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How LinkedIn succeeded in early customer acquisition and monetization without relying on an ad business

February 27, 2024

Have you heard of a service called LinkedIn? 

LinkedIn is a professional social networking service for business that was acquired by Microsoft in June 2016 at a valuation of over $30 trillion. With a cool mission of "connecting the world's talent to be more productive and successful in their careers.", they have over 840 million users in over 200 countries as of July 2022.

(Source : Linkedin)

So why do so many people around the world use LinkedIn? There are many reasons, but here are some of the most popular ones

1. To find a job 

-> Users can view job postings from a wide variety of companies, as well as receive job offers. Companies can recruit top talent more efficiently. LinkedIn offers a variety of features to help you search for a job.

2. To expand business connections in your industry

-> LinkedIn describes itself as the world's largest business networking site, so there are a lot of talented people active on LinkedIn. Unlike SNS such as Facebook or Instagram, people join for business purposes from the beginning. So even if you don't know each other, you can easily broaden your business network if you communicate respectfully.

3. To get a glimpse of your business connections' careers or activities

-> Users update their careers on their profiles and business-related activities on their feeds, so you can get a glimpse of what your connections are doing and what they are doing. You can also get hints on what kind of career you should pursue.

(Source : Pexels)

Right now, three people are hired every minute around the world on LinkedIn. How did it become the world's most popular social networking platform for business professionals? Let's dive in and start analyzing LinkedIn!

LinkedIn's growth story

From philosophy enthusiast to entrepreneur

Reid Hoffman, the founder of LinkedIn, was a pretty smart student, earning a bachelor's degree in Symbolic Systems at Stanford University. Symbolic Systems is a unique Stanford program that brings together knowledge from a variety of disciplines, including computer science, linguistics, mathematics, philosophy, psychology, statistics, and more.

During his sophomore year at Stanford, he met and befriended Peter Thiel, the founder of PayPal, who would later become one of the most influential friends in Silicon Valley. 

(Source : CNBC)

Reid Hoffman's interest in philosophy led him to graduate school at Oxford, where he earned a master's degree in philosophy. It was during this time that he realized he wanted to leave philosophy and go into the tech industry.

In fact, he was completely fascinated by the entrepreneurs he witnessed around him while attending Stanford.

"My original idea was to be an academic. I wrote essays and books about how we should live our lives. But then I realized that to be a professional academic, you have to spend most of your life writing esoteric books that only 50 people will understand." - Reid Hoffman, Founder of LinkedIn

(Source : CNBC)

The failure of SocialNet, and 3 lessons learned

After a brief stint at Apple and Fujitsu, he switched gears and launched his own service in 1997 called SocialNet, a social networking site that offered users dating, roommate matching, and professional networking opportunities, with the core business model being a dating service.

(Source : SocialNet)

To make a long story short, his company, SocialNet, died in 1999. There was no clear purpose for the service and it didn't deliver what the audience wanted. In interviews with various media outlets, he revealed three lessons he learned from SocialNet.

1. Structure your organization to be flexible

-> When he founded SocialNet, he tried to find specialists, not generalists. He tried to hire developers who were deep in one technology in a specific area rather than developers with a wide range of skills. He soon realized that his approach was really wrong from a startup perspective: a team of developers who were deep in one technology was inflexible, making it difficult to adapt quickly to market reactions.

2. Plan to acquire customers from the beginning

-> He talked about how he fell into a common trap for entrepreneurs starting their first company: "Build a good product and figure out customer acquisition later." Developing a strategy for acquiring specific customers is just as important as building the product.

3. Don't try to be perfect, move fast

-> He spent months under wraps believing he could launch a perfect product, but he soon learned that he couldn't strive for perfection and had to embrace imperfection. He said it's okay to give up 10-20% if it means you can execute faster. 

