This article originally appeared in the July 2011 issue of infoTECH Spotlight.
Priced initially at $45 a share, the stock skyrocketed to $122.70 in the first day of trading, which caused opposing camps to raise concerns about a possible dot-com era redux, while others began reorganizing their portfolios to prepare for a string of social media company public offerings. But regardless of whether you yelled “bubble” or later pointed out that LinkedIn may have been undervalued, the amount of uncertainty among investors should bring up red flags.
On the whole, the huge wave of media attention and investor enthusiasm pointed in LinkedIn’s direction is a positive harbinger for the social media market. As an entrepreneur in the social media for enterprise space, I have high hopes for LinkedIn’s success. However, the more the debate continues, the less confidence I feel that the market’s viability should be pinned on one company.
It seems that much of LinkedIn’s appeal to Wall Street centers on the fact that it has presented the biggest opportunity, so far, to touch the online networking craze. Investors relish the opportunity to get “in” on a major trend, expecting a user base as large as LinkedIn’s to translate into huge potential for revenue. The key word in this case being: “potential.”
In truth, LinkedIn’s business model leaves a lot to be desired. According to one unimpressed investment analyst, about 51 percent of LinkedIn’s revenues draw from recruiters who pay to access profiles and communicate with users. Two other revenue channels include advertising (32 percent) and subscriptions that allow users to e-mail other users (18 percent).[i]
So we see that LinkedIn’s revenue model doesn’t hinge on its user base so much as corporate spending. For some that suggest social media companies be evaluated based on the number of registered users as opposed to a traditional price/earnings ratio, this presents a few problems. Even putting that aside, it’s questionable that LinkedIn user numbers continue to rise at the same rate as the past few years – surely a poor job market played a role in driving users to the world of social recruiting.
What does this all mean for the rest of the social media market? Whether we like it or not, LinkedIn’s success is a major indicator for the rest of us. Investors certainly understand the value of social media for the consumer, but are now recognizing that online networks servicing businesses are worth a big bet. LinkedIn’s IPO may have been overvalued or undervalued or an anomaly, but it is still a milestone for the social media market not soon to be forgotten. Further, it’s a portent of a positive future for social media aiming for wider organizational adoption (sales, marketing, internal/external collaboration, etc).
If the world can’t agree about where LinkedIn is headed, we can at least admit that it has shined a spotlight on an ecosystem of innovation and opportunity. Moving forward, the next generation of social media companies must push beyond focus on social networking and add real, unique value to the enterprise. This means examining and addressing major pain points: information collection, giving context to traditional business intelligence data, and simplifying business processes. By incorporating social media as a tool that plays well with other complex enterprise technologies, businesses can more effectively listen to their customers, engage with target audiences, increase sales, and improve collaboration across teams.
As many reports have noted, the next round of social media IPOs (likely to be led by Groupon) will negotiate hard to achieve a value that won’t leave them with “pop” heartburn.[ii] It seems unlikely that the significant rise in pricing that occurred with LinkedIn will repeat. As always, the market self-adjusts, but the big guns of the social world now know there’s a favorable market in which they can seriously consider a public offering. I’m optimistic that investors will take the next step and focus energy in this growing market of startup companies targeting social enterprise users.
Wherever LinkedIn’s shares land, time is on the side of the social enterprise market, as we watch younger generations join the workforce seeking to apply their knowledge of social media to business challenges across the enterprise.
Dr. Luosheng Peng is the CEO of GageIn.
[i] NewsOk, http://www.newsok.com/berko-linkedin-is-unimpressive/article/3572265?custom_click=pod_headline_technology-news