Episode 14: LinkedIn
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You are not yet schooled in the power of network effects.

Young delt.

back.

Who got? Get the two is. Another story on the way.

Welcome to episode fourteen of acquired the podcast where we talk about technology acquisitions that actually went well. I'm then gilbert David, and we are your hosts. We have a very special episode for you today. I can't really think of a time when I didn't call a very special episode.

Every episode is special then special .

um this episode is not necessarily about the technology acquisition that actually went well. Um we have no idea how I went. Uh IT is huge and IT is recent. Today we are talking about linkin being acquired by microsoft two days ago, a at the time of the time of and um super speculative.

But I think the whole internet is sort of a buzz with, you know what's the deal with this this acquisition? Why did they do IT? You know what's the future hold? And I think it's going to be super interesting to speculative bit and throw out some possible pa ths and and draw some conclusions.

Ah we have some fun with this. I don't think we have ever gotten as many requests on slack, no email and other channels for no, please talk about looked in. So here we are.

And in fact, I think this may change the timber of what this show is about. I think for you know, at some point here, we might remain this to just show about tech acquisitions because we're doing things that didn't go well, things that didn't go well. Um really anything is got a good story.

So we love stories here.

We do.

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before we dive in um as usual going to ask please review us on itunes IT makes a huge difference in IT is what makes the show grow and tech i'm shared on twitter, facebook or even linked in as a please share IT on microsoft linked in whenever you can uh for those of you who we get some questions, you know I don't have not listening on itunes, so I don't have an apple device. We're going to post this on product. So uh, search for on product time we would love love up but there please .

thank you as always and and feel free to join the slack group. It's really it's really awesome interacting with all you guys. We've got over one hundred people now. Yeah great discussion going on. So um if you want if you want to spend more time with them in David.

join the slight group. Yeah ah we want to do a little bit to follow up. There's been some news from our last couple episodes that we think we're worth talking about for a minute here. Talk about nap. Ah we're going to add .

a sometimes we have this, sometimes we want, but adding a section to the show on followers on previous show uh will do this weekly but first um from snape chat uh big announcement uh this week as well. Ben thomson, our favorite our favorite oracle here on acquired tweet that uh the the linked in acquisition and wwdc or the second and third most important elements ments of the week and that snapped chat launching their advertising A P I was the most important announcement of the week. Well, time, i'll tell on that.

Yeah I think all we have right now is a press released to go off. And I will be super interesting to see how advertisers .

and and brains aapt that big big profile in a week though talking about the launch of this API and and and profiling the company worth reading, willing to IT in the shower notes. Um and then the second follow up we wanted to do is actually on instant articles as well. I've been had a fun experience this week.

Yeah I I don't know actually not sure if this is announced product or or even maybe just like a reliable of an existing one, but I I tapped on what looked like a facebook instant article this week. And h. IT.

Expanded into a native ad unit. And IT was something that was a super sleek experience. Ed, to just IT had my email auto filled, my phone number auto filled. And IT was a way for me to kind of join A A waiting list for upcoming product. And I I think facebook has always had this direct response captured type ad unit, but it's really interesting to see them potentially expanding that um that instant articles or or instant ads umbra to include these other things and having a real .

sleep experience with IT. yes. And and cool with both of these that um you know the ad products and ad product teams don't get a lot of air time in tech companies, but social networks in tech companies, but um really cool product innovations on on both these fronts yeah yeah cool marit with that time, what's dive in acquisition history in fact, so linked in I assume almost everybody listening to this episode as a member of linked in. But um let's go back to when I was started.

If not, i'd like to invite you to join my professional.

I think your address books, we will get to that. Okay so um liked in I think I could be wrongness but I think was the very first um uh spin out h not spin out but um project of the paypal mafia two thousand three two thousand two. So paypal was acquired, as we talked about several times ago, um was acquired by ebay in july of two thousand two and in december december fourteen th of two thousand two to be exact less than six months later several former pay pellers LED by reid hoffman ban together and they form a new company and they call IT linked in um and they they start in december and then they work really quickly and they launched an launched M V P very quickly, especially again, this is like pra W S time um they want an M V P in may of two thousand three and IT is a social network and social networks are hot.

Then yes yeah I think I member reading the facebook effect by David cpa, rick and a map book he kind of talks about that there was a group of people that were in silicon valley that were super involved in a lot of tech products and realize social networking was gonna the next big thing. And that, you know, this was totally a IT IT explains their fast time to market. Because I think that with friends right there is A A group of X A powers and other .

kind of close .

people that we're like, you know, technologies finally in the right place right now where this is about to be huge and let's let's .

get to IT yeah and really cool that like there was this in in silicon valley, this kind of like swelling of interest and and building of of social networks. Facebook and I started yet, but french was a super hot company. They they had raise money from a benchmark and somebody else I can't remember. But we're darling in silicon valley. My space was growing quickly and read .

hoffman and mark pincus both put money into friendster of our all.

