March 2 (Bloomberg) -- Jeremy Stoppelman, who watched his seven-year-old company jump as much as 73 percent on its first day of trading today, got to this point by shunning offers that other startups would have found hard to resist.
About two years ago, the co-founder and chief executive officer of Yelp Inc. rejected a $550 million bid by Google Inc. and a Yahoo Inc. overture of $1 billion, according to people with knowledge of the negotiations. He also severed an earlier partnership with Google that brought in more users to maintain tighter control of data from Yelp, a social-media service with consumer-generated reviews of businesses.
“Yelp definitely had a number of opportunities to sell the company that we did not pursue that would have given us pretty nice exits,” said Russel Simmons, who co-founded the company in 2004 and worked there until 2010. “Jeremy was not interested in selling before executing on vision. Offers were turned down, and it’s not like it was for money reasons. It was because we wanted to turn this into something really big and great.”
Adding to his reputation as a demanding negotiator, Stoppelman has walked away from venture funding when suitors didn’t share his views on Yelp’s product and its users. His challenge now is persuading Wall Street investors that he still knows what’s best for Yelp, even while competition mounts from the very companies he is said to have spurned.
Yelp, which raised $107.3 million in the IPO, also will have to justify a valuation that puts it above most of the Standard & Poor’s 500 Index based on sales. The shares rose 64 percent to $24.58 today in New York, giving it a market valuation of $1.47 billion. That price is about 18 times its annual revenue.
The stock jump values Stoppelman’s 11 percent stake in the company at about $145 million. Yelp has never reported a profit.
After fielding a takeover offer from Google in 2009, Yelp received a bid from Yahoo for about $750 million, said the people familiar with the matter, who asked to remain anonymous because the talks were private. Yahoo later discussed a price of $1 billion, without giving a formal offer, one of the people said. Yelp balked at the idea, saying it would probably want $1.5 billion to $2 billion, the person said.
Yelp declined to comment or make Stoppelman, 34, available for an interview, citing the mandated quiet period before an IPO.
Stoppelman and Simmons met as engineers at PayPal Inc. before starting Yelp. They got the idea after joining a technology incubator called MRL Ventures that was backed by Max Levchin, a PayPal co-founder.
Finding a Doctor
Yelp was borne out of a birthday lunch for Levchin at the Slanted Door, a Vietnamese restaurant in San Francisco. Levchin, Stoppelman and Simmons began discussing how frustrating it was to find a good doctor in the city. A Google search yielded almost nothing, and Internet users didn’t have incentive to share their views online.
“I said, ‘Well, obviously someone is not going to go to a business, go home and write a review,’ and everyone was like ‘Yeah, that’s ridiculous,’” Simmons said. “Which is kind of funny in retrospect.”
Stoppelman suggested building a messaging system that let people query friends about a business. Visitors could type in ‘looking for a doctor near San Francisco,’ prompting an e-mail to their social circle that asked for suggestions.
“The idea was that then they’ll respond, and by responding, get sucked into the site,” Simmons said.
After a $1 million investment from Levchin, now Yelp’s chairman, Stoppelman and Simmons went on tour to get more funding. The company eventually switched from an e-mail service to a Web-based social network -- in part because Devin Alper, then a vice president at Yelp, suggested it would help attract female users, said Jared Kopf, who was part of Levchin’s incubator.
Despite being introverted and “nerdy,” Stoppelman stood up to investors who offered lowball terms, Simmons said.
“He wouldn’t hesitate to say, ‘This is offensively low. Forget about it. We don’t need to talk to you guys anymore,’” Simmons said.
The company got $56 million in funding from venture firms, including Bessemer Venture Partners, DAG Ventures LLC and Benchmark Capital. Elevation Partners, a firm co-founded by Bono, invested as well, after Stoppelman had lunch with the U2 frontman.
Reid Hoffman, a former PayPal executive who went on to co-found LinkedIn Corp., said Stoppelman had the earmarks of a CEO early on.
‘What’s the Strategy?’
“He wasn’t just an engineer with all the technical depth, but also had an understanding of the product and what customers want,” Hoffman said in an interview. “He wasn’t one of those guys who said, ‘Just let me do my coding tasks.’ He said, ‘What’s the strategy here? What are we doing?’”
In 2010, Yelp forged a partnership with OpenTable Inc. to let users make restaurant reservations. Stoppelman was a tough negotiator then as well, though he was more focused on preserving the experience on Yelp, rather than the money involved, said Jeff Jordan, OpenTable’s former CEO.
“He made sure we properly valued the Yelp relationship, but the hardnosed negotiation was less on the financial terms,” said Jordan, now a venture capitalist. “He first and foremost cared about the user experience, and then the financials.”
As Yelp gained momentum, early decisions by Stoppelman gave the startup some stability, said Nish Nadaraja, who worked as Yelp’s marketer and community manager at the time.
Stoppelman and Simmons chose to limit Yelp’s growth to one market at a time and fine-tune their strategy in that area, even as competitors were collecting reviews from across the country. That strategy was later emulated by Groupon Inc. and LivingSocial, the two biggest daily-deal sites.
“If you have 10,000 reviews spread out over the whole country, the site is useful nowhere,” Simmons said. “If you have 10,000 reviews in one city, then it’s useful in one place.”
Yelp generates revenue by selling advertising on the site. Sales rose 74 percent to $83.3 million last year, with local ads accounting for 70 percent of the total and national-brand advertising making up most of the rest.
Still, after years of Yelp losing money, some investors question whether it can compete with the Internet giants. Facebook Inc., the world’s biggest social-networking site, could capitalize on its 845 million users by grabbing a piece of the local-reviews market. Google, meanwhile, bought Zagat Survey LLC last year, gaining a source of restaurant reviews.
Yelp may have a hard time holding its ground, said Tim Ghriskey, who oversees $2 billion in assets as chief investment officer of Solaris Group in Bedford Hills, New York.
“We just wonder if this is going to be a long-term winner in the space when you have some behemoths sitting out there that are likely to enter it,” he said.
Stoppelman also had to shore up the company’s reputation after local retailers claimed they had been bribed to pay for advertising. Some store owners said Yelp offered to delete bad reviews on their company’s public profile if they agreed to pay $300 a month to run ads on the site. If they turned down the offer, Yelp wrote negative reviews or filtered positive ones, the store owners said.
In 2010, local businesses filed two putative class-action suits, eventually combined into one, that said Yelp used extortion to persuade business owners to pay for the advertising. In October, the case was dismissed, though the plaintiffs have since filed notice of their intent to appeal, according to a regulatory filing.
Yelp has denied the accusations and points to the 67 percent of advertisers who become repeat customers as evidence that they aren’t unhappy or forced into the service.
“The site wasn’t set up to serve businesses,” Simmons said. “It was meant to serve the consumer. Without the community of reviewers, there is no Yelp.”
To contact the reporter on this story: Danielle Kucera in San Francisco at email@example.com
To contact the editor responsible for this story: Tom Giles at firstname.lastname@example.org