growing rapidly.
eMarketer, a leading market research company, estimated Facebook advertisement revenue would
increase to $4.05 billion in 2011. Lou Kerner, an analyst with Wedbush Securities Inc., s eemed to
agree. He estimated that Facebook had a 50% EBITDA profit margin and would have an EBITDA of
$1.95 billion in 2011.59 As Facebook further developed the ability to apply the information it had on
users and their preferences to create new revenue streams, revenue growth could accelerate.
Facebook, founded in 2004, had…

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