I think that's right. I think that's right. Yeah um anyway, so they start they launched in may of two thousand three and I have a really interesting um interesting sort of bootstrapping mechanic for the network uh to get uh you know how do you start a network from a cold start? And that was the infamous and product of lawsuit later on as as as a recurring theme on our show, the infamous grape your address spoke in spam all of your, all of your everybody in your .

email address book yeah and in a very funny kind of super for shadow or for shadow ask way um kind of reminds me of microsoft. I mean they did this thing that was um you know sort of sneaky and maybe would earn them a lot suit and they sort just did IT knowing that the upside from doing this thing, you know, IT would I would I would be huge and IT would be something where they would have to pay the Price later they got suit, I think was one hundred million dollars suit later on for this. But um you know once they had the network.

this is like a total recurring theme in network driven technology. Companies like you doesn't get talk a little blot about these days, but on the internet, like airbnb totally did this. You offer cg list to bootstrap their supply networks to start. And many, many other networks have done the same thing.

And do you know about microsoft? Like Price per core thing? We were talked about this on the show Price per CPU. They basically put IT when they were originally selling windows and move with doss really early on.

They were um they head in their sales contracts that they would make money for one copy of windows per core shipped by someone who entered an agreement with microsoft to sell windows at all. So they basically squashed the competition because manufacturer realized, oh, well, i'm paying for a copy of windows whether I put her on here not yeah so I may as well ship windows. And by the time you know, they they have got suit for that and and I think actually the justice department force them to pull that out of their their contracts. Um by the time that came around, they know had already to find .

a start problem as a check problem like you can. You you gotta have something some unfair advantage to get there at, you know, doesn't have to be illegal but in many cases, IT turns out I was so um late by late two thousand three, the network is starting to take off a little bit. It's still really early.

They raise a series a from sqa four point seven million dollars, which was a lot of money. Especially after the internet bubble uh had burst um and mark comi joins the board. Uh later when he left sqa, mike burritt takes over and is still to this day I believe on the board .

point to and mark comi now in in columbus, ohio and drive capital .

exactly bent .

hometown call to .

shout shout out and and so things continue to go well. And in two thousand and four the next year, they raise their series b from great lock and super cool about two I think about two years ago um much like um in when we talked about with youtube through the last suit of youtube, we were able to see scores investment memo about that um two years ago.

Read hoffman open source to quote quote his pitch deck for for his series be great luck and its a great document wowing to IT in the show notes but he has the whole slightly edited a pitch deck that he used for linked in serious bee um and then he has commentary on IT and he's like very self critical no this was obviously this works but like I made a bunch of mistakes and like I was really nervous about these things and trying to cover up like we had no revenue. Everybody was like the elephant the room was like why the heckle guys not have revenue? I was just like really nervous about that cool document.

So um in the pitch deck, you know he he kind of the the inter position ons, uh the position that is like the the unbiased, the ground source of source of truth. About professionals and talk about how with all the existing ways of finding professionals in the world at that time, I was mostly kind of directory based and all these incentive problems and people are incentivize to make themselves look good or to um you know be found her to do sales lead. There was nothing and they thought that a network could solve all these incident problems and create true um you know for the first time true uh information publicly available on the internet about professionals and where they are and how to find them and turns out they were right.

Um as we talk about this acquisition you linked in has never been primarily and advertising based network advertising based business. They've had a ads as part of their business, but most of their revenue comes from monotype recruiters. Um and so as people been commenting about this acquisition, you hear lots of talk about like, oh, linkin doesn't have a lot of engaged users and I spend no time on the site that looks like crap um but you can't really judge this company in the same way that you judge facebook, K E R, twitter because it's .

not how they monodist. No, josh elman has a great post that i'll put the shown notes to josh's. He was IT linked in. He's been a bunch of grey companies and he said a grey lock now and he is a great post talking about, you know you can't look at this like you know are is you know are the users have linked in really like x multiple more valuable? They're not that engaged at the end of the day, they are able to monetize those users in a very different way because they sell an extremely a high value product, which is brows and access to these people.

And um and it's interesting later we'll get a minute to linked s IPO. But actually in the IPO perspectives, the list in the risk factors for a substantial majority of members do not visit the website on a monthly basis, which is funny when you compare them to you know many the other businesses that we ve looked out on this show. Um but again, it's not they don't make money when you visit the website.

They make money from having your data up to date, professional data about you on the system and and you being found. So so they build these these business lines over time. But there there three that linked in has and the first is what they call talent solutions, and that's about sixty percent of their revenue.

And that is for recruiters. And it's super I sb. Was talking about, this is a super expensive product that they sell the recruiters. The full product is one hundred dollars a month year per seat.

And I think that the cheapest way to go to linked in premium is like six .

hundred box a month.

I think about that every somebody context you and has a little yellow in thing there but as like .

completely they're just not out of the park and executing on this lake. If you are a recruit Operating in the hr world today, you need to have you linked in recruit like gets just this is like a joke if you don't right .

right and and you know like imagine that you our company and you haven't purchased this for your recruiting department, you are not going to be a way to hire any recruiters because there you know they're going to be hamstring from day one. They have created this just incredible .

expected to and they've captured a ton of value in that market. Um so then the other two business lines they have other the second they called marketing look and that is primarily ads um that they show in various forms on the site, whether it's sponsored in mail or or all sorts of things. And then the third one is premium subscription. So this is um what they're spent a lot of time on over the last few years and that's monodist monetizing members of lincoln who are not recruiters.

