As IPO Nears, How Does LinkedIn Make Money?

If all goes according to plan, on Thursday LinkedIn will become the first major social media company to stage an initial public offering. Currently the company is planning to sell 7.84 million shares at a price of $42-$45 per share, which would value the professional social network at about $4.1 billion -- up over 100% from a projected valuation of about $2 billion at the end of January, and 24% from $3.3 billion just a week ago.

This steep run-up before the IPO certainly looks bubbly, but only history will tell if it was rational or irrational exuberance.  However it turns out, it's worth taking a look at LinkedIn's finances to see how the company makes money, and where it expects most future growth to occur. One thing struck me immediately: while advertising and premium subscriptions are definitely important parts of LinkedIn's business, neither could be considered the main driver of growth.

LinkedIn's total revenues have jumped from $78.8 million in 2008, when the company posted a net loss, to $243.1 million last year, when it posted a profit of $15.4 million. Over the same period, revenues generated by premium subscriptions (which offer increased functionality on the site) grew from about $35.4 million to about $61.9 million, for an admittedly impressive 75% growth rate -- but proportionally this represented a decrease from 45% to 25% of total revenues. Meanwhile "marketing solutions," which includes text and display advertising on the site, grew from $26 million to $79.3 million, for a 205% growth rate, while holding steady at 33% of the total revenues in proportional terms.

The real growth area for LinkedIn has been the last category, "hiring solutions," which includes job-matching and automated headhunting services through "corporate solutions" and "LinkedIn Jobs," and which soared 486% from $17.4 million to $101.9 million, or from 22% to 42% of total revenues in proportional terms.

Per capita comparisons show the same trend. LinkedIn's total number of unique visitors increased from about 12 million at the end of 2008 to 65 million at the end of 2010. Comparing annual revenue figures with monthly unique visitors (admittedly an imprecise approach), ad revenue per user actually decreased from $2.17 at the end of 2008 to $1.22 at the end of 2010. Over the same period "hiring solutions" revenue increased from $1.45 per unique visitor to $1.57.

The increase in "hiring solutions" revenue is even impressive when compared to the number of corporate customers actually paying to use recruitment services. The number of customers for LinkedIn's "corporate solutions" alone increased from about 900 at the end of 2008 to 3,900 at the end of 2010. That represents an increase from $19,280 per corporate client to $26,124 over this period.

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