How Reid Hoffman started LinkedIn

How Reid Hoffman started LinkedIn

How Reid Hoffman started LinkedIn

How Reid Hoffman started LinkedIn

How Reid Hoffman started LinkedIn – 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.

 Technology guru

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.

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.

 PayPal and beyond

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.

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.

Thriving in a harsh climate

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.

Preparing for launch

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.

Word of mouth

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.

On the up

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.

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.

Reid decided that advertising, while not part of the original business plan, would become the site’s third revenue stream, as it had built up a demographic base that appealed strongly to advertisers. The self-selecting nature of LinkedIn’s membership (it targeted successful and ambitious professionals) would provide an opportunity for certain brands to reach their target audience in an efficient way. Just a year later LinkedIn turned a profit, the majority of the income coming from its premium services, such as job listings.

LinkedIn became one of the few companies that thrived in the recession that hit during the late 2000s, benefiting from the increased number of people on the hunt for jobs. In March 2008, the site saw its traffic double to just under seven million users, up from 3.3 million a year earlier. Furthermore, the site continued to develop features to increase the value of its services for users.

 Later Years

Now LinkedIn can count itself as one of the largest presences on the Web, with more than 135 million members across 200 countries and territories. In June 2011 the number of unique visitors to the site reached 33.9 million, up 63 percent from the previous year. The company went public in May that year and saw its share price more than double in just a few months, making it the most successful tech IPO of the year. But for founder Reid, who is often dubbed “the most connected man in Silicon Valley,” LinkedIn’s success to date may only be the beginning.

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How Reid Hoffman started LinkedIn

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18 thoughts on “How Reid Hoffman started LinkedIn

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