The Missing Link

Social networking has been great for the kids, but not of much use to business - until now. With Reid Hoffman's MySpace-for-grown-ups at a tipping point, these days you're either LinkedIn or left out.

By Michael V. Copeland, Business 2.0 Magazine senior writer

(Business 2.0 Magazine) -- At a Starbucks in downtown Mountain View, Calif., two 30-something men anxiously await the arrival of Reid Hoffman, one of Silicon Valley's most sought-after angel investors. It's 4:30 on a Sunday afternoon, the day Hoffman fields pitches from entrepreneurs.

The coffeehouse is brimming inside and out with laptops jockeyed by students and startup specialists. Hoffman arrives, his cell phone clasped to one ear as he walks toward the table dressed in Birkenstock sandals, khaki shorts, and a black polo shirt with the word "In" embroidered on the chest.

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SIX DEGREES: LinkedIn co-founder Konstantin Guericke is harnessing the power of social networks for business.
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HEAD-HUNTER: Gutmacher spends up to an hour a day on LinkedIn, working his 3,500 contacts to reach 3.5 million potential hires for Microsoft.
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HEAD-HUNTED: When she joined LinkedIn two years ago, Schultz was unimpressed. But in recent months, she says, consulting work and job offers have been rolling in.
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Photo GallerylaunchSee more photos

That's "In" as in LinkedIn, the company that Hoffman co-founded and that he runs the other six days of the week.

LinkedIn is a three-year-old service that takes your personal business network online. People don't use it to discover new bands or track down a date - there's nothing social about this network.

LinkedIn is all about business: recruiting, sales, investment. It's not exactly a marketplace or a job site but rather a community of more than 8 million people who rely on one another to get things done.

And not just any 8 million people, but leading venture capitalists and entrepreneurs, along with tens of thousands of employees from Google (Charts), Microsoft (Charts), and other tech giants that use LinkedIn to find the best and brightest workers.

"For many, it's become irresponsible to not invite business associates into your LinkedIn network," says Mikolaj Jan Piskorski, an assistant professor at Harvard Business School who specializes in sociology and strategy. "When that kind of cultural inflection point occurs, which is what LinkedIn is going through now, that is when things really begin to take off."

Either LinkedIn, or left out

Indeed, the Palo Alto company is at a tipping point.

After a slow start, the service has nearly doubled its membership during the past year. Seeded with Hoffman's own high-powered network, a magnet for tech's movers and shakers, LinkedIn has capitalized on the Web 2.0 boom to attract more dealmaking members and race past its rivals.

VC heavyweights Sequoia Capital and Greylock - whose hit parade includes Apple, Cisco (Charts), Google, and Yahoo (Charts) - have pumped nearly $15 million into LinkedIn. The private company says it's profitable and on track to hit $100 million in revenue by 2008.

Unlike other networking sites' advertising-driven model that puts them on the treadmill of attracting ever more users, LinkedIn also makes money from services. People - mainly the site's 60,000 recruiters - pay an average of $3,600 a year for premium features such as sending messages to LinkedIn members outside their own networks. Corporate members pony up six-figure fees for access to the network.

In recent months, the buzz around the Valley has LinkedIn in acquisition talks with Yahoo. (Neither party will confirm or deny.) But Hoffman is intent on building on the company's growing popularity in a bid for the big payout down the road. In the meantime, LinkedIn has become the go-to place for the tech elite.

Increasingly, if you're not LinkedIn, you're left out.

Degrees of separation

Take those two guys sitting at the table in Starbucks getting ready to pitch their guts out to Hoffman. LinkedIn helped get them this meeting.

Here's how: When Flickr co-founder Stewart Butterfield was looking for angel money for his photo-sharing site, he tracked down Hoffman on the site via LinkedIn member Frank Boosman, one of Butterfield's board members.

Boosman made the introduction to Hoffman, who ultimately invested in Flickr. Hoffman then included Butterfield as part of his online network of associates. Butterfield knew one of the two entrepreneurs at the table (who are in stealth mode and requested anonymity).