Oh, okay, you're separating. So linked in premium is separate from the .

recruit and linked to in premium uh their different flavors of IT um but gives you uh to brought in out beyond your second degree network um unlike and that's great. Like and I use IT all the time and is a is basically the tour was meant for ventures, capital, I think and business development folks and sales folks and and that's about twenty percent of their revenue too.

So and and that's about three billion a year in revenue.

I think total yeah yeah I I think that actually did not like that.

Yeah I I think that's about right um and and that's a about one hundred and six million users.

hundred and six million active users, uh just about four hundred million registered users on the site. Interesting which is very interesting. So um so they continue to execute super well.

Uh on on this as as a private company um and and the sort of biggest event that they have before they go public is in two thousand um I believe that was two thousand seven you a read actually step aside as CEO and they bring in an outside CEO to be to run the company. Read stays at the company today, today, again and night. This isn't actually talking about he didn't stay very long. He he was there less than two years came from into IT and then he was an advance software. He went on to become C E. O of rocket lawyer um uh which reminds me a total I found this doing research for the show a but really cut a hilarious um when they raise their series sea uh which they did in in january of two thousand seven rape before this happens um they they raise best or let them but they also had the other from that I can't heard of uh and there called the european founders fund like what's the european founders fun and I looked IT up and it's the same of our brothers .

way we've talked about them before right these are .

the the guys that run rocket internet. Rocket lawyer made me think of IT um in in europe that happy cattle, the U. S. Businesses and I was like, this is just too funny. The same bar brothers had a venture capital firm I don't know if if is still exist, called the european and founders fund.

So there is copying founders fun well, just like they do have many other business man IT works for them so I I just saw that much like that is too funny. Um so a dan doesn't last very long. A C E O but number of two thousand eight ah they bring in jeff inner and he is still today the C E O of a inten and uh and so and even will be inside .

microsoft exactly .

yeah and will remain so within microsoft. Um in january of twenty eleven uh the company finally files for an IPO the go public in may of twenty eleven um they Price Price the IPO at forty five dollars a share. IT trades up to ninety four dollars and twenty five cents by the end of the first day of training. Um and this was like, I remember this was like a watershed moment at the time. They were the first like sort of new wave you know internet company, big internet company to go public um after the sort of mid two thousands and that was shortly there after the facebook went public um that pandora A I went public, that twitter went public um this this was a big moment that everybody kind of realized that social networks that you know, we're still, you know, people like how does facebook make money? You don't even though facebook makes money in a very different fashion from linked in, but when they went linked in, you filed their perspective for the IPO people like man, this business is going to do like fifty million and ever this year, IT was IT was a big moment and and so and then the stock a continued to do really welfare over the five this years that IT was public up up going up into the two hundreds and and above you until until .

february fifth twenty .

sixty and just a few months ago was a on a friday ah both linked in in tabo announced fourth quarter tony fifteen ah results and and expectations for the year to to wall street and IT was like was like black friday for software companies yeah and .

IT actually IT killed the um the private company valuation in some of the market cap of other sas comes and know IT felt like I was super sensationalized and not well understood by the market. And because linked in solicated .

announced earnings, they actually beat expectations on earnings for the fourth quarter of two thousand and fifteen but they announced lower than the guidance that was lower than wall street expected for twenty sixteen. And the stock got hammed was down forty three point six percent in a single day. Uh, ten billion dollars a market cap just wiped out of link in.

yes. I mean, they basically we're signaling that we are hitting the top of our s curve and that you you can count on this continue growth in the future. Which had been Priced into their stock.

And so I think you know what, that core business was still strong. They they were looking for secondary revenue channels with. They they had to display ads business that they had shut down a little bit earlier, at least moved resources away from. And then there was a second product um sure what that was called that that .

was that was a lead .

sales navigator.

sales navigator. They still have. I'm working, but the growth that they expected, huge growth and sales navigator and it's been slower to materialize in into this. Um but um but you know at one point linked in had a had a market cap of over fifty billion dollars um and and between that and then and then following um was just a fell off a Cliff in terms of the stocks Price on that same day.

Similar thing happened to tablo um which is a great software company here in seattle and because of those two um those two uh those two companies and you know announcing weaker than expected earnings, the whole sas sector public as companies just took a big hit. So like on on the same day on friday, news relic down twenty three percent, the desk down twenty percent. Hub spot down twenty percent, work day down sixteen percent. Next sweet fifteen click fourteen demand where which ends up getting acquired by salesforce last week two weeks ago um down thirteen percent cells force itself was down thirteen percent was just carnage.

Yeah also a nice research.

