The influence that Reid Hoffman has had in raising influential Internet companies is the stuff of Silicon Valley legend. The jovial 43-year-old entrepreneur and angel investor introduced Mark Zuckerberg to PayPal Inc. co-founder and famed investor Peter Thiel, a meeting that led to Facebook Inc.'s first financing round. He also wrote a check for social gaming phenomenon Zynga Inc.'s first stage of financing.
But his real baby, the company he helped bring to life in his living room back in 2002, is about to take a major step into adulthood. On Jan. 28, LinkedIn Corp. became the first of a very closely watched crop of social networking companies to file initial public offering papers. The Mountain View, Calif.-based professional networking service, the source of the innumerable "Join my network on LinkedIn" e-mails in your inbox, aims to raise up to $175 million.
LinkedIn's filing has been heralded as a potential spark to ignite a surge in an IPO market that has long awaited a return to some semblance of normalcy. It is also viewed as an IPO litmus test for variety of social networking companies that have been soaking up millions of dollars worth of venture capital.
Yet the IPO market already has been showing signs of life. A January report from the National Venture Capital Association found that the number of venture-backed IPOs rose to 32 in the fourth quarter, double the number in the previous three-month period. As of Feb. 2, 10 IPOs had priced in 2011, according to Renaissance Capital LLC, a Greenwich, Conn.-based research firm. That's not much more than the eight that had done so by this time last year. But the volume has quadrupled: $4.1 billion in proceeds were raised in January, compared with less than $1 billion in the first month of 2010.
Independent IPO analyst Tom Taulli argues that the IPO market could finally be primed for some semblance of a recovery. Positive job report prospects, strengthening equity markets despite the unrest in Egypt -- these things bode well for IPOs. Taulli generally doesn't put much worth in the notion of one IPO priming the market for a wave of other offerings (à la Netscape's so-called moment in 1995 that triggered an unprecedented wave of IPOs), but even his skepticism has been tempered by recent signs.
Taulli argues that LinkedIn and other pending IPOs will benefit from the groundwork laid by another recent debut. Demand Media Inc., an operator of a variety of websites, went public on Jan. 26 and raised about $151 million. After pricing above expectations, the Santa Monica, Calif.-based company's shares closed 33% above their $17 per share IPO price on their first trading day. But the excitement doesn't necessarily stem from Demand Media's business fundamentals, Taulli contends.
"It's not the greatest company in the world, it depends on [Google Inc.], and I'm not even too sure what it does, yet its stock went up," Taulli says.
Most importantly, the offering revealed a key factor necessary for the IPO market to ignite: Investors are regaining a healthy appetite for IPOs. "There's firepower now, and it could mean that the U.S. is finally getting out of its long slump," Taulli says.
Which could mean LinkedIn's timing is good. The company is profitable, though not hugely so. In the nine months ended Sept. 30, LinkedIn's net revenue doubled to $161.4 million. Its net income for that period was $10.1 million, compared with a loss of $3.4 million in the year-earlier period.
It has posted impressive growth. The company says it took 494 days for it to garner its first million members, but now it adds an average of one new member every second. It now boasts 90 million members in 200 countries.
That's not nearly as many as the more than 500 million users that Facebook boasts. It's a number that, at least on the surface, could make the social networking giant more attractive to advertisers than LinkedIn. Data from comScore Inc. has the average LinkedIn user spending 13 minutes on LinkedIn in December; Facebook users, on the other hand, spent an average of 321 minutes.
Yet the average LinkedIn user represents an interesting demographic for advertisers: They tend to be professionals in their mid-30s, with money.
And LinkedIn isn't just bringing in money from ads. A significant and growing chunk -- roughly 40% -- of the company's revenue comes from paid services and subscriptions LinkedIn provides to recruiters. For a fee, LinkedIn enables recruitment firms and enterprises to search its membership for potential hires, among other services.
Hoffman, who has long held that an initial public offering is the preferred route for LinkedIn, has said that the company would go public when an IPO could play a role in boosting user engagement and otherwise helping the business. Last year, CEO Jeff Weiner, a former Yahoo! Inc. executive who took the CEO reins from Hoffman in 2009, argued that becoming a public company and raising a chunk of money will help with LinkedIn's mission of connecting professionals.
As the company's largest shareholder, with a 21.4% stake, Hoffman stands to see his investment in LinkedIn valued at about $428 million, based on an estimated company valuation of about $2 billion. Venture firm Sequoia Capital owns nearly 19%, while Bessemer Venture Partners owns 5.1%. Other LinkedIn backers include Goldman, Sachs & Co., McGraw-Hill Cos. and SAP Ventures.
With a successful LinkedIn debut, Hoffman would not only see a big payday, but could play a role in accelerating the recovery of the IPO market. And, in many investors' eyes, that would be legendary indeed.