Both are LinkedIn members, naturally. Butterfield vouched for these two guys via LinkedIn, and voilà, now they're sipping lattes with Hoffman and hoping he'll write them a check to get their startup off the ground.

After some preliminary chitchat, the two men launch into their demo. Hoffman's face, smiling a moment before, gets serious. He puts his fingers in a steeple touching his chin, and closes his eyes while listening to the details of their new consumer Internet business.

"The way my investment thesis works is this," Hoffman says after 20 minutes of back-and-forth with the duo. "If I believe you have a chance to get to scale, I'm interested. If you don't, I'm not."

Hoffman got his bank account to scale at PayPal, where he was a key player in the $1.5 billion sale of the company to eBay (Charts). As an angel investor, he's betting that he can spot the kinds of people and ideas that have enormous viral potential. He has invested in more than 40 startups, including Digg, Facebook, and Six Apart.

But his biggest bet, and the one he also believes will pay off the most, is LinkedIn.

"Why do you think I invested in those other companies but chose to spend all my time on LinkedIn?" Hoffman says. "It will piss those guys off for me to say it, but if we can tip successfully, we are massively more valuable than Facebook - and I mean a multibillion-dollar business."

Slow start: What's in it for me?

The notion for LinkedIn began in 1997, when Hoffman and fellow Stanford graduate Konstantin Guericke began discussing the burgeoning online-community market and how a service for professionals could be built.

In 2002 they and three other engineers finally built the first version of LinkedIn, which launched the next year. The five of them germinated the service with about 350 of their own contacts. Perhaps not surprising, given the networks of a former PayPal executive, a tech-startup marketing guy, and a few software engineers, early LinkedIn members tended to be tech entrepreneurs and venture capitalists, chief among them VCs from Sequoia Capital and Greylock.

A year after it launched, LinkedIn had 560,000 members. By 2005 there were 4.4 million. At that point the average person with 20 contacts had access to about 40,000 members within four degrees of separation.

Clearly the service was growing, but it wasn't exploding the way Hoffman and Guericke had expected. "I thought that one year after we launched, we'd be where we are now," says Hoffman, 39. "If every professional had a profile on LinkedIn, you could find jobs, references, experts, old classmates, whatever you needed to do your work. Think about how rational that is."

Rational for someone who invested in Friendster and watched its user numbers blow up (and then the company too). But getting professionals to try and then trust a new service with their business contacts is not like getting teenagers to build a MySpace page. It's a much harder sell.

The reason most people join social networks is to hook up with friends who are already there and to make new ones by rallying around a favorite band, school, or TV show. By the time you've hit your 30s, though, you don't need a lot of new friends.

What you need are contacts, old and new, who can help your career. "The people who LinkedIn wanted already network quite a lot, and they are pretty busy," says Harvard's Piskorski. "Unless they understand the value proposition instantaneously, they won't sign up."

Seeking A-listers

Hoffman and Guericke knew that. What they tried to do was make LinkedIn both as easy and as unobtrusive as possible. Your friends may nag you to join Friendster or MySpace, but nagging doesn't work very well in the business world.

The mechanism at LinkedIn that overcame that obstacle is very simple: Anyone can join, but to make someone else a part of your network, you have to invite them and they have to accept. And whom would you rather invite to your network, someone who ranks below you in the work world or above?

"You are more likely to invite up than down for your own network," says Guericke, LinkedIn's marketing VP. "That's only natural, but what that does is keep the quality high on LinkedIn. We wanted it to be a place where people you think highly of can be found. It might not be Steve Jobs, but it will be other senior people at Apple (Charts) who you might want to know."

Still, LinkedIn had the chicken-and-egg dilemma that every online network faces: For it to be useful, it needs to have people; for it to have people, it needs to be useful. And LinkedIn did not provide a massively useful service for very many people during its first two and a half years. Not that there weren't quality people on its network. There just weren't very many of them.