Thank you. Uh internet um and uh and and so then for the last couple months, the share Price of of linton has crept back up but nowhere near the highest once was and then two days ago monday, uh in like what was gotta be one of the best kept secrets of major ami of all time. Um microsoft announced that they are acquiring the company for one hundred and ninety six dollars .

per share which comes to .

which comes to twenty six point two billion dollars total um which is a lot of money but half of what lincoln was worth you know a year .

ago yeah I mean, the thing that I wasn't thinking about in february win. It's like there's two parts to arriving at this conclusion and I feel like within that first week I I sort understood like, oh, these companies are sort of undervalued right now because they took this huge hit and you know their core business remains strong.

IT was just that a new business that process that promise huge growth didn't quite materialize like they are still doing three billion in revenue a year. And I think that didn't occur to me at that time is okay. These guys are on sale, and that doesn't mean on sale just to go the stock. That means like they're massively at discount for somebody to acquire them. And what you got to start thinking then is that who are key acquire where linked in could be a massive .

asset and amplified by their existing or so our job today is speculate and think about, was this good was this a good move for microsoft for linked in? Shareholders will find out. Um but I I feel like we can't we can't dive into IT just yet without mentioning ing a super important piece of context here, which is that um about a year ago, a little over year ago, there were tons of rumors swirling in the market that microsoft had made an offer to acquire sales force.

Yeah I think I think IT was all but confirmed like that that was actually you know came to the eleven hour and fell through.

So the the rumors and these are just rumors we show on at some point that would be fun. Um the rumors s where that microsoft offered somewhere between fifty and fifty five billion dollars to acquire sales force a little over year ago and sales force was willing to talk but they wanted seventy and and microsoft away from them. So super important and that played out in the press over weeks um and that two things with this both of that .

this was completely kept quiet .

month ago yes yeah and jeff winner, in his memo to linked in employees, mentions that you know the senior management team that linked has had court months to digest ce, which is pretty mazing. And apparently i'll started after after february fifth.

which says to me a microsoft that not a lot of people knew. I mean that this was, this was something that was bored. Satio key executives, actually friend of the show, kt delvin, is a very much involved in you orchestrating how these two companies will will .

come together. Heard who we were lucky enough to have on for our a company and wonderful st episode is going to be leading the the integration for microsoft yeah and actually .

the press release talks about how he's going to be doing that with thum Scott gothia, who leads enterprise, which includes both azure and dynamic C R M product and SHE lew, which um SHE she's preview, is uh mostly in productivity. So the whole office sweet and being. And so I think there is a little bit a clue there as to what they're going to do with that probably in office and then some combination of of azure and feeling .

the DNA ic product. yeah. So well, let's jump into an acquisition categories. I feel like this will start to start to unpack this here. What's your what's your early categorization here?

yeah. So I mean, I think there's a business line from acquiring the the you know um current revenue stream um but in my mind, you know you don't buy this product, just two cash flow IT like they're are not buying that business line because it's it's onna pay itself back in short order and we feel good about owning this new revenue stream. It's an integration place. I'm i'm calling this a product acquisition since it's a product that they are going to and amplify the current sales of with their their own kind of channel and and integrations and then make their own products of a Better and um kind of define the future of of identity. So I would say it's A A A product acquisition to be combined with their existing products.

Yeah, I am going to take A A A similar though um but I think this is really key. So for me, I said, yes, product acquisition, but it's a proof acquisition that at least has the potential, I think, to transform and involve an entire business line for for microsoft. So clearly, this is I don't know, but I would imagine this is going to be within microsoft business process of productivity and business processes segment um which is one of the new segments that uh sato a streamline the company into when when he took over. Um and and and I think you know there are so many ways angles to think about linked in, but one of them that you have to imagine people at microsoft are thinking about is as a as a data set and a data acquisition and the ability to both Operate in continued Operate linked in as the set of products that IT is within that segment. But then infuse that data into into office, into active directory, into dynamics, into all of the you know the sort of mobile first, cloud first, a world that microsoft to lives in now um all of the business um tools that they have uh you you have to imagine as something I think about yeah totally and .

that's a really good lead. And I I start to have like four buckets of of why I think they pulled the trigger on this one. And the first one you know you just nailed, ed, this is integration with office three sixty five to extend identity outside the company in the world of microsoft. Of you are they are they have .

active directory um where I T A lot of .

listers about. So basically microsoft lock in in the enterprise comes from the fact that they own identity and everything that stems from that. So everything work seamlessly with with their or historically work seamlessly across other products because everything is is you know plugs into exchange and users active directory to manage identity and it's it's you know the rocks solid truth of who you are that everything in the company can plug into.

Yeah so when you as a employee at a company that uses the microsoft productivity sweet, you know, you sign in to your microsoft account and then give grants you access to your email to office three sixty five to whatever .

enterprise .

that if you windows for the few people out there who use dynamics into .

dynamics here and even windows, think the sign on and the nature of companies has changed. And I think that that the we will talk about trends in a little bit, but I think that a big tech trend are really a big like world trend that happened as people move around a lot mean people stay at companies for eighteen to thirty months and there's a lot of bounce around and people collect knowledge from all the different companies they were at and build reputation from all the different companies they were at. And a world that is entirely served around know who you are at this company is kinder.

antiquated yeah company .

the company doesn't only identity anymore. You only identity and you lend your skills and reputation to the company while you're there. And some people do have really long time, but some people don't and you have to have a way to be able to access and leverage all other data up.

