Wednesday, May 18, 2011

LinkedIn Failure Imminent

I heard rumors months ago that social network companies like Linkedln (and yes, Facebook too) were planning IPO (initial public offerings) to debut onto the stock market. When I heard the rumors, my first thought was that Facebook would be the first and my second thought was that I'd never buy their stock. Looks like my first thought was misplaced as...Linkedln seems to have beaten Facebook to the punch.

LinkedIn Rockets To $4 Billion Valuation, Who's Next? -

Let's first review the reason for why companies want to conduct IPOs. IPOs, as its acronyms suggests, are a means to sell stock to public investors (e.g. investors on the open stock market). They are useful to companies because it helps tremendously to raise the capital needed for expansion, in addition to passing on the financial burden of failure onto investors. Another byproduct is that it makes the founders or major private shareholders extremely wealthy -- because their stake with a real-time value of 0 just exploded.

IPOs offer the advantages of allowing price fluctuations (mainly of going up) and of independence from a small number of investors. For publicly-owned companies, investor activism is generally much less likely than when shares are held by only a small number of investors. Investor activism still happens when you have pesky investors like Carl Icahn holding your stock; but these are "it is what it is" scenarios.

Back on the subject of Linkedln IPO. DealBook reports that the higher prices values the site at $4.3 billion -- a ridiculous sum of money for a business-minded social network with a much smaller user base than Facebook. I shudder to think what Facebook will be valued when it inevitably conducts its own IPO. All I can see is that it will be extremely overvalued.

Being a social network, Linkedln's current success in popularity is a mixed blessing. As soon as there comes along a superior alternative, it will quickly be displaced and its stock prices will free fall. And believe me, better alternatives will come along quickly. Nothing screams "compete against me" better than a massive valuation. But let's review some other reasons as to why Linkedln's failure is imminent (yay list of reasons!):

1. Tiny user base. "Tiny" is clearly an understatement here. The company boasts more than 100 million registered users, across more than 200 countries around the world. Clearly they have a strong foundation from which to build out. But expansion is limited due to the nature of the social network: it is business oriented. Furthermore, most businesses do not use Linkedln to advertise open positions because most businesses still operate with a dark-age mentality (internet as a last resort). One has a better chance of finding a job listing on Craigslist than on Linkedln. I do not see this changing much.

2. Competition. Facebook is clearly the elephant in the room here, and Zucks (Mark Zuckerberg) has shown his willingness to expand into other people's turfs (e.g. offering local deals to compete against Groupon). It only seems natural that Facebook would attempt to revise itself to target the business demographic. How so? I can easily seeing the company offering users the ability to establish a business profile independent of its social profile. When this happens, you can expect Linkedln's usage to half at least. Research studies have shown that people prefer the convenience of operating through one website, rather than two -- and Facebook already hosts a bunch of other services with theirs. Facebook > Linkedln. Everytime.

3. Lack of monetization opportunity. Whereas the beauty of Facebook (as described before) is that users voluntarily offer valuable information about individual preferences, the information posted by Linkedln users is not useful to marketers. Perhaps to job hunters/recruiters, but I cannot see Ford flocking to Linkedln for the opportunity to advertise its products through the site. This problem is compounded by Linkedln's small user base.

4. User interface stinks. I must admit that my negative opinion of Linkedln stems in part from my own experiences using it. From what I remember (this was over a year ago), a Linkedln profile offers no ability to customize and requires an enormous amount of user input before it becomes useful. Customization is very important to the long-term health of a social networking company -- MySpace offered too much, Facebook offers just the right amount. Even its touted ability to connect to other professionals (e.g. establish relationships) isn't very useful when the others professionals do not have a Linkedln profile. [And you better hope that recruiters from the desirable employers are savvy enough to check your Linkedln profile!] I just do not see revisions being made that could boost its user friendliness.

As with GM but with different reasons, I do not see myself ever owning Linkedln shares. Out of the proposed IPOs of social network sites, arguably Facebook is the only worthwhile company. Why not Groupon you ask? I may well be writing a post to discuss (or more likely...bash) soon but for now, I simply do not see Groupon as one with much growth potential. It's at its limit right now -- just like Linkedln.

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