"If you're not embarrassed by the first version of your product, you launched too late." - Reid Hoffman, Founder of LinkedIn

(Source : Paypal)

Building Paypal together in two years

After the failure of SocialNet, Hoffman was thinking about launching another startup, but he was asked by his college friend Peter Thiel to join Paypal, the online payments company he founded.

"Come to Paypal as an executive, help out and then go back to the startup." - Peter Thiel, Founder of Paypal

Thiel joined Paypal as chief operating officer in January 2000, becoming an official member of the "Paypal Mafia," which included Elon Musk (founder of Tesla, SpaceX, and more), Steve Chen (founder of YouTube), and others.

The PayPal Mafia is a group of early PayPal members who bonded over the success of PayPal together. They bounced off each other and went on to become hugely successful entrepreneurs, investors, and more in their own right. 

After Hoffman joined, PayPal expanded at a tremendous rate and in July 2002, it was acquired by eBay, which was struggling in the online payments space, for an enterprise value of $1.5 billion. Hoffman was a vice president at PayPal at the time.

(Source : Fortune)

Trying again at a social networking service

In the fall of 2002, after successfully selling PayPal, he started toying with the idea of creating a new Internet service again.

There were so many different ideas being discussed at the time, including a time capsule service that would store memories and allow them to be unearthed 20 years later. After going through a lot of different ideas, the idea for LinkedIn was chosen.

"Of all the ideas around me after SocialNet, I found the idea of empowering people to take control of their professional lives and make it easy for them to collaborate with the right people to find the right information was the most compelling, which is why I co-founded LinkedIn." - Reid Hoffman, founder of LinkedIn

He gathered a group of friends and former colleagues from Stanford (Allen Blue, Konstantin Guerickle, Eric ly, and Jean-Luc Vailiant) and founded LinkedIn in December 2002, less than half a year after selling PayPal.

They worked diligently to build the world's leading business professional social networking service. On May 5, 2003, about five months after the founding, LinkedIn launched to the world.

(Source : Linkedin)

Early user acquisition strategy of LinkedIn

LinkedIn's strategy for acquiring early users was to focus on specific communities and places.

They focused on professionals in the IT industry in and around Silicon Valley. Hoffman used his connections to get some of the biggest names in Silicon Valley to join LinkedIn.

The ability to network with Silicon Valley's biggest names made LinkedIn even more attractive, and it soon became an essential service for people working in Silicon Valley. 

Having carved out a niche for itself in the social networking category, LinkedIn grew at a pretty significant pace. Driven by word of mouth and email marketing, it reached 1 million users in August 2004, a little over a year after launch.

(Source : hoangluongsjsu)

Time to monetize

The number of users joining LinkedIn was growing steadily, but they had one big problem: by August 2004, they had over 1 million users, but they weren't making any profit until January 1, 2005. So they set a goal to start making money in 2005 and 2006.

To do so, the company launched Linkedin Jobs in 2005 and introduced a subscription model with a monthly fee for premium membership, followed by Business in August and Pro and Personal Plus memberships in November. In 2006, the company ramped up its advertising business model to enable granular targeting based on user data.

Linkedin Jobs was a recruiting and job search service that allowed users to find the people they needed for their business or check out various job openings.

(Linkedin in 2005)

With a premium membership, recruiters could more easily find candidates and reach out to them, thanks to LinkedIn's massive user data.

The product became more mature and the number of users continued to increase, but the new business models weren't performing as well as expected.

The company began looking for a new CEO to accelerate growth. In December 2008, Jeff Weiner, formerly vice president of Yahoo's network business, was named CEO.

Jeff Weiner reorganized the existing business model into three categories (Talent Solutions, Marketing Solutions, and Sales Solutions) and boosted LinkedIn's revenue by more than tenfold in his first four years as CEO. As a business professional social network, LinkedIn has done a great job of monetizing its business verticals.

(LinkedIn's Quarterly Revenue 2009 - 2021)

Listing on the New York Stock Exchange and Microsoft

With both user acquisition and monetization on their minds, LinkedIn decided to go public on May 19, 2011, on the New York Stock Exchange.

