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LinkedIn Looks to the eBay Way

LinkedIn, the business networking service created by former PayPal executive Reid Hoffman, believes it can duplicate the eBay business model of collecting revenue from a small percentage of power sellers.

The company, which offers tools that connect friends to friends of friends, on Wednesday announced the closing of a $10 million second round of funding, led by new investor Greylock, as well as 14 undisclosed angel investments from a range of well-known entrepreneurs with ties to eBay.

They include Peter Thiel, co-founder of PayPal and Josh Kopelman, founder of Half.com, both eBay-owned companies. Marc Andreessen, co-founder of Netscape and chairman of Opsware and Joe Kraus, co-founder of Excite, also participated in the latest funding round.

"It's no surprise that our angel investors are guys who totally understand the eBay business model, because that's exactly what we want to do," said LinkedIn co-founder Konstantin Guericke, who doubles as vice president of marketing.

"eBay has built a billion dollar business around the concept of collecting fees from a small percentage of its users. If you look at it, the power sellers that drive eBay's is a very small percentage of the active user base," Guericke said in an interview with internetnews.com. "It's safe to say that eBay does not monetize about 90 percent of its users, and that's exactly what we're aiming for."

According to an eBay spokesperson, there are 430,000 people earning a part-time or full-time living on the auction network. Of the 48 million active users, only 100,000 are considered "power sellers."

LinkedIn, by comparison, has a user base in the range of 1.2 million, but only about 5 percent to 10 percent of those users are considered active (power) users, Guericke said.

"That small percentage go to the the site several times a week and do a lot of search queries. That's the market that is willing to pay for the ability to dig deeper and deeper with searches.

"The power users push the envelope," Guericke continued. "They want to search by industry and narrow it down to a particular region. The job recruiters are on LinkedIn digging deeper and deeper, and they are willing to pay for lots of specialized features. They want to subscribe to databases to look for business connections. That's where the real value is."

Like many competitors in the social networking space, LinkedIn has attracted VC interest, even though skeptics argue that the absence of a clear-cut business model equates to more hype than substance.

For the most part, revenues are non-existent and profitability is not even in the equation today. But Guericke insists there's an "evolving business model" that monetizes the casual users indirectly and collects significant revenue from the power users.

"Last month, we started testing an advertising model where sponsored links are attached to results from search queries," he said. "And we're very satisfied with that test. We have service providers, lawyers, PR agencies, Web design firms all looking to be found, and targeted advertising is the best way to do that.

"We'll never be able to compete with Google, but we think we can do targeted advertising better. Google targets by keywords, but we can go much deeper and target by location or industry segment."

For example, Guericke said, an intellectual property lawyer in New York can have his ads displayed on search results for a businessman in New York looking for a patent attorney.

In the long run, LinkedIn believes it can find a way to monetize that connection through referral fees.

"We could conceivably collect a fee on a per-lead basis, rather than on a click-through basis. That's where we can beat Google because we own the transaction side," he added.

David Sze, Greylock general partner, echoed Guericke's feelings. Sze told internetnews.com his firm decided to lead the $10 million round because it was convinced LinkedIn is positioned to tap into a very lucrative market.

"I believe people are willing to pay for these credible business connections," Sze said. "If you get to millions of users, you don't need to pay a whole lot to make this a profitable business. The basic service will always be free. Then, the challenge is to attract and monetize those power users who want special features and advanced searching capabilities."