And um you know for microsoft previously, which is again trying to reinvent everything is doing uh as as kt talk to us about a few months ago, you know in this mobile first cloud first world, like when the reality is that the majority of employees, at least in fields like tech or finance, um you aren't staying in the same job for a long current time anymore. If you as microsoft only have these very silos views into people and not the their holistic view of their skills and their career history and their identity across jobs there go hand linked.

yeah. And the parallel, think I should that I rode down anyways, know five years ago, ten years ago, we had this like I T shake up, where they'll freaking out of A B Y O D. Bring your own device and this is the realization of B Y O D when IT comes to identity .

yeah B Y O E bring your own employee Q I O P here on person yeah yeah and you mentioned.

um well, I was going to go into the sort of a second thing that includes a good segway there um the second reason we kind of talk about a identity in office three sixty five there. I think that as IT extends to dynamics C R M, it's hugely valuable to know an entire person's work history when you are trying to sell something to them.

So imagining, you know that the problem with microsoft world view before is this is john smith, and he was a company. A, there is also a john smith. K. B.

We don't know if those are related and and you know i'm sure there's just like attempts to make sure they are related, but the magical thing that linked in nailed is all the incentives are aligned for them to make money off of you wanting to make all of your information accurate. And so if you can have this like holistic view of identity when IT comes to customers, that's incredibly valuable. Also.

the I agree. I I want to jump into with something that I ve been thinking about is with regards to this acquisition and Better. And I were texting about this earlier. The way I think about lindon is like it's such a canonical example of like the power of a network effect and the value of the asset of linked in's network that they build.

And i'll get into this in a little bit tech themes, but if you take for a given for the moment that the uh the network effect uh and the the defensively, that means that their professions network that they built basically can never almost never be disrupted. And lord knows many people have tried over the years despite the products being really crappy and all these other things. Um you know what can you build on top that and we talked about how linked in isn't doesn't monodist via ads really. They certainly they they did recruiting first that was the most obviously nail IT like they own that industry. Um but then it's also really always like they should do like sales and video and partnerships like you know like what I use linked in for um and probably many, many of our of our listeners um and they kind of really drop the ball there um and then you think about like, man, could microsoft with the linked in network asset on top of really execute where linked in hasn't I think there's a big opportunity there.

Yeah and then time agrees with you. I pull this quote. It's getting to be not a question of if, but how many times will mentioned and prolific writing on the show but uh he is a quote in the street techy article about this as I do believe upside is magnified significantly by microsoft should linked in sales navigator, for example, sell into one hundred percent of microsoft dynamic um user base. A good portion of the deal would be paid for. And that just really interesting to think about is you raise a good point though the proxy the whole thing is, can microsoft leveraged the network asset that link that lincoln has created Better than they themselves?

Yeah it's worth a word on like on sales navigator. This is this product that linked in is put a tonet effort into and this is their attempt to execute capture this sort of second pillar value on top network with sales um and and the generation and the problem we've had is that like sales runs on the C R M, this is why sales forces such a valuable company. And unless you're directly plugging into the C R M, like is really hard to add a ton of value. And and they've done a lot of immigration and you know sales navigator has had integration with sales force and with all the other C R M out there, bit like it's really hard to do that. And and for microsoft, like a, they can plug IT directly into dynamics, which has a very small market share, but they also have the way and through all the rest of the productivity suite, including email, the most important APP for sales and many other uh many other you know professor functions um and to be able to plug all of linked in's network I set into that like huge opportunity yeah .

and for everybody out there listens to um that work at company that sells to businesses. Salesforce has become kind of the Operating system of the B2B com pany. And if a product doesn't plug in the sales force, you're not using IT because that's the central repository for how all the different departments of your company and communicate with each other.

And and IT is the ground source of truth. So I mean that microsoft has always been the uh we power productivity and we enable enterprises to be the most productive and a efficient they can with the use of technology or through the use of technology. And let's been their their mission for a long time, or at least one of their missions. And to see salesforce really like echo a way at that, it's almost like to defend that turf.

They had to do that. Yes, I I wanna to his his other two points, but I I want to add and really quickly like yes, I have to imagine. So what's also really go about this acquisition is team on the show will will get to find out all the little gray of how that happened when S C finally come out, when the when the deal clothes.

which they said is this year, which likely means late december .

yeah um and i'm really looking forward to that because I have to imagine that if there there there must have been at least another Better here or the Price wouldn't have gone this high if not most of others. But I got to imagine the other Better with sales force has to .

be and this is this is the awesome this is leading right in the point three for me um somebody else was going to buy them like that they are on sale. There is only one linked in like the magic of network effects makes IT so that you know they were the source of truth for where an employer has been and what they have done, what they're good at even though there are skills and endorsements. Thing is a little bit of a joke.

