Something to Yelp About

Jeremy Stoppelman's local-review site is off the business-press radar. That's O.K. He's building credibility, market by market

Don't be fooled by Jeremy Stoppelman's persona. The barely-30 CEO of local-review site Yelp may exude the Web 2.0 ethos, sporting jeans and T-shirts about town, bringing his dog, Darwin, to work, and hosting blowout parties at San Francisco's swank Roe or his own South-of-Market Street loft.

Just beneath the hipster facade, Stoppelman is serious about business. During an hour-long interview, Stoppelman answers almost every question with the "b" word. "We're building a business for the long term here, Sarah!" he says, throwing his arms up in exasperation over the attention doted on companies other than Yelp. He has drafted a Yelp mission statement, incorporating a list of core values. He reads Jim Collins' business classics, Good to Great and Built to Last. He even spent a year at Harvard Business School, though he dropped out to return to Silicon Valley and—you guessed it—build a business.

And it's for that very reason that Yelp has become the forgotten Web 2.0 gem you really should be paying attention to. I'm as guilty as anyone of not being more attentive. As I reported for an August, 2006, BusinessWeek cover story on the consumer Web, I spent hours with Stoppelman and Yelp co-founder Russel Simmons, just as Yelp was just becoming a San Francisco sensation. But ultimately Digg's Kevin Rose wound up on the cover. Rose was the Web 2.0 everyman. Stoppelman and Simmons were just, well, too normal. Maybe a little, um, boring. "It boils down to what people are excited about and right now it's not business," Stoppelman says. "It's all about growth curves and land grabs."

Bragging Rights

Don't get me wrong. There's plenty to like about Yelp's curves. Facebook it's not, but the site was visited by 9 million different users in the past 30 days, up from 5.5 million in November. Yelp got its start in San Francisco but has been expanding to other cities, including New York and Chicago. The metrics suggest Yelp is gaining traction outside its home base, which has a population of less than 1 million.

In January, Yelp closed a $15 million round of venture capital from DAG Ventures and earlier investors, gaining a healthy $200 million valuation. That puts it in a class with Marc Andreessen's Ning and beneath only a much-hyped handful of names that include Facebook and Slide.

But Yelp's real Web 2.0 bragging right is its business model. Unlike many companies in its peer group, Yelp provides a compelling advertising platform. People go there intending to make a transaction—say, find a Thai restaurant in New York or an accountant in San Francisco. And it's always easier to sell ads to someone when you know what they want. Even on a search engine like Google (GOOG), people are only looking to transact part of the time. Often, they go to get information. And on a social network such as Facebook, people aren't looking to transact at all; they're just there to connect with friends.

Legitimately Local

What's more, Yelp is one of the few companies that has tried to tap the elusive local market and actually succeeded. Craigslist is another exception. Even giants like Yahoo! (YHOO) and Google have stumbled when trying to monetize local markets. Fellow Web 2.0 players have fared worse still. Sequoia Capital-funded Insider Pages was sold to IAC/InterActiveCorp.'s (IACI) Citysearch for roughly the same amount of capital it raised. Judy's Book simply folded.

The plight of local sites can be compared to that of companies that sell software to midsize businesses. Small to midsize companies make up the bulk of the economy, but they also represent a fragmented market. Revenue from winning their business doesn't always offset the cost. So it takes a lot of up-front capital and patience to build a business large enough to eke out a profit (just ask NetSuite (N), still in the red after years in business). Similarly, tailoring Web content for several different cities and then tapping those small local businesses for sales is something Internet companies have a hard time doing.

But Yelp has gotten off to a strong start, painstakingly building legitimacy market by market. It encourages locals to write reviews so other locals will consider Yelp an authority, and then rewards active users with its infamous open-bar parties. So you're more likely to read about Yelp in the style and culture sections of a local newspaper or the Village Voice than in the business section, or BusinessWeek. All of which is fine with Stoppelman: "We just want to be part of local culture, and if the Village Voice is talking about us, we're probably legit in New York."

A PayPal Pedigree

Another reason Yelp is off the business-press radar is that unlike a lot of Web 2.0 experiments of the early 2000s, Yelp doesn't see itself selling any time soon. Stoppelman and Simmons were both part of what's come to be known as the PayPal Mafia, the group that famously helped launch the successful online payment service that later sold to eBay (EBAY)—a rare handful of entrepreneurs who didn't get burned when the Nasdaq crashed.

In the wake of the bust, Simmons went to Hawaii and Stoppelman went to Harvard. But separately lured by PayPal co-founders Max Levchin and Peter Thiel, they each came back to the Valley to build something big. Unlike Digg or Flickr, which was later sold to Yahoo, Yelp was more than a hobby that turned into a success.

Doing Business the Old-Fashioned Way

Another contrast between Yelp and other consumer-Web startups: Stoppelman insisted on building his own ad sales force from day one. That lifted Yelp's costs dramatically, compared with peers that outsource ad sales to the likes of Google, Microsoft (MSFT), or Federated Media. But Stoppelman knew he couldn't sell to local businesses using computers and mathematical models à la Google. He'd have to do it the old-fashioned way, manning the phones, calling one local business at a time.

That's not glamorous work, no matter how many parties Yelp throws. And despite its success, Yelp still has a long slog ahead. It won't get any easier as the economy slumps into a recession. But if the company continues on its current trajectory, it could become one of the very few billion-dollar names to come out of the Web 2.0 generation.

If Yelp does, it won't be a fluke; the company will have earned it. Until then, Stoppelman & crew have come to terms with getting no love and say with a pout that they're O.K. with being under the radar. "Real business is happening but no one seems to care," Stoppelman says. "Honestly, I don't want the hype. I don't need people thinking we're awesome. We'll just keep doing it."

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