LinkedIn and Reid Hoffman: Recession Ready

(page 2 of 3)

Those lucky enough to attract investors, he says, should be ready to part with lots of equity—or sell out altogether. These days, survival trumps the prospect of a jumbo payday. "You want to stay in the game," says Hoffman.

Networking in Hard Times

Many Net startups won't make it (BusinessWeek.com, 10/24/08). In recent weeks music site Social.FM, travel site TripHub, and news site Thoof have closed their doors. Hoffman's startups, he knows, are hardly immune. Seesmic, a Web video company, laid off 7 of its 21 employees in October. Hoffman sees more pain ahead. "You have to remember that in startups, most end up as corpses," he says.

But LinkedIn, he argues, may be a recession play. As industries struggle, he says more workers shed the illusion that they're safe and protected inside companies. They face what Hoffman calls the reality of the modern career: "Essentially," he says, "every individual is a small business." He predicts that workers increasingly will be networking outside their companies, looking for the right leads or morsels of knowledge—and for this, millions of them will turn to LinkedIn.

Hoffman sees his own network as the key to his influence. It extends from his associates at Oxford, where he visits yearly to teach, to partners at venture firms Sequoia and, entrepreneurs like Netscape Communications co-founder Marc Andreessen, academics, members of the Barack Obama campaign, and finally on to leaders of charities and the open source movement. All of these connections amount to what Hoffman calls his business and investing ecosystem. And he manages it on the same LinkedIn page he is furiously navigating. In essence, he built a tool to manage his life.

The question is whether the fast-growing LinkedIn can become as valuable for businesspeople worldwide as it is for Hoffman. With 30 million members, LinkedIn is no match in scale for giants Facebook and MySpace.com, each with more than 120 million members. But LinkedIn execs argue the company should suffer less than the bigger social networks in any advertising downturn. Ads account for only 30% of its revenues, which are expected to hit $75 million to $100 million this year. Another 30% of revenue comes from corporate recruiting services, while the rest comes from sales of premium subscriptions, which help users establish contacts and be located.

Hoffman trusts that survival instincts will lead professionals to nurture their networks—and pay for subscriptions. A typical 30-year-old, he says, should have 50 to 100 contacts. And the middle-aged journalist who's peering over his shoulder? "I'd bet you'd have 1,000 to 1,500," he guesses. By extending the reach to friends of friends, so-called second- and third-degree connections, an active user like Hoffman can buttonhole contacts in companies throughout much of the economy. Hoffman and his team have convinced investors that LinkedIn will be the base for such networking, and the information pouring through the system will amount to a new "social" form of media.

On Oct. 22, Goldman Sachs (GS), German software giant SAP (SAP), and The McGraw-Hill Companies (MHP), the parent of BusinessWeek, invested $22.7 million in LinkedIn. (LinkedIn is also a technology partner in BusinessWeek's topic network, Business Exchange.) The new money, along with a $53 million venture round last summer, gives LinkedIn a sizable stash as it heads into the downturn.