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.”

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