LinkedIn IPO: Witness The Recruiting Machine

Today LinkedIn went public with a huge (somewhat controversial) valuation of 80 times 2011 earnings and and around 21X 2011 expected revenue. This makes the company worth around $8.9 billion. The company’s total revenues hit $243M in 2010 and are likely to be around $400m in 2011. This is an amazing story of entrepreneurial success and business execution.

Most of us think of LinkedIn as a professional social networking service. And it clearly serves this purpose – nearly every professional I work with is already on LinkedIn, and it is trivially easy to find people, contact them, and arrange some type of business (or personal) relationship through the system. Growing at a rate of nearly 1 million people per week around the world, the company will continue to accelerate that position in the market – and this gives the company a clear and compelling differentiation from Facebook.

However the more interesting part of the story for us is the fact that perhaps inadvertently, LinkedIn is becoming one of the most powerful corporate recruiting machines on the planet. If one looks at LinkedIn’s revenues, by far the fastest growing part of the company’s revenues are in the corporate recruiting market. The “Hiring Solutions” business for the company tripled in revenue from $36M in 2009 to $102 Million in 2010 and was over $46 Million in the first quarter of 2011. This is a growth rate of over 300%, making the company one of the biggest players in the corporate recruiting market already. (Corporate recruiting revenue grew from 38% of LinkedIn’s revenues to 49% in the last year and I expect that percentage to continue to rise.)

The core part of this business is a product called LinkedIn Recruiter – a high-powered search engine that lets corporate recruiters search, find, and contact people throughout the LinkedIn network. This system gives any corporate recruiter an up-to-date database filled with millions of candidates which can be searched and filtered by seniority, role, title, company, location, education, and a myriad of other factors. This database, which an individual recruiter can purchase for around $9,000 per year, is more extensive and more current than the resume databases of nearly every corporate headhunting firm. In fact, companies like Heidrick and Struggles, Korn Ferry, and others are now turning to LinkedIn to source their candidates as well.

In reading the company’s S-1, you also find that LinkedIn now has 4,800 corporate customers.  These are businesses (typically large enterprises) who purchase seats to LinkedIn Recruiter.  Based on the financial data which was released today, we would guess that around so far LinkedIn has sold approximately 11,000 of these LinkedIn Recruiter seats to these 4,800 customers.

How big is this potential market?  Huge.  There are around 3 million Human Resources professionals around the world, and at least 15-20 percent of these take part in some recruiting function as part of their job.  This means that conservatively speaking LinkedIn’s potential market for recruiter licenses is at least 30-40 times the size of its current market – and if one assumes that these seats would sell for some range between $3,000 to $9,000 per seat, this market alone is over $1 billion in revenue.

Not only has LinkedIn created a dominant position in this important marketplace, the company now understands that there are many related markets it can tap into.  Once a recruiter starts to use LinkedIn, there are a variety of other tools he or she might want to buy:

  • An integrated candidate management system to help sort and filter candidates
  • An applicant tracking system which enables recruiters to manage lots of resumes and candidates
  • A series of assessment tools which are integrated into LinkedIn for assessment and screening
  • A set of tools for online and video interviewing and interview management
  • Tools to manage job advertisements (LinkedIn advertisements are among the most powerful in the market)
  • Tools for employment branding to attract target candidates.

Today the company is starting to open up its database to access by third party applicant tracking systems and a wide variety of other tools. These tools include a wide range of recruiting solutions being used by corporate recruiters around the world – search engines, ATS systems, assessment tools, screening tools, and more.  Ultimately the company finds itself in the nexus of corporate recruiting, with opportunities to add value (and revenue) from a wide variety of business models.

Already the LinkedIn profile is becoming the “standard resume” for most professionals.  Companies not only compare candidate resumes to the LinkedIn profiles for accuracy, I recently talked with an HR leader who built a system to monitor whenever an employee changes their LinkedIn profile, so they could assess flight risk among high potential leaders!

LinkedIn is clearly a disrupter in the corporate recruiting market and can grow significantly in this space.  With more than 40 million professionals changing jobs in the US alone each year, the market for recruiting tools and services is over $55 billion in size (including the entire range of services from resume preparation to outplacement).  LinkedIn is learning about the recruiting market very quickly – and we expect the company to continue to grow and disrupt this market in a major way.

Is the stock worth $4.3 billion?  Financial analysts can answer that question better than I can.  All I can say is that this is a company with tremendous opportunities ahead in the large, diverse, and critically important market for corporate recruiting.

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