How They Started (14 page)

There’s an old saying in business:
it’s not
what
you know but
who
you know. LinkedIn set out to make this a reality in the online world, creating a site aimed at helping professionals connect with each other. Set up in 2003 in the wake of the dot-com crash, the business survived a harsh economic climate and became profitable four years after launch. Today the company has more than 51 million members in over 200 countries and says that someone joins LinkedIn every second.

Reid Hoffman grew up in Berkeley, California, and it seems ironic now that during his childhood his father never let him have a computer, thinking it was irrelevant. It wasn’t until Reid went to college, where he studied artificial intelligence and cognitive science, that he got one. In the early 1990s, he won a scholarship to study philosophy at Oxford University, but after a year he realized that the world of academia was not for him. Instead, he had a few ideas for technology-based businesses, one of which was a personal information manager for a hand-held device. Convinced his idea had potential, he networked his way to meeting two venture capitalists. They didn’t turn him down flat but advised him to get some experience producing and selling products, and then come back.

Following their advice, Reid sought a job at a high-profile technology company. He landed his first job at Apple in 1994, again using his networking skills (he heard about an opening in software development through the roommate of a college friend and applied to the company directly). Nearly two years later, he left Apple for a job at Fujitsu, this time in product management and business development.

During this time, Reid always planned to work for himself one day. His aim was to build up experience, skills and confidence and prove to the venture capitalists that he was taking them at their word. At both companies, he set himself a strict timeline and mapped out the areas he needed to master before he could strike out on his own, including design and product management, building a team, and producing and selling products successfully.

Reid always planned to work for himself one day. His aim was to build up experience, skills and confidence and prove to the venture capitalists that he was taking them at their word.

In July 1997, Reid quit his job at Fujitsu to set up Socialnet, one of the earliest versions of a social networking site. He’d thought up the concept of social networking long before most people had started using the Internet at all. The aim of Socialnet was to build on the kinds of relationships that people have, as a way to identify potential dates, roommates or even tennis partners. The idea was to put users “near” the people they’d be interested in, but online. The right person for you could be in the next building, but you’d never know it: everyone would be connected online, so physical locations did not matter.

Reid realized that the only way he would get the business off the ground was to bite the bullet and go for it. He looked at financing opportunities and went back to the original venture capitalists he had contacted years before. This time, they were impressed by his background and his ambitions for Socialnet, and he raised $5 million at the end of 1997.

Just over two years later, however, Reid resigned from Socialnet because he wasn’t convinced that the company was going in the right direction. The business’s strategy had been to partner with newspapers and magazines to encourage subscriptions to the site, but it soon became clear that this was not viable and would not give them the user numbers they needed. Reid had a difference of opinion with the board and left soon after. He had learned a valuable lesson: you can have a brilliant product but unless you know how to reach tens of millions of people, the product will count for nothing.

“There are three words people use for retail: location, location, location. For the Internet, it’s distribution, distribution, distribution,” Reid said. “If you don’t get this, the value of your site is zero. I hadn’t realized this when working at Apple and Fujitsu as they worked with big channels of established customers.”

He told a friend, Peter Thiel, who had studied with him at Stanford, of his intentions to start another company. Peter was one of the founders of Internet payment system PayPal, and at the time was its chief executive. Reid had been one of its board members since its launch in 1998, and Peter persuaded him to join the company as executive vice president in charge of business development instead of starting another business.

At PayPal, Reid was responsible for external relations including corporate development, banking, and international development. All the while, he continued to be fascinated by how the Internet (then in the early stages of its commercialization) accelerated the rate at which people did business. He was particularly interested in how individuals could use the Internet to promote their business profile and skills and what influence this would have on their careers.

“There are three words people use for retail: location, location, location. For the Internet, it’s distribution, distribution, distribution.”

It wasn’t until a few years later that Reid capitalized on his online networking ideas, since he believed that it wasn’t possible to perfect his business plan while still in another job. In 2002, PayPal was acquired by Internet auction site eBay for $1.5 billion, and Reid received $10 million for his share in the business. He planned to take a year’s sabbatical, but just three months later was back on the business trail, too tempted by his desire to start another online business. Even after the dot-com bubble burst, Reid was adamant that there was still potential for online success.

Reid saw nothing but advantages in the harsh economic climate of the early 2000s. He wanted to create a business that would only be possible via the Internet and that would change people’s lives. He reasoned that in the current climate there would be less competition and therefore a greater chance that his venture would succeed. Reid had several ideas, including a worldwide online computer game, but rejected them in favor of revisiting his passion for how people could be brought together online. He wanted to start a business that would let professional people establish profiles online so that other people could find them, effectively creating a network to enhance and further their careers.

