On October 30, 2009, Diane Goodman logged on to Yelp.com. Like many business owners in cities across the country, Goodman had lately developed a small obsession with the website, which allows customers to publish critiques of local businesses. She had been visiting her company's Yelp page every day to see what her customers had written about her bookstore. Goodman found reading Yelp reviews to be emotionally wrenching -- but she also couldn't look away.

Scanning the page, Goodman discovered that an amateur critic -- a Yelper -- had written a new review of Ocean Avenue Books, the small store in San Francisco where she is the owner and sole employee. Over the previous few years, Goodman's store had received a handful of reviews on Yelp. Most of them were positive, but they often contained just a touch of cruelty. For instance, there was the customer who gave her five stars out of five but went on to describe her store as "poorly lit, mothball infested, disorganized, and a bit chaotic." Another described Goodman as "a sweet lady" but also recommended that she give the store "a good cleaning."

"I know it's a mess," Goodman says, showing me inside the shop, a 650-square-foot box with tall shelves and haphazard stacks of paperbacks blocking the aisles. "But it's just me working here." Goodman is 49 years old and has an easy smile. She opened the store, at a different location, in 1992. "I have the kind of business where I get really close to my customers," she says. "I'll spend hours talking to people who are lonely. That's the job."

But a few years ago, the job started to change. Whereas before dissatisfied customers might have complained directly to Goodman or simply gone away, now they were seeking relief on the Web. "In the past, if someone was difficult, you could just tell them to leave," she says. "But you can't do that anymore. You talk to someone, and a couple of minutes later, it's on Yelp."

Goodman began reading the latest review. "This place is a TOTAL MESS," wrote somebody who went by the handle Sean C. "I think this place needs to close down for a few days and do a thorough cleaning and organization and get rid of all the crap!"

Goodman was angry -- yet another review about the mess -- and she decided to let Sean C. have a piece of her mind. She clicked a link on Yelp's website, opening a tool that allows business owners to send messages to reviewers. "Why don't you come in here and say it to my face?" she wrote. "Are you too much of a coward?" She told him that she knew who he was -- so few people came into the store that it was obvious -- and that the store was a mess because sales were slow. Over the next few hours, she sent several more angry messages. She warned of a "world of pain." "Goodbye pussy boy I will be contacting your employers," she said. And: "Your mom was a bitch and she didn't teach you how to behave. That's why your life is such a mess right now."

Sean C. went back to the Yelp page for Ocean Avenue Books, amended his review of the store, and attached the e-mails. He also attached the e-mails to a post on Yelp's message boards under the subject "Getting threatening and crazy e-mails from business owner." Dozens of the amateur critics who write reviews on the site jumped to his defense. Someone named Morgan M. wrote, "That owner is fucking crazy," and Patricia H. wrote, "Wow, what a nut job!" A few attempted to defuse the dispute. "Leave the small [companies] alone," wrote Verona N. "They are already struggling to keep their heads above the sea of large businesses."

For two days, Goodman was transfixed by the discussion -- and she started to get paranoid. "I couldn't tell if the people coming into the store were real customers or just people who were going to say something about me on Yelp," she says. A customer would ask an innocuous question -- for instance, "How long have you been open?" -- and Goodman would panic, fearing that her response might become fodder for yet another Yelp comment. "I was saying to myself, 'Come on; that's crazy,' " she says.  " 'Don't think this way.' "

At the end of the second day, she decided to end the crisis by apologizing. She figured out Sean's last name -- Clare -- with a Google search and found his address in the white pages. His house was just two blocks from her store. She walked up the stairs to his front porch and, at 6 o'clock on a Sunday evening, knocked on his door.

Accounts differ as to what happened next, but a struggle ensued. Goodman says she started to explain that she had come to apologize for her e-mails and was attacked; Clare says Goodman began yelling, forced her way into his house, and refused to leave. In any case, the two became entangled, grappling until Goodman fell down the steps. When she hit the ground, Clare ran back inside and slammed the door. The police arrived a few minutes later.

They told her she would be booked for battery and remanded to San Francisco General Hospital for a mental health evaluation. She sat and listened, bewildered. Since when, she wondered, was it illegal to knock on a neighbor's door? And why, after all the nasty things that had been said about her in public, was she the one being punished? Wasn't she the victim here?

More than anything, she blamed Yelp. Out of nowhere, the little company had somehow managed to get between her and her customers. It had hurt her business and caused her to humiliate herself, first online and now, improbably, in the real world. "I've never met any store owner who likes Yelp," Goodman says. "We're all gritting our teeth. It's evil."