As the first social networking service to go public, it was a big deal. Fortunately, the company's stock price, which started at $45, rose about 84% on the first day of trading, and they were able to successfully complete their IPO.

After a successful IPO, LinkedIn announced another big news in 2016, when it was acquired by Microsoft for $26.2 billion.

At the time, LinkedIn had over 400 million users. Microsoft was not the only company interested in acquiring LinkedIn, as Salesforce, Facebook, Alphabet, and others were also interested in acquiring the company, with Microsoft paying a huge premium.

(Source : Microsoft)

Will LinkedIn seize the opportunity?

Since being acquired by Microsoft, LinkedIn has continued to scale steadily. As I mentioned in the introduction to their growth story, as of July 2022, they have more than 840 million members in more than 200 countries around the world. 

Experts see the pandemic, which is changing the way we work faster than ever before, as both an opportunity and a crisis for LinkedIn, because depending on how it responds, another startup could take its place, or LinkedIn could see new opportunities for growth.

(LinkedIn's Quarterly Users 2009 - 2021, Source : Business of Apps)

The Secrets Behind LinkedIn's Growth

SEO for public profiles

In 2006, LinkedIn started SEO (Search Engine Optimization) of users' public profiles to make them more visible on search engines like Google, so that if you searched for Bill Gates in English, you could easily find his LinkedIn profile. This greatly increased the number of users who came to LinkedIn from search.

Today, about 22% of LinkedIn's users come from search, which is more than 10% higher than Facebook, a comparable social networking service. People searching for Bill Gates, Richard Branson, and other famous people are landing on their LinkedIn profiles.

(Funnel analysis for LinkedIn and Facebook, Source : SimilarWeb)

A stable business model

Konstantin Guericke, co-founder of LinkedIn, once spoke about the company's business model.

"Guys, are we making money? We're cash flow positive, and that's very important for a startup. It means we don't have to do another round of fundraising. We're not here to build something cool, we're here to build a business. MySpace and Facebook have done really well, and I think they can monetize on what they've built, maybe by adding more e-commerce. But ultimately, the opportunity is bigger in the business sector." - Konstantin Gericke, co-founder, LinkedIn

For companies that provide social networking services, the majority of their revenue is based on traffic. Even Facebook and Twitter(X), the most popular social networking services, generate most of their revenue from advertising.

However, the advertising market is highly volatile due to external factors, such as economic conditions.

When the market is down, the easiest thing for a company to do is to cut back on advertising expenditures. On top of that, there are new channels for advertising every day, and the competition is fierce. For all of these reasons, the advertising business model is very unstable compared to other business models.

(Facebook's share of revenue in 2018, Source : VisualCapitalist)

However, unlike other social networking services that rely heavily on ad revenue, LinkedIn has succeeded in establishing a stable revenue model. In 2015’s data from before the acquisition, you can see that recruiting solutions are the largest revenue generator, and premium subscriptions are also a large revenue generator.

As a result, while other social networking services were struggling to find new revenue models, LinkedIn was able to steadily scale its service.

Because it already had a stable business model, the increase in users naturally led to an increase in revenue. LinkedIn achieved a virtuous cycle of [improved service -> increased users -> increased revenue].

(LinkedIn's share of revenue in 2015, Source: Linkedin)

What it takes to succeed as a early startup

Before I started researching LinkedIn, I assumed that as long as I build a good product, it will attract a lot of users and monetization will happen naturally.

However, I realized once again how critical it is to consider how to acquire early users and what kind of revenue model to take, especially Hoffman's advice: "Have a plan to acquire customers from the beginning.

I hope this article has given you some new insights to build your own product. Thank you for reading this long post. Please leave the comment if you have any questions!

Written by Product Lab (Link)

※Original Source : 

※This article was not reviewed for English translation by the original author.


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