Ghost of Midnight

… about neighbors, community and Front Porch Forum

Yelp, Local Online Leader, worth $200M?

Posted on Thursday, February 28, 2008 by No comments yet

TechCrunch reported this week…

Yelp, the popular local review site, will soon announce a new $15 million dollar round of financing led by DAG Ventures. The valuation is rumored to be in the $200 million range. Yelp says that they will be using the money to expand geographically, add onto their sales team, and establish an office in NYC (they are based in San Francisco). This is Yelp’s fourth round of funding since their founding in 2004. Yelp is also boasting some impressive stats: 8.3 million uniques in the past 30 days and over 2.3 million review.

Mike Boland comments

Yelp has become a poster child for how to build a local reviews site and has become a clear favorite of the twenty and thirty-something urban “foodie”.

And Greg Sterling offers

Yelp’s success is about its “personality” and “transparency.” The site has managed to create a brand as a result of offering content that people have come to value and trust.

This brand identity is what now lifts it above many or most of its competitors.

But it’s the comment area on TechCrunch that starts to get at the most interesting points.  E.g.,

Comment No. 12 says in part…

Local interest websites are always non-viral, because they operate in the disjoint “internets” of each metropolitan area. So one needs to wait a very long time before they reach decent size. For Craigslist, it took 7-8 years. VCs will not wait that long. To accelerate this, you can throw money at the distribution/marketing. I do not know what the timescale for them will be in NYC, but VCs may get impatient, especially because this business is very recession-prone, and the recession is coming.

Comment No. 15…

i’m no expert, but $200mm for sub-$10 million revenue, no profits, and difficult to scale growth (building a community in a new metro area takes time and local ad sales takes sales manpower) seems really generous. i guess yelp is essentially the market leader and probably does get high return traffic from those who do use the site… maybe you can argue a decent ltv for each user?

And comment No. 37…

I helped start a review site that was funded at the same time as Yelp, InsiderPages, Judysbook, etc. After building the feature set, we set forth to capture the YP advertising market. Kelsey Group and other industry pundits were playing up the pending “massive” migration of local advertising from offline to online. We all wanted to be there to capture it.

There was one big problem with capturing those ad dollars: the cost of sale. Reaching out to local businesses costs money, a LOT of it. I’m not sure what Yelp’s rate in customer-review-leads-to-advertiser equation looks like, but here’s some back-of-the-envelope math:

2.3 million reviews
Assume average of 1.5 reviews per business location (this is generous)
1.5 million businesses reviewed to date

Break down those businesses:
60% local, 40% regional or chain (some split along those lines)

The ad dollars are in the “national-local” or “regional-local” businesses. They have bigger budgets, and they’re familiar with the web play. But if you’re in the local review business, how many of your users will enjoy ads from Applebees and Home Depot?

So, you go after the “local-local” businesses, because that’s what brings the value of your site (Yelp) over the big guys (Yahoo Local, Google Local). Reaching out to these folks? You have to put feet on the street, and the cost of the sale just doesn’t pencil out.

Because of this, Yelp’s strategy is obvious acquisition. But at those numbers and a fourth round, they need to be eclipsing the {portal-name-here} Local properties in traffic. In short, good luck.

Front Porch Forum is not a local review site (although many of our subscribers do use it for reviews), but many of the points above apply.  We launched in our pilot area about 18 months ago and it gets a little easier every day in ways that money can’t buy.

Posted in: Front Porch Forum, Local Online, Local Reviews, Local Search, Peer Reviews, Small Business Advertising, Social Media, Viral Marketing

Leave a Reply

Your email address will not be published. Required fields are marked *