When you see deals like this it is often not reported what liquidation preferences or other the investor is getting.
E.g. If Hedge Fund X puts in a $20M investment for 1% it might seem expensive, but not if they have a 3x liquidation preference that guarantees them a profit on any trade sale above $20m in value, and most likely on an IPO.
Similarly it helps LinkedIn set a price point with any future IPO plans.
These are not new shares being issued, so, correct me if I'm wrong, but any liquidation preferences that are attached to this purchase would be at the original valuation, not the new one.
He means that if linkedin would be sold for 60 million, they would get the first 60 million. Then afterwards the normal shareholders are served until the initial ratio is reached.
I am noticing a trend lately where private market valuations seem higher than what equivalent public companies get. Of course, it is hard to find a public company equivalent of Facebook or LinkedIn, but I would say Google can be a good proxy for FB or LI.
This is puzzling at first: if private parties thought public markets were undervalued, why won't they directly invest in already public companies?
I believe the answer has to be that private parties believe private companies are relatively undervalued compared to what "they should be" in public markets - in other words, they are not undervalued compared to currently public companies, but they are undervalued compared to some notion of what they ought to be as public companies themselves.
This idea is not surprising - after all every start-up investment, almost by definition, reflects the investor's bet that they found something that is "relatively undervalued compared to its eventual public status."
Makes some sense to me: LinkedIn really provides a great service, so to my non-business, humble programmer mindset, this equates to value. Personally, I get many times the utility from LinkedIn than from Facebook - no comparison!
In looking through the profiles of some of my past co-workers, the ones who have the most impressive profiles roughly coorelate to the weakest software developers I've ever known. I just have to shake my head and laugh. The absolute least productive person I've ever worked with by far, has a tremendous profile: 191 connections, 27 people have recommended, 3 dozen corporations in the last 15 years where he's listed himself as Architect, Consultant, Senior, Project Leader. Also loaded with an impressive mass of buzzwords.
So, from my experience, LinkedIn really can provide a great informational service and you don't even have to sign up for it! If you Google someone and find little or nothing except their trumped-up LinkedIn profile, then that should tell you something about their motivations.
Good questions: check colleagues' info at start of new gigs, many people from my working past have contacted me through LinkedIn, and the email traffic on a few interest groups is low volume and of reasonably good value.
I have never used LinkedIn for its original function: finding a contact point in a company through a mutual connection. The reason for this is that it is so easy to simply email someone, introduce yourself, and try to say something interesting enough to them that they will spend a few minutes getting acquainted.
Are they just pulling these numbers out of the air?
Let me rephrase, what goes into the calculation when they estimate the value of a company like LinkedIn?
Sure in the article they say 70 million users + a healthy economy. But $2 billion ? I think I've heard estimates all ranging from $5 to $15 billion for facebook. That's 500 million users.
LinkedIn has a much more sophisticated, educated, wealthier and more focussed user base. They also have a strong and consistent revenue stream that is diversified.
Valuation is hard, especially for startups. People view Facebook, for example, as an "option" on whatever smart business can be built out of 500 million address books and the world's largest photo-sharing service. FB can tax companies like Zynga in order to extract most of the economic profit those folks make.
In this case, though, it's a lot simpler.
(Value of shares purchased) / (Percentage of shares purchased) = Market value of 100% of shares.
It's the same way you'd calculate the market value of, e.g., Google. Share price times shares outstanding. In Google's case, the market is more 'efficient' in the sense that it's easier to buy and sell, and there's more information. But private company stocks offer a different kind of efficiency: the amount of research, compared to the size of transactions, is far higher. Ask a typical economist, and that's inefficiency; but ask Warren Buffett, and it's not.
Interestingly it looks as though each user for both services is valued about the same: Linked-In: $2b/70m users = $28.57 per user. Facebook: $15b/500m users = $30 per user.
I think the prevailing thought is that that $15b valuation for Facebook was always a bit of a red herring. More recent investments put it at around $10b.
It is true that existing shareholders might not price the round fairly if they have ulterior motives on the pricing.
However, frequently insider funding rounds are at realistic valuations, or even unrealisticly low valuations, to force all existing shareholders to participate or be diluted.
Your question is fairly meaningless. There are many different ways to value something, but one of the more reliable ones is "what are people willing to pay for it?"
By that valuation method, then yes, LinkedIn is really worth that much. By other valuation methods, probably not.
I guess what I mean is whether people that have followed them over time or are regular users, is that valuation really justified. I guess the investors could be looking to make a fairly quick profit if the do have an IPO.
E.g. If Hedge Fund X puts in a $20M investment for 1% it might seem expensive, but not if they have a 3x liquidation preference that guarantees them a profit on any trade sale above $20m in value, and most likely on an IPO.
Similarly it helps LinkedIn set a price point with any future IPO plans.