They there was only once. So you couldn't go out and buy the other linked in or build the other linked in. IT was like there was a one super valuable asset.

And that sort of an interesting M N H and be because of the you know network effects and technology today, um IT makes them immensely more valuable. And I create these these apps. They're certainly a bidding war here. So when you're considering the value of this and you're microsoft and um you get approached by the investment banker that sort of put this together and said, hey, what do you think .

about this which I I believe was Frankl turn again we get will fact .

this but I linked was .

a um you ve got .

to be thinking with the hat not of boys this worth you know to twenty five, twenty six million dollars but more with the hat of what is the opportunity cost of IT going to someone else and what is the capital outlet that we need to make order to not have our lunch and and IT taking a step back from that. It's sort of interesting companies, more so these days than ever, have to look at ma as a competitive threat and have the means, the borrowing means or the cash on hand means to do what they need to to defend their turf against of a massive landscape shift like this.

Yeah I mean, like let's just take as an example um what if twitter had acquired instagram? I mean I know when like early days instagram, like my primary use case for IT was posting pictures twitter so I totally could I see in the rest now that happen yeah um like how awful with that beaver facebook right .

now yeah not good, not good. The other interesting thing that I sort of danced into hear a little bit as um microsoft did not pay for this in cash and and we haven't. This is off in the .

case so well, right, right?

They did not pay for IT in the cash that they Carry on their baLance sheet. They took out you know a large amount of debt because ninety four percent of their .

assets are just.

i'm sorry, their cash is held seas and you know with the forty percent um tax that they would .

have an on greek um all companies are that are multinational stals in their headquarter in the U S. But tech companies especially hope yeah big problem with repeat in the cash. What they did this was not a stock deal that was all cash uh, consideration that linked in shareholders are receiving um but they uh microsoft took out that to find transaction .

yeah and I think not entirely. They took out like it's not you know twenty six billion dollars of debt but there is is A A A large part of the finance in the transaction. So um yeah you know I think .

that they're .

getting back to David point, like there was one single huge asset with network effects here. And the question is, can microsoft, you know squee more revenue out of IT then linked ton .

was doing themselves. I mean, will they is uh, we will see a can they answer is in my mind one hundred percent yes.

Yeah yeah, yeah. And then getting into my fourth point, this is a little bit more broad, but um so microsoft has you know admitted that, that when windows is not the future that they are not the windows company going for d of course, they know large number of people working on windows huge revenue stream. But its its Operating systems are not the solo cash cow that they once were.

And I should even say Operating systems windows is not. And so in moving to this mobile first, cloud first company and focusing on um you know their cloud offering, as you look up and down the cloud stack, theyve infrastructure as a service and platform as as a service with azure. They have software as a service with office three sixty five.

And you could look at this like, okay, they're becoming the cloud services company. So um a uh business tools for recruiters and and more broadly for sales and marketing also is a cloud offering that they can add to that stack of services they provide. And so I think like you put on your old microsoft hat, you're like, what are they doing? And like they typically squander large mini. So this is terrible. As I got to go.

I talk to a bunch of current and former microsoft employees about this. And that is the most common reaction.

I would say, yeah, yeah.

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i'm dying to get to check themes. Um but before we do, do I think which I think it's worth A A minute spending a minute on the what would have happened otherwise. Uh, we talk a little bit about somebody else buying linked in. I think it's probably most likely, clearly, they were on sale, as you say, in more ways than one. But I think you know if the other road is that, let's say, linked in and managed to stay independent theyd ever, they're having a hard road executing on building another pillar um of monetization on top of their network.

I said um but I I wanted to any here some a bit discussion that come out in the press I think is relevant um that that somebody pointed out and I believe there is I believe there's a new york times article about this lintons stock based compensation um has grown hugely in the last few years and he actually was becoming a real problem for them um so stock based compensation uh as probably many readers know you know, made concept and startups but also in public companies where part of your equity package as an employee is you get a salary. But then you also get stock options in the company and and links in had basically over the last couple of years been giving A A A huge amount of equity to employees and that deux a the existing shareholder. So it's a noncash expense um so he doesn't show up in like eva domestics and stuff like that.

But um stock base compete at linked in went from thirteen million a quarter in twenty twelve to two hundred and twenty two million per corner uh in the first quarter of twenty sixteen. Um and the problem there is like if you start doing that and competition, you employees obviously I A huge believer in employee quality but um you know there's think about capta les is like only one hundred percent I can have more than one hundred percent of the equalities so any time you give more out you're deluding everybody. And so IT was like the the linked in stock had become this sort of like leaky sive um that was happening. That was a major problem that they would had to deal with.

but now they don't. interesting. Yeah, I think what happened otherwise I I you know they would have get to the sales force. And in that case, I wonder for the future of what microsoft is doing with dynamics that they lose out on this deal because I feel like that to know in the coffin for sales force.

a nail in the coffin .

for day what's .

what's the teams because this is i've said this to so many people over the years um you know that as a investor i've been such a huge fan of linked in um and continue to be uh David.

when did you buy a linked in stock .