That all began to change with the explosion in membership during the past year. Deborah Schultz is a former head of marketing at blogging software company Six Apart and now works as a freelance strategist for social-media software companies. Schultz joined LinkedIn two years ago.

"I've been on every freakin' social network from the beginning: SixDegrees, Orkut, Flickr, blogging sites - all of them," Schultz says. "I joined LinkedIn just to check it out, and really I sort of forgot about it. It was always there in the background, but it sort of disappeared for a while."

Not anymore. "Recently I started noticing that the people I trust and respect are using LinkedIn," she says. "I started getting more invitations. I have been contacted for consulting work and full-time gigs through LinkedIn. Now it's a tool I use once or twice a week."

A doubter turns devotee

How did LinkedIn go from lame to, well, linked in? Web 2.0 came along, for one thing. A new wave of dotcom startups drew more entrepreneurs and investors to the service, which already boasted Silicon Valley's A-list. As the network grew, more people began noticing the quality of the links and realized that real deals were getting done.

That was Srivats Sampath's experience. The founder and CEO of Silicon Valley online music site Mercora, Sampath had tried the service in its early days.

"I put the invitations to LinkedIn in the same category as Friendster invitations," Sampath says. "Annoying crap. I'd mostly just toss them."

Less than two months ago, however, Sampath received an invitation from Andy Chen, a mobile-device consultant, through Morten Lund, an associate of a colleague of Sampath's.

Chen had seen Sampath give a talk at the Demo Conference about the online music industry. Chen liked what he heard, and contacted Sampath via LinkedIn to talk about mobile devices and music, a nexus that will play a huge part in Mercora's future.

"It was this moment where you say, wow, the perfect guy that you would spend months looking for just dropped into your lap," Sampath says. "That's the power of LinkedIn. Now when I go tell my business development guy that we need to line up all these device manufacturers, I'll send him first to Chen, who already knows all of them."

Linking to Chen opened up a whole new world of business contacts for Sampath. "I realized this is a service that is all about identifying a task or a business objective, and then finding someone who can help," he adds.

Heard through the grapevine

Ismael Ghalimi, CEO of Intalio, a software company based in Redwood City, Calif., uses LinkedIn for hiring, for fund-raising, and even to check on the scuba-diving conditions in Curaçao. He's currently raising his next round of funding.

Before any pitch meeting with a venture capitalist, Ghalimi does some scouting on LinkedIn to see if they have any contacts in common, what the VC's interests are outside of work - anything he can dig up that gives them some common ground.

After the meeting Ghalimi goes back to those common connections he's unearthed on LinkedIn to get feedback on how the pitch went. "I'll even give information to these indirect contacts that would be a little bit difficult to say face-to-face with the VC," Ghalimi says. "For example, I'll tell them I expect a certain valuation - say, $20 million - and that will get back to the VC."

LinkedIn has also paid off for Ghalimi in more personal ways. When a group of French friends and relatives who were set to fly to his wedding in San Francisco got booted from an overbooked United Airlines flight, he located the airline's general manager in France through LinkedIn and then wrangled an introduction through an Israeli contact.

Before long, the reservations were reinstated. "United's French general manager sent me an e-mail an hour after the flight departed," Ghalimi says, "indicating that all had boarded."

George Hoyem, a VC with Blue Print Ventures in South San Francisco, turned to LinkedIn when he was doing due diligence on an Apple iMac camera.

"Through LinkedIn, I got into a part of Apple that I wouldn't have been able to any other way," Hoyem says. "I wanted to make an introduction for my portfolio company into an engineering effort inside Apple. I didn't have a direct connection, but one surfaced through a link one degree removed, and we tracked him down."

At Microsoft, finding hidden talent

That ability to get things done makes LinkedIn valuable to people like Ghalimi, Hoyem, and Sampath, but members like Glenn Gutmacher are the ones who make LinkedIn profitable.

