May 10, 2005
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There was a time when David Sze, a venture capitalist at Greylock Partners, could be counted among those skeptical of the millions of dollars being poured into Internet companies that were creating online communities to foster business and social contacts.
By Gary Rivlin
"Basically, it reminded us a lot of what we saw in the late 1990s," Sze said of the first rush of investment in social networking ventures in 2003. "It was, 'Let's hope some users come, and if they do, we'll figure out how to turn that into a business.' We didn't see a real business model there."
Even now, a year and a half later, the question persists of how these ventures can make money--and justify the millions already invested. Still, some of the start-ups have shown such impressive growth in number of users that they are starting to win backing from skeptics like Sze. And there are some signs that selling classified ads on these Web sites may be a solid business model.
In October, Sze and Greylock partners took the plunge as majority investor when LinkedIn, a social networking venture based in Palo Alto, Calif., was seeking an infusion of $10 million to expand its operations. The company had previously raised $4.7 million in venture financing in November 2003, most of it from Sequoia Capital.
LinkedIn had signed up only 40,000 members on its site when its founders first approached Greylock in 2003, Sze said. By last fall, it had nearly a million members. Today the site has 2.5 million registered users.
"They're showing the rapid growth you like to see," Sze said.
Like other social networking sites, LinkedIn is hoping to create a viable business by capturing a small piece of a classified advertising market estimated to be worth more than $20 billion. That strategy has been tested in recent months.
"A lot of these sites rose with great fanfare, but many are still scrambling to make a go of it," said Greg Sterling, an analyst with the Kelsey Group, a market research company.
The study of social networking, a decades-old academic discipline, has given the world the concept of six degrees of separation, among other theories that help explain the nature of social interactions. In the context of computers, it is a catch-all phrase used to describe any effort to replicate people's social and business networks over the Internet, or to create new communities around shared interests.
The LinkedIn Web site allows business professionals to make contacts for sales leads and the like. Users are encouraged to invite people within their business sphere to join the site and connect with people they know who are already part of the network. Joining is free, although there is the nonfinancial cost of deciding whether to give permission--or deny access--every time someone seeks to make a connection through you.
In February, the company announced it would charge employers $95 to post a job listing for 30 days, the first in a series of revenue-generating strategies. The company would not provide any figures, but a search at the site revealed that it had at least 1,000 job listings over the previous month.
"Everyone knows that the best jobs come through people's networks," said Reid Hoffman, the chief executive and co-founder of the company. "So this seemed a natural starting point for us to start demonstrating to people how they can use their online network in a very strong way." Job seekers and employers alike can use the service to screen one another through mutual connections.
"They're giving recruiters access to people they wouldn't normally be able to get to," said Charlene Li, an analyst with Forrester Research. "These are passive job seekers--people who aren't actively looking for jobs--who are extremely valuable to the recruiter and the hiring manager."
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