Blog Post

Yelp is worth $1.5 billion… Now what?

So Yelp(s YELP) shares popped in the company’s first full day of trading, closing up more than 60 percent over the initial price of $15 per share. This is just the latest in a string of tech IPOs — after Brightcove(s bcov) and LinkedIn(s lnkd) — with big first-day gains.  And now at $24.58 a share, Yelp has a market cap of about $1.5 billion.

So what’s Yelp to do with its new riches? Well, if it’s anything like LinkedIn or Zynga(s znga), it will start sniffing around for acquisitions to augment its existing platform, to integrate new features and to add talented engineers. Here’s a list of some interesting possible acquisition targets for the company.

Foursquare

To be honest, this is a bit of a long shot, and yet … I can’t stop thinking about how perfect this marriage could be. Yelp would bring all of the relevant ratings data to help users determine where they might want to shop, eat and hang out. Foursquare then connects them with their friends when they get there. Yelp provides qualitative sentiment data, while Foursquare offers up the actual relevant behavioral data. Together, the companies could go beyond just letting you browse user ratings to decide where you want to go, and instead provide smart recommendations, with accompanying information from each company’s users.

All that said, there’s plenty of reasons why such a hook-up wouldn’t work: Foursquare’s most recent financing round valued it at approximately $600 million, according to reports. While CEO Dennis Crowley has seemed open to the possibility of an acquisition during an interview with AllThingsD in December — that valuation likely puts Foursquare out of reach for Yelp.

Also, let’s face it: Both products are sufficiently mature that there’s probably no easy integration without alienating one user base or another. That kind of thing can be a killer — and the main reason why deals like this destroy more value than they create.

Tello

When I met with Tello CEO Joe Beninato a few weeks ago (see disclosure), I thought of the product almost as the next iteration of what Yelp could be: More immediate and actionable, in its ability both for consumers to provide instant feedback and for businesses to respond to their ratings and comments. Yelp’s five-star rating system is more than a little imperfect — Hunter Walk wrote a pretty interesting post a few weeks ago about why such systems don’t work very well — and a lot of its user reviews are in the TL;DR category for most users.

Which is why Tello is such a breath of fresh air: its “thumbs up, thumbs down” ratings system is much more intuitive, and its character restriction in the feedback form means that users don’t have to sit down at their computers to compose (or read) some novel-length review. It’s all about just getting right to the point. More importantly, Tello could share some real granular usage data with business owners — down to the location and even the personnel that served the consumer. And since it’s mobile, feedback is more immediate and actionable — it could even reach a disgruntled customer while he or she is still in the store. That’s real value Yelp could add to users and businesses.

Foreca.st

This is almost like doing a deal with Foursquare, but much cheaper and with the potential for a lot more synergy. Choose a place based on Yelp ratings, and, rather than check in when you get there, let folks know where you’re going from a single user interface, whether that be from your mobile phone or on the web. The cynic in me says that if Yelp really wanted to enable this sort of functionality, it could do so without acquiring someone — sort of the same way it rolled out (and subsequently revised) its own daily-deals strategy rather than acquire one of the smaller entrants in the space. Still, it seems there could be some real synergy and product fit between the two.

The takeaway

Notice a common theme? If Yelp is to move beyond the crowdsourced nature of its user reviews and its advertising business, data will be key. The more it knows about users’ actual behavior, the better it can be at providing recommendations, not based just on some qualitative range of reviews, but on where users actually spend their time. Apply that for businesses, and Yelp could provide more granular information than its current sentiment data, and perhaps drive not just more customers to their businesses, but better customers.

(Disclosure: True Ventures is an investor in the parent company of this blog, Giga Omni Media. Om Malik, the founder of Giga Omni Media, is also a venture partner at True.)

9 Responses to “Yelp is worth $1.5 billion… Now what?”

  1. I would add Ness Computing to the acquisition list. When reseaching restaurants, I find myself using Ness to narrow my options (via data analytics) and Yelp to do the final selection (because it helps answer qualitative concerns such as size, noise, liveliness, etc.).

    Yelp + Ness, along with heavier marketing of Yelp’s current check-in feature, seems similar to a Foursquare acquisition, but at a sliver of the price (>$600mm vs a multiple of Ness’s $5mm A round) — all while avoiding user integration issues.

  2. Surely a roll up of the biggest European / Asian local review websites would make sense at this point for Yelp? Qype seems like the most obvious acquisition target.

    • Ryan Lawler

      @Sam – I think it’s difficult for anyone to integrate a foreign company, even if it adds some bit of localization. I’m not sure that’s something Yelp would want to do.

  3. Erik Schwartz

    It is going to be interesting to see what happens with these now public companies with tiny float who raised huge late rounds at high valuations when the late stage investors get unlocked.

  4. I’m not sure what yelp can do, I wouldn’t use a hundred million bucks for acquisitions when you’re losing money. I also am not sure shareholders would be happy in a share swap/merger so early.

    • Ryan Lawler

      @alex – Good point. But outside of the Foursquare example, I’m sure that there are a number of smaller firms Yelp could pick up with stock. It’s just a question of how much, right?