I bought right after the IPO um and I bought a bunch more after february fit and the reason for that is like we've been discussing you, there are major chAllenges for the business and the company. But to me, there is so few a real true network effects that um existence and technology and lintons is so powerful.

I don't believe that anyone, perhaps you do ever ever is a long time, but any time in the foreseeable future will be able to disrupting software alone is just software, like just commodity. Somebody will build something Better. IT will come along. But and linton is such a classic example, like IT looks like crap, like let's i'll be honest, like the product is really bad at this point.

has an if like ten second .

page load is really, really bad but like nobody will ever beat IT. Like I will always easy to use IT everyday because everybody I need to interact with this on IT and if I leaving, go somewhere else, they're not on IT, you know.

So like, yeah and the only thing like I can envision a future where people chip away in vertical and then those vertical expand but were ways out from that. And the couple things i'm thinking of our you know um when recruiting developers, it's very common to start on github exactly. And then all the den this all data that is not actually in linked in that so much more actionable. And it's like, oh, it's just the mere, you know, bread ground trail that theyve left from doing their work, create a much richer profile. Or you can imagine and sort the same thing on Angel list like IT, they move out from founders and VC to employees, and then people are actually incentivize, keep their Angel est profile of today, that proliferates to other industries.

design those called be hands, that adobe bot there was doing this. Totally agree. If you are going to attack them, this is the only way to do IT because it's the only way where you can actually get enough critical mass like a network is is a zero value until IT is a critical mass value and then IT is of like completely defensible value. But but it's I really think IT IT would IT would be a false air in the try and build a horizontal, wide based a professior network at this point.

Yeah I mean, in the same way that that would be fulish to build a horizontal video hosting platform at this point or a horizontal pure social network. I the era of horse zona platform, horizontal platform, once day of network effects supplied, you don't disrupt them by building other horrors on a platform. And I think that um you know that's that's just the interesting thing to note when you are thinking about um starting new startups because i've heard so many people say linked and socks, somebody to try in and see and disrupt linked in and like yeah, we have our product homes, but you're not going to do IT by creating a Better horizontal linked .

in and and I think this place um for me at one point, I want to bring up about the acquisition that plays really strongly and here is linked like the market is like h and goals like they they get this um so what has linked in been more terrified of than anything else in its history. Its people explore trading the network, create off of linked in and and stealing IT out and boost and .

competing with them. And linked is famously like just the iron fisted in their a their terms about no their A P I limits or your ability to store data that you retried from lincoln. They have the most locked down and open A.

P I is joke IT is an other joke. Um and so one of the things that gets me really excited about linking being part of microsoft um as a uh as a as a user, as a user of products um and as a um you know as as as somebody who is has a huge vested interest in innovation, the future is man. Could this mean the dawn of a real linked in A P I? Because microsoft has a very different set of motivations then linked in um and so long as they .

keep the network effect lock.

so long as they keep the network effect, but it'll also be embedded into all microsoft products, right? And microsoft is is also a developer facing company. And so like if they open up the linked in A P I too, I mean, I think about like even like venture capital firms, like so many firms, are building data tools internally for themselves.

A to be old, identify people who might be founders, great founders, before they start companies, or people who might be interested, enjoying startups s before they do, who really talented. And you've just been totally hamstring because you can't really use the linked A P I very well. Um but if now all a sudden you can like and think about all the cool products and services they're going to be able enabled by that.

you can um all just copy out this like David remember venture capitalists are in nit market.

Yeah exactly exactly. Um but uh there so many more examples too.

Yeah good point. Um should we .

greet IT? Um yeah the other there was one.

I the question I want to post to you. So here IT is in microsoft rest to integrate linked in with all their products. Keep in mind microsoft also owns now a link linked in product and hasn't incentive to make that revenue stream profitable. So do they .

is without accounting for a question .

um or I should say as successful as possible, do they do a bunch of google apps integrations also that microsoft starts to encounter or potentially could encounter? Will will be interesting to navigate the platform versus product tensions where you know famously, they didn't want to release office .

for ipad because as you know .

all too well because IT competed with the competitive vantage that that surface had or you know in in a million other ways, office and windows always having tension. Do you run into a scenario here? Or is there a clear um you know subsequent product and leader product where it's nope, we're not focused on growing length in through other people's integrations. And that is a soul um you know source of value for other process of microsoft.

I mean, I got to imad. I be really disappointed in microsoft sati and current everybody, if if they take the dots, call microsoft reproach, I can't see them during that fired. But I mean, like you do, this is this is the whole thing about you know, saat his leadership.

And microsoft is like the way that this company becomes relevant again and and and and an innovator again and something are you relevant again? Technology moves fast, right? It's like fair speer.

You know you might miss IT if you don't stop like around everyone ece a while um but men like you know office on ipad like want to be everywhere where you are. And like so if if linked in all the value that they are gona hopefull go try and create in bringing linked into sales. Another verticals isn't on sales force too. Like you know that's a big failure for them. Okay, conclusion what you get back and so how we are going to do this like this is are regretting like right now the buy or we predicting the future and thinking like yeah put yourself .

five years from now, was this a good purchase for this Price?

