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Yelp! IPO shares pop in debut

by Olaf de Senerpont Domis | Published March 2, 2012 at 4:00 PM

Shares of online review site operator Yelp! Inc. soared 63% in their debut Friday, March 2, after pricing above their expected range the previous evening.

The San Francisco-based company, which enables people to post online reviews about local businesses, priced its shares at a dollar above its indicated price range of $12 to $14 each. Yelp! shares traded at $24.42 Friday afternoon.

The company raised $107.3 million by offering 7.15 million shares. At its $15 IPO price, the company commanded a market capitalization of $987 million.

Despite the excitement surrounding Yelp!, which arrived after a tepid week for IPOs marked by two offering postponements, some investors remained concerned about its future prospects. Yelp! has never turned a profit since it was founded eight years ago. It posted $83.3 million in net revenues for 2011, which resulted in a net loss of $16.7 million for the year. That's a bigger loss than in 2010, when the company posted a net loss of $9.6 million on total net revenue of $47.7 million.

Yelp! derives a majority of its revenue from local advertising -- a tricky market, as small businesses have equally small ad budgets and are notoriously hard to reach and keep as paying clients.

"This is a tough business model," said independent IPO market analyst Tom Taulli. "The concern is: Can Yelp! truly build a big business solely off of local advertising? At the end of the day, the company relies on a revenue stream that is a bit iffy."

Yelp! also is beset by several tough competitors, including Google Inc., Yahoo! Inc., Microsoft Corp.'s Bing search engine and Groupon Inc. Search and advertising giant Google has made local ads a priority, but also acts as the most significant source of traffic to Yelp!'s site, as the company noted in its prospectus. The company argued that Google has removed links to Yelp!'s site and promoted its own competing local products.

Groupon provides another kind of competition to Yelp! Rather than rely on advertising, the Chicago-based daily deals company, which went public in November, gets fees from coupons it arranges with local businesses. While it isn't always easy for a small business to prove that a sale resulted from a particular ad, a consumer who brings in a coupon is a far more tangible result, Taulli said.

"Companies have this idea that there is only so much in their advertising budgets, but they are willing to do crazy things when it comes to coupons," he said.

The returns for the venture firms who backed Yelp! aren't in doubt. Its largest holders, Bessemer Venture Partners and Elevation Partners, each own 22% of the company's shares now. At the IPO price, each firm's 11.9 million share-stake is worth $178.5 million. Benchmark Capital Partners owns about 16% of Yelp!'s shares, worth about $126 million at the $15 per share initial price.

Yelp! chairman Max Levchin, a tech investor and former Google executive, owns a 13.6% stake worth $107 million, while CEO and cofounder Jeremy Stoppelman's holdings are worth $88.5 million.

Shares of another newly public social media-related company, Zynga Inc., also rose Friday after the San Francisco game developer moved to address one of the biggest criticisms it has faced around its revenue stream: its heavy reliance on Facebook Inc. Zynga on Thursday unveiled plans for a new gaming platform that is separate from Facebook. The company's shares spiked nearly 10% to $15.91 in morning trading Friday, reaching one of its highest points since the shares went public in December. Zynga shares experienced a similar increase on Thursday.

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Yelp! IPO shares pop in debut

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Olaf de Senerpont Domis

Bureau chief, West Coast; Editor, venture capital

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