Weighing Business Against Friendship: Exactly Why Is Facebook Valuated That Much Higher Than LinkedIn?
by
on August 04, 2008,
Eric Eldon over at VentureBeat has two interesting posts today about both Facebook and LinkedIn allowing their employees to sell up to 20% of their stock options in each of the respective company. Eric has a great and insightful analysis of both companies and how these decisions could work out but to me the most interesting part in both stories is that if Eric's sources are correct, Facebook's internal valuation is now at $4 billion while that of LinkedIn is at $500 million.
And the question that I could not help but ask is how it happens that business is priced that much lower than friendship in this crazy web 2.0 world. After all, in the social networking field the two networks are often set against each other: Facebook is believed to be for entertainment mostly while LinkedIn is viewed as a serious network for grown-ups doing business and looking for the useful tools to do just that.
Sure, $500 million is not the worst valuation but when compared to the valuation of Facebook it seems to be much lower than deserved. At the same time Facebook's $4 billion internal valuation is at least more realistic than the official $15 billion based on the recent investment from Microsoft that no one still seems to be able to believe. But still why are the figures so different?
If it was a normal real-life business world, valuation should have been based on revenue or revenue potential. But in this particular case if the difference in valuation is based on revenue, it does not really make complete sense. Sure, LinkedIn annual revenue is reported to be around $100 million while Facebook plans to achieve $300 to $350 million this year. But that's only 3 times higher, not 8 times. Moreover, this is only Mark Zukerberg's prediction he made early this year while last year's revenue was at $150 million which is only 1.5 times higher than that of LinkedIn. What's more, as outlined in this article by Kara Swisher, Facebook is going to actually end the year with negative cashflow of $150 million due to heavy expenditures, even if the projected revenue figures are achieved.
Besides, revenue sources are still different here: while Facevook is only monetized with advertising, LinkedIn has other revenue sources, including job postings (that Alex Iskold estimated back in January at approximately $1.75M and suggested they could be boosted) and paid memberships. And even if Facebook is quite fine with the advertising deal with Microsoft, the fact remains that people on LinkedIn are generally older and have more money they could spend on buying certain advertised items while Facebook is mostly populated by the younger users. If we take a look at the data obtained in the recent study of social networks' users by Rapleaf, we will see that LinkedIn users are virtually non-existent in the category of under 21 years old with usage growth starting from 21 when people enter the most dynamic part of their professional lives.
Is the valuation difference based on the number of users in each of the networks? Yes, it is a habit in the web 2.0 world to sell and buy companies based on the number of users (registered or active) they have. But I don't think it can be applicable always without any deviations or corrections - and this particular comparison does not seem to be the case at all. Even if LinkedIn currently reports 25 million users and Facebook talks about more than 90 million active users, we need to realize that these are two very different types of users again. Sure, a typical Facebook user may visit the site a few times a day to catch up with what's new with their friends. Also, LinkedIn users may only visit the site from time to time when they have a real business need (find a job or post one, find a lead or update a CV) which may be less often (but still can be improved if they emphasize such services as Answers that have potential of making users return more often). But to me what matters is that people on LinkedIn are generally more willing to spend money buying services or products advertised if they need them (in business world it is called investments, right?) while on Facebook people rarely even report noticing ads at all - let alone clicking them or buying anything.
To me the valuation of Facebook versus that of LinkedIn is a very tricky question because I fail to understand how a serious grown-up business can be valuated higher than our beloved (and too much hyped) friendship destination. Such valuations prove to me that the market we work in is not particularly healthy and may really face a bubble burst unless we rethink many of our approaches to determining value for this or that company.
If you enjoyed this post, make sure you subscribe to profy RSS feed!
Bighorn
kalipso
Mav
Opensource 
Michael Fidler 
This is a good question. Should Facebook enjoy such a higher valuation than does LinkedIn, when LinkedIn’s business model is more apparent and sustainable to me? (PS - Good job on keeping your head up and continuing to post great content)
It simply has orders of magnitude more advertising potential than Linkedin does. The demographic on Facebook is much more lucrative.
@Louis: This is what I think myself: LinkedIn is more predictable with its revenue streams and with the grown-up audience (and management as well) and I can see where it will continue to earn money from. With Facebook I think a problem is that users may very well find a new hype of the day and migrate to it and nothing will remain to earn money. (And thanks for the compliment, I promised Profy would not end because of this commotion and I’m already talking to some bloggers interested in joining me).
FB’s Teens and College-Aged Market? Beats old people looking for jobs maybe.
@Jeff: I support Jeaneane here 100% - I think the grown-ups on LinkedIn have a better buying potential so should be more lucrative to advertisers.
Very interesting analysis article!
as someone with a strong marketing view and concept, the only less explanation to bring these numbers to a common sense is that i strongly believe that more than just clicking on an Ad or actually end up with a purchase, theres a Brand exposure concept!
Which, if you get “Coca Cola” for example, teach us that a brand itself can be more powerful than the whole company itself… and maybe, that could make a bit of difference for Facebook and numbers of users to stand out over quality of users and target… even purchase potential…
so as i see it, more users are often on Facebook and therefore, theres a bigger chance to being noticed, which in many cases, its a big advantage for the company other than the purchase itself..
acknowledge is powerful and in my view, essential to survive nowadays!
Also think about activity. How often do professionals actually go on LinkedIn (not often, in my experience)? How often do teens refresh Facebook?
Brent: That’s what I mentioned in the post as well. Obviously the teens are more frequent users but that does not mean they are the best audience since they do not spend money (or only spend something allowed by parents) while the business people consider many things “investments” in their careers and are more willing to buy online, including professional services.
Facebook is the more versatile network. People spend hours on that site, and there’s a lot to do. Sure, there’s no defined business model, but Facebook has something better: upside. The market loves upside; the moment you implement the plan and build a path toward revenue, you’ve defined your possibilities too well.
People can actually spend hours on LinkedIn searching for leads or jobs or participating in the answers section (which is much more addictive than FB poking). It just depends on how many users spend those hours on LI.
@Svetlana Gladkova (profy): There’s always the obvious: People go to LinkedIn to MAKE money, not to spend it. People looking for jobs and corporate hook-ups don’t care if you’re advertising a Lexus in the side-bar, they want to buy one later, elsewhere, when they can afford to continue their habits of eating and sleeping indoors. FB has a massive, active, monied demo target of teens and twenties with lots of disposable income and low-cost expenditure targets. It’s very clearly and obviously the better target for advertising.
@Alexander Williams: I can’t agree here and I don’t think it’s so obvious. Of course, buying a Lexus is a luxury but if they are offered some services that can help them in their career, chances are they will go do it and spend money on it - it is called investment in the business world.
@Svetlana Gladkova (profy): It is … but I can sell thirty thousand impressions for something a lot easier to develop as a product before breakfast on FaceBook. With a lot more likely click-throughs. With a smaller number of eyes, with a far tighter array of products that are even LIKELY to be active on the service — no, it’s definitely obvious why FB ad valuation is so much higher than LinkedIn. Unless your product is in the very narrow field the LI cognoscenti are into, you’d be way better putting it on FB.
@Alexander Williams: But you do realize that targeted advertising tends to be more expensive? I published a post about ads on FB some time back where I described that with my Russian IP I often get ads for child porn and ads for our local social networks (that FB is supposed to compete with now). Very unlikely that I’ll ever click any of those ads.
To me, the value of Linkedin is much higher than Facebook… with Linkedin I made business, with Facebook I loose a lot of time!!!
Luca: That’s exactly what I tried to explain myself in the post and that’s why I’m surprised that LI is valued this much less than FB.