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Hot Tech Companies Like Yelp Are Bypassing IPOs

In a desire to keep control, they're opting for private rather than public investment—even, as in Yelp's case, with rich bids from Google and Microsoft

During the boom, Silicon Valley's entrepreneurs dreamed of taking their companies public for all the recognition—and cash—that an initial public offering bestowed. But a growing number of tech's hottest startups are passing on the process, or at least delaying it indefinitely. The latest example: Jeremy Stoppelman, whose Yelp is one of the fastest-growing sites on the Web. On Jan. 28, Yelp said it would take up to $100 million from private equity firm Elevation Partners to finance growth and let employees cash in some of their stock. "It might make sense to go public someday," says Stoppelman. "If you can delay that day, there are plenty of advantages."

Three other startups have opted for similar deals in recent months—Facebook, Twitter, and Zynga, a rapidly growing games developer. What's unusual isn't that major investors want a chunk of these hotshots, but that they've agreed to spend tens of millions of dollars so cash-strapped founders and employees can pursue their visions without the pressure of public shareholders. "You've got venture guys who want out and employees who have no assets," says Lise Buyer, founder of consultant Class V Group. "This puts control back in the hands of management."

Letting entrepreneurs cash in stock used to be controversial since venture capitalists want the people they back to have every motivation to succeed. But the stance has softened as the average time it takes for a startup to go public has stretched to years, according to the National Venture Capital Assn. "You want [entrepreneurs] hungry, not starving," says NVCA President Mark Heesen.

Six-year-old Yelp attracts 29 million unique monthly visitors, who use its Web site to find member reviews of local restaurants, plumbers, retail stores, etc. The company has grown to 340 employees, most of them stuffed into a seventh-floor office in San Francisco's trendy South of Market neighborhood. Yet Stoppelman and his crew believe they've only begun to tap the potential of local online advertising. Their desire to keep control is strong enough that Yelp recently turned down a $550 million acquisition offer from Google (GOOG) and a bid north of $700 million from Microsoft (MSFT), according to two people involved in the negotiations. "Yelp has the chance to become one of the great Internet brands," says Stoppelman. "That for me is the chance of a lifetime."

Yelp used Facebook's private equity infusion as a model for its deal. Stoppelman and Yelp director Peter Fenton from Benchmark Capital crafted terms and then negotiated with Elevation. The infusion values Yelp at $475 million. Yelp will use $25 million for company investments, while $75 million will go for a tender offer to buy a small share of each employee's holdings. That includes Stoppelman, who insists the money won't weaken management's resolve. "This isn't going to change my life dramatically," he says. "My head is still in the game."

Burrows is a senior writer for Bloomberg BusinessWeek, based in San Francisco.

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