Even after the dot-com bubble burst, Reid was adamant that there was still potential for online success.

In these years, it was harder than before to raise money for an Internet venture. Not wishing to waste any time before launching his idea—after all, it had effectively been brewing for several years—he decided to use the money from the sale of PayPal to start the business.

For Reid, having enough capital wasn’t the big issue at the start—his main concern was making sure that he had the right team. He gathered a team of people he had previously worked with and known from his college days, whose experience and opinions he valued. The group included Allen Blue, Jean-Luc Vaillant, Eric Ly, and Konstantin Guericke. Konstantin had been a fellow classmate at Stanford; Jean-Luc had worked for Matchnet, an online dating business that had acquired Socialnet; Allen and Eric had worked at PayPal. Over several months they met in Reid’s living room and hatched the plan that was to become LinkedIn.

As the US officially entered a recession, the founders worked on the business plan for LinkedIn for several months before launch. Having witnessed the collapse of the dot-com bubble, they knew they needed to prove that the business could grow at a low cost, make money and be sustainable.

In the face of a gloomy economy, Reid continued to believe that starting in a time of recession gave LinkedIn a competitive advantage. Even as consumer Internet ventures were no longer the next best thing, LinkedIn now had the opportunity to stand out with a fantastic idea. Investors were interested only in startups that could offer a solid, long-term business strategy, something that LinkedIn was determined to prove it possessed. The team wanted to show it had a sustainable business model based on a number of revenue streams, such as subscriptions, and at its core, a valuable proposition for prospective members.

Reid continued to believe that starting in a time of recession gave LinkedIn a competitive advantage. Even as consumer Internet ventures were no longer the next best thing, LinkedIn now had the opportunity to stand out with a fantastic idea.

The business continued to be funded by the proceeds of Reid’s PayPal shares, as the founders held off seeking additional funding until they were sure they could prove the value of LinkedIn’s business model. By early May 2003, the founders felt confident enough to launch the site. But it was to take several months of hard work for the idea to catch on.

Reid set himself the challenge of getting a million people to register for the site. LinkedIn’s premise—that people could search for other members and share information—meant the site had to have enough people signed up in order for it to be valuable. Right from the start, Reid planned to grow LinkedIn organically by word of mouth—it seemed the most cost-effective and efficient way to attract members. The speed of uptake would also help to demonstrate the site’s value to potential investors.

The founders planned to look for a first round of funding to support the business’s growth plans once they had recruited a sizeable number of members. The LinkedIn founders began by inviting 350 of their most important, well-connected and trusted contacts to join, encouraging them to get their friends and contacts to join, too.

This worked well. At the end of its first month in operation, LinkedIn had a total of 4,500 members in the network, and the business (using more of Reid’s money) set up offices in Mountain View, California, not far from Google’s company headquarters. Reid also recruited new staff members to work on the technical side, bringing the total number of employees to 13.

The site wanted to emphasize the strength of the connections between members, so it dissuaded members from adding people to their network randomly. Instead, LinkedIn encouraged members to connect with colleagues, clients and people they had worked with in the past. Connections were therefore based on the trust and experience of those individuals. Reid believed that this increased the value of people’s networks by focusing on existing connections in the real world, as opposed to the random connections that are common in some social networks.

Member numbers were increasing, and timing now seemed to be on LinkedIn’s side. When it launched, there were no similar businesses in operation, enabling LinkedIn to develop its concept of online professional networking without worrying about competitors. It didn’t take long, however, for other professional networks to spring up, including Tribe and Friendster. With a growing interest in the sector, it was not surprising that investor appetite was waking up to the potential of social networking sites, particularly since the US economy was showing signs of a recovery. In December 2003, the stock markets were up for the first time since the Internet bubble had burst back in early 2000.

The current LinkedIn homepage.

LinkedIn was now ready to seek venture capital funds. Reid recalls how he was besieged by at least a dozen unsolicited visits from venture capitalists. At the end of October 2003, he signed a deal for $4.7 million from Sequoia Capital, a leading venture capital firm whose support he’d targeted in the first place. By this time, the site was doubling in size every six weeks and had gained users in more than 80 countries and 120 industries. Several months later, Reid says, he was still hearing from venture capitalists he’d never met, begging to be allowed to buy a piece of his company even though they’d heard about it second or third-hand.

Although it was common for online businesses to use advertising as their main revenue stream, LinkedIn was determined to be different, having learned lessons from the dot-com fallout. In 2005, two years after launch, LinkedIn introduced two income streams: paid job listings and a subscription-based service, which offered users an enhanced search service allowing them to connect to people they didn’t already know.