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.

Yelp's beginnings were, as a result, anything but humble. The company was, literally, conceived over lunch and funded -- to the tune of $1 million -- by dinnertime. At the time, Stoppelman and Simmons, who were 26 and 25, respectively, were working in a 10-person incubator created by Levchin. He instructed them to look at a handful of investment ideas, one of which was "the yellow pages for the 21st century."

As Stoppelman and Simmons ate lunch one afternoon in the fall of 2004, they talked about building a service that would allow you to e-mail a question to your friends -- for instance, "Who knows a good doctor in San Francisco?" -- and then publish the results online. (The idea of allowing people to publish reviews without being prompted, which is today Yelp's core offering, was an afterthought.) It was Levchin's 29th birthday, and about an hour after the lunch ended, Simmons and Stoppelman approached their boss and pitched the concept. They had no PowerPoint presentation and no specific revenue plan; just a sense, Stoppelman says, that they could make something that would appeal to lots of people.

Levchin hesitated. "I wasn't sure if it would work," he says. "But the guys were really enthusiastic about it. And in my experience, when you have smart people who work well together, it's foolish not to invest." Maybe because it was his birthday -- or maybe because he had made tens of millions of dollars on PayPal -- Levchin agreed, investing $1 million in the half-baked idea.

During its first few months, Yelp was a failure. It attracted few readers or writers beyond the founders' friends and family, and it did not impress the venture capital investors whom Stoppelman pitched at the end of 2004. After a few weeks of unsuccessful meetings, Stoppelman and Simmons went back to the office and set about trying to improve their product. "We got the doors slammed in our face over and over again," Stoppelman says. "But that was lucky." Had Yelp succeeded in raising money, it probably would have attempted a national rollout. But without any additional funding, he and Simmons had to stay local. "We said, 'You know what? If we just create a cool city guide in San Francisco and it's worth $10 or $20 million, that would be a win. We don't care.' "

The idea of talking about a $20 million exit as a mere "win" betrays a hardheadedness that is one of Stoppelman's strengths but that can also make him seem strangely cold. Stoppelman's analytical tendencies make his reviews almost comically dispassionate. Writing on his blog about a book he read recently, The Lives of Ants, he calls it, "an okay survey of the ant species." A review of the clothing retailer French Connection sums it up as "clothing of medium-level quality."

Without the cash for a national rollout, Stoppelman decided to focus on making Yelp famous locally. With the help of a buzz-marketing guru he hired on a whim, Stoppelman decided to select a few dozen people -- the most active reviewers on the site -- and throw them an open-bar party. As a joke, he called the group the Yelp Elite Squad.

Levchin thought the idea was crazy -- "I was like, 'Holy crap: We're nowhere near profitability; this is ridiculous,' " he says -- but 100 people showed up, and traffic to the site began to crawl up. Because the parties were reserved for prolific reviewers, they gave casual users a reason to use the site more and nonusers a reason to join Yelp. By June 2005, Yelp had 12,000 reviewers, most of them in the Bay Area. In November, Stoppelman went back to the VCs and bagged $5 million from Bessemer Venture Partners. He used the money to throw more parties and to hire party planners -- Yelp calls them community managers -- in New York, Chicago, and Boston. The company now employs 40 of these people.

As Yelp's influence grew, bars and restaurants were increasingly willing to host the parties -- which involves giving away drinks, food, and space -- in the hope that the crowds would come back and write positive reviews. By the summer of 2006, Yelp had amassed 100,000 reviews and was attracting more than a million users a month. That June, the San Francisco Chronicle called it "San Francisco's online 'it' guide for what's hot and not." Around the same time, potential acquirers came calling. Neither Stoppelman nor Levchin will discuss specifics, but they acknowledge that a large technology company offered to buy the then-30-person company in 2006. Yelp turned down the offer. "It was a tough call, and it was contentious at the board level," says Stoppelman. "Because if we said no, we'd have to build a real company."

Building a real company meant creating a sizable sales force. With an additional $10 million raised from Benchmark Capital at the end of 2006, Stoppelman set up call centers full of salespeople in New York and San Francisco. Today, 150 young people spend their days cold calling businesses that have been reviewed. For prices that range from $300 to $500 a month, advertisers get to pick a "favorite review" that appears at the top of their Yelp page, which can help a company with some bad reviews create the impression that it is beloved by its customers. Yelp advertisers can also elect to have their ads appear when someone searches for local businesses in their industry or on the Yelp pages of their competitors.

