Yelp Files to Raise $100 Million in IPO
On Thursday, Yelp filed to raise $100 million through an initial offering of its Class A stock, to be listed under the ticker “YELP”. An exact valuation figure was not released, though Yelp management has said it was considering pegging the company’s worth between $1 and $2 billion.
The latest of a series of Internet 2.0 IPOs, Yelp has been around longer than some of its freshly listed peers. It was founded in 2004 and has amassed a considerable following: 61 million monthly unique visitors, up from about 16 million in 2008. Yelp has developed a popular mobile app and a loyal following of both users and businesses who swear by it.
Yelp has monetized its business to the tune of $80 million annually. It sells advertising to local businesses listed in its database, as well as to larger companies. Since 2006, revenues have grown faster than unique monthly users. This is an impressive feat for a start-up, especially one that has seen both sides of the recession.
Clearly, its website and mobile app features keep users coming back. It has deftly stayed on top of its competitors, which range from the smallest start-ups to the Big G. This fact should not be overlooked; Facebook’s easy win over Google+ had strong implications for the company’s future.
Yelp’s strong monetization comes at a cost - specifically, its SG&A cost. Yelp disaggregates selling & marketing from general and administrative on its S-1 filing, but both figures have grown quite recklessly. The soon-to-be-public company downsized with the recession, and its SG&A, which had been 124% of revenues, shrank to 87%. But it was back up in 2010, when SG&A grew by 95%, compared to a revenue growth of 85%. A closer look provides reassurance. In the 9 months ending Sep. 30 2010, Yelp’s SG&A grew by 100%, implying that the last three months were somewhat less reckless. In the 9 months ended 9/30/10, SG&A expense grew just 55% compared to still strong revenue growth of 80%.
Actually, is Yelp so strongly monetized? It has only 19,000 active business accounts, compared to 529,000 listed businesses on its platform. This 3.59% monetization has declined heavily from 2008, when 16% of listed businesses were paying for ads.
The ugliest part of Yelp’s IPO filing is its intent for the sale. Yelp cited “general corporate purposes” and “sales and marketing activities” as intended uses for the capital to be raised through the IPO.
In other words, they plan to increase SG&A. Based on Yelp’s poor use of funds spent on SG&A, the company may be better off keeping that $100 million under a pillow. Does it really take $100 million to get more local businesses to advertise on Yelp? If Yelp management (including some big names in venture capital) thinks that more money will solve their burn rate, the firm should set aside a few million to hire a consulting firm.
Yelp has had 7 years to address unsustainable spending on sales; investors should think twice before rewarding it with eager funding.
The darkest part to Yelp’s story is the shadow of Google. Despite the flop of Google+, the Internet giant has shown its strength through bold and successful expansions into new markets, challenging companies that used to not think of themselves as competitors. Yelp turned down a $550 million offer from Google in 2009, smacking of arrogance a la Groupon in 2011.
Flying solo, Google has successfully developed its Google Offers service in-house. It has tons of cash, which allows it to compete with Groupon by offering cheaper deals to merchants. Only 3% of businesses pay for advertising space on Yelp, which implies that advertisements may be too expensive. Yelp should realize this problem before Google does first.