LinkedIn starts trading today! $4 billion valuation!
And it’s certainly a very successful company and that valuation, while high, is not bubbleicious.
That being said, there’s one argument of LinkedIn bulls that we have a hard time buying: that LinkedIn has a high barrier to entry because of network effects.
Network effects happen when a service gets more valuable the more people use it. A classic example is the phone network. If nobody has a phone, buying a phone isn’t very useful. If everyone has a phone, it becomes a necessity to have one.
Social networks are also a good example: the reason you go on Facebook is because all your friends are there.
But this might be less true of professional social networks like LinkedIn, because you don’t want to access “your” network so much as “a” network. We interviewed Dan Serfaty, the CEO of one LinkedIn’s biggest rivals Viadeo, and when we asked him whether LinkedIn’s network effects would crush him, here’s what he had to say:
Start from the motivation of someone who signs up for a professional social network. You go for basically two reasons: to be visible for recruiters and to find customers. If you want to be visible to recruiters, why the hell wouldn’t you sign up for a second social network? If you want to find customers, why would you exclusively look at one network?
Serfaty’s argument here is obviously self-serving, because he’s arguing for the relevance of his own company. But it also rings true, or at least worth paying attention to.
Facebook’s entire value proposition is connecting with your friends. On a professional social network like LinkedIn, that’s much less true. Having your rolodex there is valuable, yes, but so is tapping people outside your network, and making your resume visible to recruiters.
LinkedIn has other barriers to entry. It is the biggest professional social network. It has tons of relationships with big companies that use its recruiting and advertising tools. Its executive team is the cream of the Silicon Valley crop. It’s a great, diversified, fast-growing business.
But when you hear people talking about how strong LinkedIn’s network effects are, you might want to keep this caveat in mind.