The pitch has proved reasonably popular -- Grossman told me that a typical Yelp salesperson generates at least $8,000 in monthly billings -- but it has also attracted controversy. Some business owners have reported seeing their Yelp ratings fall after they declined to buy advertising. The rumblings came to the surface in a 2009 article that appeared in the East Bay Express, a weekly newspaper in Oakland, California. The article, "Yelp and the Business of Extortion 2.0," suggested that Yelp salespeople, like Mafia foot soldiers, were threatening businesses with bad reviews if they did not buy a sponsorship package. Stoppelman denies the charges.

But the suspicion and anger are symptomatic of a larger problem, namely that Yelp's algorithm is a mystery to nearly everyone outside the company. Stoppelman says this is necessary to prevent business owners from hiring shill reviewers, but nearly every business owner I spoke with in reporting this story complained of being caught in the crossfire. "We've had some positive reviews suddenly disappear," says Laurie Lavy, the owner of an upscale home furnishings store in Phoenix. "They say it's the algorithm. But the whole thing is weird."

I met Lavy, and two dozen other business owners who had been touched in one way or another by Yelp, after traveling to Phoenix, which is something of a frontier for Yelp. Yelp plans to open a sales office in Phoenix later this year, but right now, the lone face of the company's Arizona operation is a community manager named Gabi Messinger, a compact, bubbly woman of 35.

As far as I could tell, being a Yelp community manager consists mostly of sending little messages of encouragement to users. Messinger has sent thousands of the messages, with bromides such as "cute pic" or "great review." "When I send a compliment, it encourages other people to do the same, and that creates the culture." Being a model Yelper for Messinger also means setting an example of openness. She has written reviews of two sex shops and two gynecologists ("There are not too many people I trust to go 'down there,' but Dr. Bartels and Dr. Webb are on that list!"). It also means engineering a seemingly endless series ofparties and outings.

One afternoon in November, I joined Messinger as she called on a number of businesses that had participated in a Yelp promotion earlier in the year, giving discounts on such things as haircuts and massages to Yelpers. Our first stop was the Root, a salon in downtown Phoenix. The owner, Lauren Hart, a 48-year-old with short black hair, took a break from wrapping a customer's blond locks in foil to tell me about how she came to love the Web. "Two and a half years ago, I didn't know how to turn on my computer," says Hart. "I thought the Internet was something for my kids."

Things started to change when a new customer mentioned to Hart that she had found the salon on Yelp. "When you're in a trend-driven business, if you're not keeping up with the trends, you're just going to get old with your clientele and die," says Hart. She lifted the ban on Internet usage in the office, took a basic computer class at the Apple Store, and showed up at one of the monthly meetings Messinger holds for business owners.

Today, the Root offers deals on its Yelp page -- anyone who mentions the site might get a free conditioning treatment -- to attract new clients, and Hart tries obsessively to avoid negative reviews. When a new client makes an appointment and mentions Yelp, Hart generally checks to see if the person has a profile on the site. If the Yelper has written bad reviews, Hart will make sure she personally cuts the customer's hair. Hart responds to every review -- which in 29 out of 30 cases has meant saying thank you.

Like every business owner, however, Hart cannot help focusing on the rare exceptions. "I've had one negative review," she says. "The customer called in and wanted the owner, and when she came in, I could tell she wasn't my type." The new client seemed edgier than Hart's typical clientele. Hart cut the woman's hair, and at 2 o'clock the next morning, Hart received an automated e-mail about a new review: two stars. She was devastated.

"The fact is, I can walk out this door and trip over salons," she says. "A bad review would be horrible. In this economy, good enough isn't good enough." But unlike Goodman, the bookstore owner, Hart kept her head. She composed an apologetic reply, and, using her Yelp account, sent a private message to the dissatisfied customer. Hart suggested a competing salon and offered to pay for a second haircut there. The result? The two-star review became a four-star review. (For more on how to respond to a bad review, see "Take a Deep Breath.") Hart told me that if a junior stylist were to get a review below three stars, she would consider firing the stylist. "My girls flinch every time we get one of those e-mails," she says.

And yet Hart loves Yelp. Amid a recession that has been disastrous for most retail businesses, sales at the Root have grown 148 percent compared with last year's. Meanwhile, the Yelp traffic -- Hart says she gets two or three new customers every day -- has allowed her to stop advertising in the local neighborhood newspaper, which had cost her $400 a month. Apart from the services and discounts she offers Yelpers, she hasn't paid Yelp a penny. "There are a lot of business owners who feel like Yelp reviews just happen," she says. "But it's not true. Responding to reviews, giving offers, maintaining your page -- it all makes a huge difference."