Gutmacher works for Microsoft, identifying the right people to fill jobs at the software giant. Gutmacher and his peers at companies from Google to Salesforce.com (Charts) to VMWare account for 10 percent of the site's membership. They can reach almost anybody they want via their massive networks.

Gutmacher has 3,500 people with whom he directly connects. That gives him access within three degrees to about 3.5 million people. At any given time, Gutmacher might have 10 searches going within LinkedIn, looking for the best candidate for a spot in Redmond.

"LinkedIn is a very efficient tool when you're trying to target passive candidates, people who aren't actively searching for a job," Gutmacher says. "For the niche that I am recruiting, usually the mid- to senior-level software and development engineers, they're all there."

People like Gutmacher are part of a controversial group within LinkedIn called "promiscuous linkers." The person with the most connections is San Jose-based recruiter Ron Bates, who proudly trumpets more than 28,000 direct connections on his profile.

Bates has built his recruiting business on the back of LinkedIn, which is a testament to its usefulness but does little to support the high-quality network idea that Hoffman promotes. LinkedIn has tried to discourage "link banking" by showing a maximum of 500 connections on a profile page, but that has done little to stop the practice.

For people like Christian Mayaud, who held the top-connected spot for a time, there's no reason to stop. Mayaud, a New York City-based VC, argues that LinkedIn's value doesn't come from your trusted direct connections.

"My experience has been that they're more apt to screen you from someone who could be important in business," Mayaud says. "I have found that total strangers are more effective connections than people I know well."

A connection to retirement

To become a mass phenomenon - and massively valuable in the process--LinkedIn needs the 80 percent of members who visit the site only occasionally to become addicted users. Hoffman knows he needs to find some recipe to give members the epiphany Sampath had, that "aha!" moment when they realize that LinkedIn is as necessary a business tool as a laptop or a cell phone.

"Once we get them, we can keep them from the age of 25 to 65, the time when people are most valuable, when they are out changing the world," Hoffman says. "I want to be the service for them."

LinkedIn is busy rolling out new features to encourage members to stick around. The most recent is LinkedIn Services, which allows members to recommend a handyman, chef, or real estate agent.

"We want LinkedIn to go wherever your business network would go," Guericke says. "If it's social, we'll leave that to Facebook. But if it's about money, then it's LinkedIn."

The other big push for the company in the coming year will be to extend its reach globally. There are nearly 4 million LinkedIn members outside the United States. While the service has cemented its lead in North America, it faces competition from sites in Europe and China.

Not only would global expansion create new local markets, but the premise of LinkedIn gets very powerful as people connect around the world with customers, suppliers, and investors. If you're looking for a manufacturer in Korea, or a sales lead in France, LinkedIn wants to be the matchmaker.

First-mover advantage

If the site can do that, it can become the service Hoffman imagines, and he'll be able to command the price he imagines as well. There is competition - Spoke, Ryze, and newcomer Hoover's Connect - but for the moment, it's LinkedIn's market to lose.

The company is phenomenally good at understanding how networking happens offline and how it can be improved online. Most members bring their offline business relationships into the service, and they're putting a lot of specific information about themselves into the system.

"That builds in a lot of stickiness," says Harvard's Piskorski. "Those bonds are very strong, much stronger than a social site like MySpace. It's not to say that another business network couldn't be developed that had better features, but it would be tough to migrate all those people from one service to another."

Back in Mountain View, the meeting at Starbucks ends without Hoffman whipping out his checkbook on the spot. "I'm leaning toward investing, but I will have a definite answer for you in a few days," he says.

An investment from Hoffman would be the last piece of angel funding the startup needs. Now the two entrepreneurs must find people to help take their company to the next stage. "We are looking for a set of advisers who really understand the arc that a startup goes through," the CEO says. "We need to identify who in our network can help us."

And how will they do that? LinkedIn, of course.

Michael V. Copeland is a senior writer at Business 2.0. Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.