WEB 2.0 STARTUPS: WHO WILL SURVIVE?

"Pull up a chair." Reid Hoffman waves a big arm toward his computer. It's not easy to maneuver in this office strewn with books, wires, and empty Amazon.com boxes. Hoffman, wearing sneakers and black shorts from a morning workout, opens up his page on LinkedIn, the social network for professionals that he founded six years ago. His in-box is jammed with solicitations for meetings and funding. He looks at one proposal from Minnesota and shakes his head: "Looks like it's based on bad math."

Hoffman cuts an unusual figure in Silicon Valley. He's a Californian with a philosophy degree from the University of Oxford, and his oversized body looks more heartland than coastal. But his brain is in sync with the Valley. In addition to founding LinkedIn, he has become in the past six years the leading angel investor in the so-called Web 2.0, the wave of Internet companies spawned this decade. With stakes in dozens of startups, including news aggregator Digg, blog software developer Six Apart, and the social network companies Facebook and Ning, Hoffman was widely envied during the boom.

Now he must navigate the downturn. As the economy dives and the market for public offerings dries up, venture firms are cutting off funding for startups and forcing their portfolio companies to slash costs and race for revenue. The DeadPool, a fixture from the dot-com crash in 2001, has reappeared on the TechCrunch blog, detailing firings, closures, and busted financing. In this unforgiving climate, Hoffman is putting in long hours, hammering out survival strategies, and scrounging for savings and revenue. "Without Reid, [many] entrepreneurs are left with limited options," says Peter Fenton, a partner at Benchmark Capital.

Hoffman won't discuss specific plans for companies he has stakes in, but he's free with his views on the industry overall. Internet companies with a service up and running and millions of users should fare O.K., though the likely ad recession may force them to make painful adjustments. This could apply to Facebook and, to a smaller degree, LinkedIn (which relies less on advertising). Early-stage startups face grimmer choices. Those lucky enough to attract investors, he says, should be ready to part with lots of equity--or sell out altogether. These days, survival trumps the prospect of a jumbo payday. "You want to stay in the game," says Hoffman.

NETWORKING IN HARD TIMES

Many Net startups won't make it. Outside Hoffman's orbit, outfits such as news site Thoof and music site Social.FM are shutting down. And Hoffman's brood is hardly immune. Seesmic, a Web video company, laid off 7 of its 21 employees in October. Hoffman sees more pain ahead. "You have to remember that in startups, most end up as corpses," he says.

But LinkedIn, he argues, may be a recession play. In tough times more workers shed the illusion that they're safe inside companies. "Essentially," Hoffman says, "every individual is a small business." He predicts that more workers will be networking outside their companies--and using LinkedIn.

Hoffman sees his own network as the key to his influence. It extends from his associates at Oxford to partners at venture firms Sequoia and Benchmark Capital. These connections amount to what Hoffman calls his ecosystem. And he manages it on the same LinkedIn page he is furiously navigating. In essence, he built a tool to manage his life.

The question is whether the fast-growing LinkedIn can become as valuable for businesspeople worldwide as it is for Hoffman. With 30 million members, LinkedIn is no match in scale for giants MySpace.com and Facebook, each with more than 120 million members. But LinkedIn execs argue the company, currently profitable, should suffer less than the bigger social networks in any advertising downturn. Ads account for only 30% of its revenues, which are expected to hit $75 million to $100 million this year. Another 30% of revenue comes from corporate recruiting services, while the rest comes from premium subscriptions, which help users establish contacts and be located.

Hoffman trusts that survival instincts will lead professionals to nurture their networks--and pay for subscriptions. At the same time, Hoffman's team has convinced investors that the information pouring through LinkedIn will amount to a new "social" form of media.

On Oct. 22, Goldman Sachs, German software giant SAP, and The McGraw-Hill Companies, the parent of BusinessWeek, invested $22.7 million in LinkedIn. (LinkedIn is also a technology partner in BusinessWeek's new topic network, Business Exchange.) The new money, along with a $53 million venture round last summer, gives LinkedIn a sizable stash as it heads into the downturn. These investments value the company at a bit more than $1 billion. Hoffman's goal is for LinkedIn to be "a major Web company" with a market value above $4 billion.

To guide LinkedIn, Hoffman and the board hired the veteran software executive Dan Nye last year. Hoffman, who admits to a chaotic management style, stayed on as board chairman and director of product development. Part of his CEO job, Nye says, is "wrestling to get the thinking out of Reid's head, package it, and get it to the other people."

It was at the bleakest stage of the dot-com bust, in 2002, that Hoffman began to build his empire. He had been a key partner at PayPal, the online payment company eBay bought that June for $1.5 billion. Flush with his share, he looked for next-generation investments--and found himself nearly alone. "The common wisdom was that the consumer Net was dead," he recalls. "I thought it was just beginning."

So he devised a strategy. He would start a company to run the business side of the social Net--LinkedIn--and would join the consumer side as an investor. Even facing the downturn, he touts the economics of Internet businesses. "This is the only time in human history when, for somewhere between $5 and $30 million of capital investment, you can create a sustainable ecosystem for 10 million-plus people," he says.

When discussing his career, Hoffman can sound positively utopian. He regards LinkedIn as a system where the good are rewarded by the community for their deeds, while liars and cheaters are exposed.

Despite lofty visions, his advice to entrepreneurs is hard-boiled pragmatism. Hoffman urges them to focus first on financing--and only later to hone a product or service. It's financing, not products, that keeps them alive, he argues. And in a Silicon Valley now chronicled by the Dead Pool, survival is the game's new name.

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The PayPal Mafia

Hoffman is one of many PayPal alumni who play big roles in the Valley. Jeffrey O'Brien wrote about the PayPal Mafia in the Nov. 26, 2007 Fortune.

To read O'Brien's blog, go to http://bx.businessweek.com/Web-20/reference