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IPO Looming, "All Grown Up" Yelp Looks to Boost Ad Revenues

Posted by Sheila Shayon on February 20, 2012 11:01 AM

Yelp, the user-generated review website, quietly launched seven years ago with a cartoon-like logo designed by YouTube co-founder Chad Hurley.

Now known for its distinctive 'burst' logo and spanning the globe, it plans to raise as much as $100 million in an IPO on the New York Stock Exchange on March 2nd.

As the company — which will offer 7.15 million shares for $12 to $14 each, giving the company a value of as much as $840 million — also aims to boosts its advertising revenues to monetize its wealth of user-generated local content, some may wonder about Yelp's viability as a business model.

"The important thing here is that the filing means Yelp could become is one of the first almost entirely crowdsourced media entity entities to go public," argues GigaOm's Ryan Lawler. "Yelp’s entire business is built on the more than 25 million reviews that it has accrued over the years from its users. That user-submitted content is the reason that Yelp attracts more than 66 million unique visitors a month."

Yelp claimed 66 million unique monthly visitors in 2011 and has become one of the most popular websites in the US and international growth in Canada, UK, Ireland, France, Germany, Austria, The Netherlands, Spain, Italy, Switzerland, Belgium and Australia. 

By the end of Q4 2011, Yelpers had written more than 25 million local reviews, and causing some merchants to seek greater control of their online profiles feeling reviews are sometimes stacked against them.

On average, more than 5.7 million monthly unique visitors have used Yelp Mobile apps, the brand innovated by launching the first Augmented Reality (AR) iPhone app for the US in the iTunes App Store in 2009, enabling iPhone 3Gs owners to shake their phones three times to turn on a GPS compass feature called "the Monocle."

The current valuation is less than the $1 to $2 billion originally reported in November and Yelp’s niche advertising model has critics saying it’s an unsustainable business model. With years of financial loss, the platform’s consistent revenue growth remains its strong suit.

Reports that Google tried to buy Yelp for $500 million may have spiked the current valuation. "They don't make any money," commented Wedbush Securities analyst Michael Pachter to the Los Angeles Times. "The free service to consumers is great, but they're also offering free services to businesses."  

Pachter says that Yelp's business model overcharges companies for ad impressions on the site with just 2.6% of 606,000 small businesses with profiles actually paying money; the rest maintain free, basic pages.

Goldman Sachs, Citigroup and Jefferies & Co. are leading the deal. Max Levchin, Yelp’s chairman, owns 13.5 % and founder and CEO Jeremy Stoppelman owns 11.1%. "I don't know what investors are going to do, but I personally think they have a ton of brand equity. I think they ultimately will have success,” added Pachter. Sounding a cautionary note, the Wall Street Journal commented: “The company cautioned its soaring top-line growth rate is likely unsustainable and likely will decelerate as the business matures."

Its community of reviewers and users appear to see it as a validation for their participation. "Always figured they'd be acquired by now," a user named Chris B. wrote on Yelp's Talk forum, as reported by the LA Times.  "Nice to see the Craigslist of review sites all grown up." 

Below, three small business owners talk about why they use Yelp for local advertising:

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