Weighing Business Against Friendship: Exactly Why Is Facebook Valuated That Much Higher Than LinkedIn?

Eric Eldon over at VentureBeat has two interesting posts today about both Facebook and LinkedIn allowing their employees to sell up to 20% of their stock options in each of the respective company. Eric has a great and insightful analysis of both companies and how these decisions could work out but to me the most interesting part in both stories is that if Eric's sources are correct, Facebook's internal valuation is now at $4 billion while that of LinkedIn is at $500 million.

And the question that I could not help but ask is how it happens that business is priced that much lower than friendship in this crazy web 2.0 world. After all, in the social networking field the two networks are often set against each other: Facebook is believed to be for entertainment mostly while LinkedIn is viewed as a serious network for grown-ups doing business and looking for the useful tools to do just that.

Sure, $500 million is not the worst valuation but when compared to the valuation of Facebook it seems to be much lower than deserved. At the same time Facebook's $4 billion internal valuation is at least more realistic than the official $15 billion based on the recent investment from Microsoft that no one still seems to be able to believe. But still why are the figures so different?

If it was a normal real-life business world, valuation should have been based on revenue or revenue potential. But in this particular case if the difference in valuation is based on revenue, it does not really make complete sense. Sure, LinkedIn annual revenue is reported to be around $100 million while Facebook plans to achieve $300 to $350 million this year. But that's only 3 times higher, not 8 times. Moreover, this is only Mark Zukerberg's prediction he made early this year while last year's revenue was at $150 million which is only 1.5 times higher than that of LinkedIn. What's more, as outlined in this article by Kara Swisher, Facebook is going to actually end the year with negative cashflow of $150 million due to heavy expenditures, even if the projected revenue figures are achieved.

Besides, revenue sources are still different here: while Facevook is only monetized with advertising, LinkedIn has other revenue sources, including job postings (that Alex Iskold estimated back in January at approximately $1.75M and suggested they could be boosted) and paid memberships. And even if Facebook is quite fine with the advertising deal with Microsoft, the fact remains that people on LinkedIn are generally older and have more money they could spend on buying certain advertised items while Facebook is mostly populated by the younger users. If we take a look at the data obtained in the recent study of social networks' users by Rapleaf, we will see that LinkedIn users are virtually non-existent in the category of under 21 years old with usage growth starting from 21 when people enter the most dynamic part of their professional lives.

Is the valuation difference based on the number of users in each of the networks? Yes, it is a habit in the web 2.0 world to sell and buy companies based on the number of users (registered or active) they have. But I don't think it can be applicable always without any deviations or corrections - and this particular comparison does not seem to be the case at all. Even if LinkedIn currently reports 25 million users and Facebook talks about more than 90 million active users, we need to realize that these are two very different types of users again. Sure, a typical Facebook user may visit the site a few times a day to catch up with what's new with their friends. Also, LinkedIn users may only visit the site from time to time when they have a real business need (find a job or post one, find a lead or update a CV) which may be less often (but still can be improved if they emphasize such services as Answers that have potential of making users return more often). But to me what matters is that people on LinkedIn are generally more willing to spend money buying services or products advertised if they need them (in business world it is called investments, right?) while on Facebook people rarely even report noticing ads at all - let alone clicking them or buying anything.

To me the valuation of Facebook versus that of LinkedIn is a very tricky question because I fail to understand how a serious grown-up business can be valuated higher than our beloved (and too much hyped) friendship destination. Such valuations prove to me that the market we work in is not particularly healthy and may really face a bubble burst unless we rethink many of our approaches to determining value for this or that company.