So I think I think like today sitting here, I say this is a great buy because a year ago is linkedin was worth twice this much um and it's this incredibly unique, incredibly defensible asset that is now part of microsoft and like huge stops up um but by that rubrics, you know. Got it's really just going to be like can they execute on s no, the opportunity is massive. But but with great you know with great opportunity comes great.

Now there's a lot of complexity here and is very difficult to do these things. Um it's all going to come down execution. So right right now i'm going to give IT having to given an A A minus right now just accounting for the huge amount risks to to an execution.

How are we both positive on this? I was going to give you today like I, I, I will got monday morning being like what and here alright, but here's I have some couple of rationals, but one is, you know in november of twenty fifteen, the stock .

Price was at two fifty five OK.

right? And and they they bought IT for one one. I you know I don't think the company is actually worth less。 And if you look at IT, like it's twenty five, what is for twenty six billion and IT was it's a little over three billion in revenue. So like an ax.

you know yes, to acquire a very you know sort of premier internet and sas company for seventy adec revenue like those companies were trading on the public markets at ten to fifteen next revenue like a year ago before accounting for any kind of liquidity premium premium. So like get great by yes.

so that that's any of the assumption that lincoln continued its trajectory. Um you have the the risk that typically comes with a start up acquisition, start up uh any M A thing of of integration fAiling.

Of integration .

fAiling. The bigger the acquisition, the for further you can fall and a twenty six billion or write down would be truly like a good punch. And I think, you know, this kind of comes down to two things.

I think they needed to make this acquisition or acquisitions like this because that's their future bt, there there, this cloud services company. And you know, this is a cloud service that is right in their warehouse, delivering value to enterprises to make them more productive and efficient and do their best work possible. The question is, could they did they need to do large, eminent to do IT like they? They needed a product offering like this for companies.

Um they weren't going to build their own like that, that was going to fail miserably. You know what what else could they possibly have done? I think I do have faith in this new microsoft, much more or so than the microsoft of all days that is famous for flub, flub dema.

And I think when I say old days, all to say under Steve bomber and you know, I think with satish leadership and the people, I really have a lot of faith in the people leaving these integrations. And I think that like you will pray, end up you want to follow up up a anywhere or another. But well.

here so here's something interesting that we haven't talked about IT all on this absolute, he is really relevant. This is by far the biggest acquisition we have covered on this episode. Like the scale of this like this, maybe i'm just trying to do some quick math in my head, but like the value of this acquisition is approaching the combined value of all the other companies we ve talked about combined um maybe .

slightly less.

But it's like on you know is the is microsoft linked in worth? You know how we got here? Pixar, instagram, twitch, bungee theory, luis film, youtube become rightly universe who has a lot of money?

I don't think you can really look at IT through that lens. You have to look at IT like what was the cost .

of not doing .

IT up and I think .

you've got to pull the trigger.

Yeah well, hats off for now at least to microsoft and and all our friends over .

there now and folks linked the big question be like, can these cultures match? Um you know they get a lincoln has office is all over the world, but primarily center and silicon valley. Microsoft typically doesn't do well what their silver ley .

campuses as as could talk about a few months ago. You know they have a new mindset of when he comes to M A of like we don't care you are like, you know you can be in you may wonder this ban a comply mean unit can valley like doesn't matter.

you know yeah just a lot of fate and fortunately close well.

fortunately asked about bergin. So it's a .

great place to leave .

is a great place to leave.

We do to do a quick card about yeah, yeah, my mind super quick because I think a lot of people probable have seen IT already. But code conference was last week and IT was book ended by elan and and jeff BIOS and I hadn't watched the jeff one yet but the elon must want to so fantastic so go watch the elon musk interview at the code conf. Um he he just like has this incredible way of dancing back and forth between like total due in a space suit that is like talking about the future .

in a way where you're like why this is this the one way but then .

there's other things were like the way that he explains why the um first stage rocket lands on the drone ship and unfortunately bloop today but know the last four have the drones ship. He does a really good idea like explaining why the drones ship needs to be where he needs to be in position the ocean and and for anybody that sort like to the space x story, understanding any the physics behind that super approach, able, very interesting .

and clearly visionary. So I I am, I am grinning widely here because literally no joke as my, my, my car out was was the best of ticket. So this is great because I have not yet watched the elon talk.

So now I got to watch IT and you got to watch and everybody listening has to watch to the basis is talk IT is fantastic um you know he uh man that guys just awesome um but uh um one couple of quick things I love from IT you when they ask him like what there's so much going on an amazon, like how do you think about this? Like how do you think about your businesses? And he says, and I think about innovation is like I like to think about one of starting when we're starting a project or something super ambitious know like alex a what not like, what about our customers isn't going to change you know over in the first simple future like um you so much is changing so fast and technology but what are what do they like core things that are not onna change and and else that that reminds me of link instance you know like I sit here today like I was a linton happy linton chair older for a long time because I just sit there and was like i'm going to using the ten twenty years from now no doun in my mind no. So anyway, there would go code conference. IT was good this year.

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