Everyone's a critic. The cliché has long been a useful way to brush off a caustic remark or a biting comment. But now it's true -- and it's driving entrepreneurs crazy.
Maybe you've seen the red decals posted outside your local takeout joint or your nearest watering hole. They say,"People love us on Yelp." Or, if you happen to own a service business, maybe you have received a red business card from a customer with the words, "You've been Yelped!" printed in large block letters. The calling card directs business owners to the site where they -- and the entire world -- can read what the customer really thinks of them.
A bad Yelp review can damage more than an entrepreneur's ego. Yelp is by some measures the most popular reviews website in the world, with more than 26 million monthly readers and a library of user-generated content that is probably matched only by Wikipedia. There are some eight million Yelp reviews, covering service businesses in most major American metropolitan areas, along with Ireland, Canada, and the United Kingdom.
Yelp was founded in San Francisco in 2004 by Jeremy Stoppelman and Russel Simmons, two men in their 20s who wanted to make it easier for consumers to find good businesses and avoid bad ones. What they created was an online yellow pages with attitude. Yelp lets anyone critique any business and grade it, with ratings from one star to five stars. Yelp then uses a closely guarded algorithm -- the company won't discuss even the basics of how it works -- to determine which reviews are displayed prominently, which are buried, and which are removed from the site. Most Yelp reviews are overwhelmingly positive, but some are painfully negative, often in a personal way. Reviewers will insinuate that there are rats in the kitchen, that the owner looks like a meth head, that the merchandise is stolen. They will suggest that the barber's razors aren't sterilized, that the restaurant manager is racist, or that the business, whatever it sells, is just plain bad -- to be avoided, one star, DO NOT GO HERE!!!
Yelp allows companies to respond to reviews, either by posting a public comment on their Yelp page or by sending a private message to the reviewer. A company can edit basic information on its Yelp listing -- such as a phone number, Web address, and operating hours -- but it can't remove itself from Yelp. The upshot is that in the 33 cities in which Yelp has established a firm foothold, most companies must contend with the fact that they neither control nor wholly understand the mechanism by which millions of customers decide where to spend their money.
Yelp makes money by selling ad space to small businesses. Salespeople typically call a company that has received several reviews and encourage the owner to "claim" his or her Yelp page. This allows the business to respond to reviews and receive traffic reports from Yelp. Once a business has done this, the next step is an offer of a $300-per-month paid sponsorship, which buys the company advertisements elsewhere on the Yelp site. "We explain to them how getting more exposure on Yelp benefits their business," says Jordan Grossman, a salesman in the company's San Francisco office who let me listen in on his sales calls. "Usually the reaction is positive."
But not always. The Web is littered with the testimony of business owners who claim to have been shaken down, slandered, or otherwise damaged by Yelp and its users. Go into any service business, find the owner, and ask her what she thinks about Yelp, and you are liable to get, at best, a mixed response. A restaurateur in Phoenix told me that reading Yelp reviews is like "panning for gold in shit." "Anybody can ruin your business," said another restaurant owner in Lafayette, California. He urged me to "come out and expose these guys."
The speed at which Yelp -- only five years old, unprofitable, and cute in all the ways that Silicon Valley start-ups tend to be -- has managed to attract animus would be enough on its own to make it worthy of examination. But Yelp is also noteworthy as a case study in start-up success. It has managed to pull ahead of entrenched, well-funded competitors while building an enormous community of dedicated writers and readers. According to the Internet research firm comScore, the site's traffic increased 45 percent over the past year, even as Citysearch, a 14-year-old site owned by the Internet conglomerate IAC, saw its traffic drop slightly.
Yelp doesn't disclose its revenue, but the figure is thought to be about $30 million. The company, which has raised $31 million from venture capitalists since 2004, expects to be profitable by the end of the year and has more than $15 million in the bank. Yelp employs roughly 300 people, and Stoppelman, the company's CEO, expects the figure to increase to 500 by the end of this year. Max Levchin -- Yelp's first investor and the co-founder of PayPal -- says he expects Yelp to be "one of the highest-return investments I've ever made." Indeed, as Inc. went to press, rumors surfaced that Google was in talks to buy Yelp for $500 million.
Stoppelman and Simmons met while working as engineers at PayPal, the online payments firm that was founded in 1998, taken public in 2002, and then sold to eBay for $1.5 billion. PayPal was a contentious, intensely competitive place, and it launched the careers of entrepreneurs who helped create many of the successful companies that Silicon Valley would hatch over the next decade. The so-called PayPal Mafia -- led by co-founders Elon Musk, Peter Thiel, and Max Levchin -- founded or provided angel investment to Facebook, Tesla Motors, Digg, Flickr, YouTube, Kiva, Slide, and LinkedIn.
