CREATING A DEEP COMPETITIVE ADVANTAGE

Though it’s now obvious to us all, LinkedIn created a very deep competitive position for itself. The heart of LinkedIn is its remarkably large data set of professional information on individuals and companies. The company spent many years figuring out how to build up this corpus of information and create the right user experience to keep the data set growing in value. Arguably, no pot of money from Microsoft, Google or Salesforce.com could rebuild this data set at this point. This is the moat. The fact that it took a long time to build only makes it more valuable, and it’s not going anywhere.

Wall Street has gained confidence that a competitor cannot come up and kill LinkedIn, and on Wall Street, once the fear of credible competition evaporates, valuation multiples shoot up. To wit, while 2013 revenue expectations have nearly doubled since the IPO, as the chart above shows, the multiple investors are willing to pay for this revenue has more than tripled (from 5.2x to 17.5x). Fear of competition is subsiding and confidence in the company’s ability to exceed its guidance is growing.

BUILDING MULTIPLE GROWTH VECTORS

LinkedIn built not one, but many, growth vectors. Wall Street investors love a large, addressable market, and while they don’t love when companies spread themselves too thin by going after many disconnected markets, they do love adjacent markets that leverage core assets. With this, investors can model out more growth over more time and will continue to pay up for a stock, expecting high growth rates. LinkedIn has done incredibly well at building multiple revenue streams (Talent Solutions, Marketing Solutions and Premium Subscriptions are all rapid growers that contribute a healthy share of overall revenue), increasing their product set, and moving to mobile with an aggressive iOS plus HTML5 strategy, all leveraging their core data set.

DESIGNING A PRODUCT THAT GETS BETTER AS IT GETS BIGGER

LinkedIn has aged like a fine wine, getting better and better with age and size. In the Valley, people focus on growth at all costs. This makes sense. Wall Street is also enamored with growth, but investors also typically love margin expansion and expanding profit growth as much (and sometimes even more).

LinkedIn has invested in its business so that the company now benefits from great profit dynamics — a fast-growing top line alongside expanding margins (EBITDA margins, for example, were up in the June quarter to 24.4 percent from 22.1 percent a year earlier). My guess is that company management opted to sacrifice more rapid growth early on in order to make sure they engineered the right model. This may explain why some didn’t view LinkedIn positively on Sand Hill in the early days, but it’s all moot now as their patience is paying off on the Street.

In the wake of the Facebook IPO debacle and recent resurgence, I’m often asked about how companies should plan for Wall Street. My answer: the more you can emulate LinkedIn’s approach, the better.

@glennsolomon

By comparison Facebook has a deep competitive advantage but is its product getting better?

By the way, there is a new revenue stream coming -- news feed advertising -- that will also be quite lucrative now that LinkedIn has a feed worth checking regularly.