LinkedIn and Reid Hoffman: Recession Ready

The business networking site's creator will play a big role in shepherding startups through the downturn

By Stephen Baker

Editor's Note: This is an extended version of a story in the Nov. 17 issue of BusinessWeek.

"Pull up a chair." Reid Hoffman waves a big arm toward his computer. It's not easy to maneuver in this office strewn with books, wires, and empty Amazon.com (AMZN) boxes. The 41-year-old Hoffman, wearing sneakers and black shorts from a morning workout, opens up his page on Linked¬In, the social network for professionals that he founded six years ago. His inbox is jammed with solicitations for meetings and funding. "Here's a guy from Minneapolis who wants me to help on a social-good project he's doing." He reads for a moment and then shakes his head. "Looks like it's based on bad math."

Hoffman, whose headquarters is a mile up the road from Google (GOOG), cuts an unusual figure in Silicon Valley. He's a Californian with a philosophy degree from the University of Oxford, and his expansive body looks more heartland than coastal. But his brain is in sync with the Valley. In addition to founding LinkedIn, he has become in the past six years the leading angel investor in the so-called Web 2.0, the wave of Internet companies spawned this decade. The list on his LinkedIn profile reads like an industry almanac. He has pieces of social network companies Facebook and Ning, news aggregator Digg, and blog companies Six Apart and Technorati. He was an early backer of the photo site Flickr, which was later sold to Yahoo! (YHOO) During the boom, Hoffman's portfolio was the object of the most intense envy in Silicon Valley.

Survival Strategies

Now, though, he must navigate the downturn. As the economy dives and the market for public offerings dries up, venture firms are cutting off funding for startups and forcing their portfolio companies to slash costs and race for revenue. This punishes much of his portfolio, including LinkedIn. On Nov. 5, the company announced lay-offs of 36 employees, 10% of its staff, in a restructuring move to focus on revenue growth and maintain positive cash flow.

Hoffman is going through the same process with his collection of start-ups, hammering out survival strategies and scrounging for savings and revenue. "Without Reid, [many] entrepreneurs are left with limited options," says Peter Fenton, a partner at Benchmark Capital. Mary Hodder, an entrepreneur in the Valley (whose geolocating startup, Apisphere, is not backed by Hoffman) predicts that, like other investors, he'll subject his portfolio to triage (BusinessWeek.com, 10/23/08). "He'll pick a few likely to win and keep them funded," she says.

Hoffman won't discuss specific plans for companies he has stakes in, but he's free with his views on the industry overall. Internet companies with a service up and running and millions of users should fare O.K., though the likely ad recession may force them to make painful adjustments. This could apply to Facebook and, to a lesser degree LinkedIn (which relies less on advertising). Early-stage startups face ruder choices.