If Hart's story shows what's possible when business owners embrace Yelp, it also helps explain why some yearn for a world in which a single mishap might go unnoticed and in which a business's employees don't have to live in terror of customers' comments. Though the Yelp users I met in the course of reporting this story seemed well intentioned enough -- some were amateur writers who enjoyed the creative process of composing a review; others used the site to find like-minded friends -- it's impossible to write a negative Yelp review without experiencing the thrill of righteous indignation. One Yelp Elite member in San Francisco, a man who has written more than 100 Yelp reviews, told me, "I write reviews to screw over businesses I don't like."

This makes sense, when you think about it. American society has, for more than a century, been defined by corporate power, and the Internet has upset that balance, mostly for the good. When someone sends a Twitter message about his baggage being lost by a large, publicly traded airline -- "Delta sucks!" -- it's hard to argue that this is a bad thing. Delta does suck in that instance. And Delta can take it.

But Yelp encourages people to be unsparing in their critiques of companies that can't take it -- companies that are small, independent, and not particularly profitable. The site capitalizes on our impulses to take down the Man, but, in doing so, turns us against mom-and-pop businesses -- already hit by globalization, consolidation, and a recession. At its best, Yelp is meritocratic, helping good businesses like Lauren Hart's to thrive. At its worst, Yelp empowers people who do not need to be empowered at the expense of those who are already struggling. There's a lot of insanity in Diane Goodman's story, but there's also this truth: Review sites can be unbelievably cruel.

On some level, Stoppelman seems to know this. In 2008, the company gave business owners the ability to respond privately to reviews. Last year, Yelp allowed businesses to publicly confront their critics. "The main thing we've done is try to do a better job reaching out to the local business community," says Stoppelman, who regards entrepreneurs' anger as a source of great disappointment. "The most frustrating thing is talking to owners who say, 'Yelp has been great,' and then they think for a minute and remember the one negative review. I understand that people want to be heard, but you're meeting the Yelp founder, and all you want to talk about is a single review that doesn't even matter in the grand scheme of things. I don't understand that."

There's arrogance in this remark, but Stoppelman's suggestion that business owners simply move past their bad reviews has merit. Yelp is not your friend; it's your critic. And if it became your friend -- by, say, censoring angry reviews -- customers would probably abandon it for a site that allowed them to more fully express themselves. Or they could just post an angry blog, tweet, or Facebook message. Questions about whether Yelp is good or bad are academic.

"I don't like Yelp, but I realize I can't do anything about it," Diane Goodman says near the end of our conversation. She tells me that though she doesn't regret going to Clare's house, she does understand why he might have felt threatened. "I'm sorry I wrote those mean things," she says. "If I read those e-mails, I'd probably think I was crazy, too."

Goodman's case may be extreme, but business owners all over the country are struggling with this new order. "I sometimes wish these people who tee off on you would have to divulge where they worked so I could criticize them," says Julian Wright, the owner of La Bocca, a restaurant in Tempe, Arizona. "But the reviews help us get better faster." Brad Keeling, the owner of a chain of dry cleaners, says Yelp reviews are to be heeded. "It's the public's opinion, and I don't mind hearing it," says Keeling. When someone criticizes him, he defends himself or simply apologizes. In several cases, he has been able to get customers to remove or at least revise their bad reviews. He estimates that 10 percent of new customers find him on Yelp. "Ignoring Yelp gets you nothing," he says. "You can't hate the future."

Of course, it's easy to see why so many business owners, faced with millions of Yelpers, each capable of ruining or at least damaging a business, choose to look on the bright side. Jane Reddin, who owns a crafts store in Phoenix, complains to me for 10 minutes straight about Yelp, assailing the company's business model, its arrogant salespeople, and the stupidity of the average Yelp reviewer. "They don't know what they're talking about," she says. "It's as if they're complaining that the gazpacho is cold."

So, I ask, you're not the biggest fan of Yelp?

She protests. "That's not what I'm saying at all," she says. "I adore the community aspect of Yelp." She thinks the Yelpers are an asset to the Phoenix business community. She is a happy user of Yelp and has written 38 reviews, most recently giving five stars to Oliver & Annie, a pet store.

Reddin pauses for a second, puts a hand on my shoulder, and smiles.

"Can you imagine if I said something negative in a national magazine about Yelp," she says. "What would happen to my reviews?"

Max Chafkin is Inc.'s senior writer.