Posted on February 27, 2008
Filed Under Bubble Watch |
TechCrunch is reporting that Web 2.0 local reviews service Yelp has raised $15 million in a fourth round of funding led by DAG Ventures. The rumored valuation: $200 million.
The funding would take the company, which was launched in 2004, to $31 million in total funding. According to TechCrunch, “Yelp says that they will be using the money to expand geographically, add onto their sales team, and establish a second office in New York City.”
I like local reviews services and one could probably argue that Yelp is a decent player in the space. But for a company whose “revenues are rumored to be sub $10 million/year,” $31 million in funding and a $200 million valuation do not make sense.
By the fourth round of funding, I personally believe that a company should be well on its way to having validated a scalable business model. If Yelp, with its 8.3 million unique visitors in the past 30 days (according to internal analytics) cannot earn at least $10 million/year, one needs to ask just how a larger salesforce, a second office in New York and geographic expansion are realistically going to turn the company into a viable, self-sustaining business.
The Yelp approach smacks of a Bubble 1.0 strategy that is doomed to failure. Of course, investors haven’t put their money behind because they think he’s capable of developing a viable business model. They’re looking for an acquisition. Unfortunately, given the poor economic landscape and the troubles other desperate startups with hefty valuations but minimal revenues are having finding their fools, Yelp’s investors might want to be careful about a fourth round knockout.
A sensible approach to building a company like Yelp would be to prove that your business model works in the cities that you initially target and then replicate that model elsewhere once you have your validation. If you cannot establish a profitable business model in the cities you initially target, expanding your salesforce, adding additional offices and replicating your unsuccessful model elsewhere are not viable solutions for devleoping one.
Yelp’s approach of taking an unprofitable model and bringing it to new locations reminds me of a (hopefully fictional) business story I was once told. A VP tells his CEO that the company is losing money on every product sold. The VP asks, “What should we do about this?” To which the CEO replies, “Don’t worry. We’ll make it up on volume.”
Of course, a sensible model was probably never that important to Yelp seeing that its founders have than in building a good business. I simply hope that Yelp’s investors get their invitations to the parties they’re subsidizing while they last.
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