Jeremy Stoppelman, CEO and cofounder of Yelp, has made a star of star ratings for businesses. | Photo by Jeff Minton

Not Just Another Web 2.0 Company, Yelp Basks In Its Star Power

In the fractured and fractious world of local advertising—and in the stock market—Jeremy Stoppelman and Yelp are shooting for the... you know.

Sometime last year, the home button on my iPhone stopped working. I spent a few fruitless hours trying to fix it myself—mostly by jabbing hard with my index finger—then proceeded to the Apple Store, where a good-looking kid with a mop of brown hair and a blue T-shirt told me that my phone would have to be replaced. Cost: $200. I didn't want to pay $200, choosing instead to spend the next several months in a state of constant frustration every time I had to coax the thing into making a call or pulling up an email.

Then I found Peter. A thirtysomething guy of South Asian extraction, Peter works in a shoebox of an office on the seventh floor of a shabby building in San Francisco's financial district. There is a worktable, a watercooler, some mismatched furniture, and, crucially, a letter tacked to his bulletin board with the following words printed in large block letters: PEOPLE LOVE US ON YELP.

I see the sign, but I still ask, "So how do people find this place?"

"Internet," Peter mutters—and gets back to work.

To Peter and millions of other local businesses, Yelp, the San Francisco-based company that has become the largest and best source for online reviews, might as well be the Internet. I had found Peter by doing a quick search for "home button repair" using the Yelp app on my barely functional iPhone. He was less than half a mile away, and of the 160 or so reviewers, more than 140 gave him five stars out of five. I used the app to get directions, and within 10 minutes Peter was dissecting my phone.

This is, when you think about it, a minor urban miracle. I handed over my most valuable possession—a pocket-size, easily resalable $600 device that contains the entirety of my digital life—to a guy whose last name remains a mystery to me. The only tracking document was my name on a Post-it, yet I was not only certain that Peter would not steal my phone but also that his repair would be flawless. Because Yelp told me so. And Yelp was right: Peter restored my iPhone to perfect working order. Cost: $89, less than half what Apple charges. It was, as I would write in my Yelp review, another five-star experience.

When I relate my story to Yelp's 35-year-old CEO and cofounder, Jeremy Stoppelman, he gives me a sly grin. "The mission," he tells me, "is connecting people with great local businesses."

He makes it sound simple, but in fact, Stoppelman is tackling—all at once—several of the most bedeviling problems to challenge Internet companies today. Yelp is in the local advertising business, a market that no Internet company has ever truly disrupted but one so tantalizingly large (worth between $90 billion and $130 billion, depending on whom you ask) that it has attracted the likes of Facebook, Google, and Groupon, larger rivals that would like to crush Yelp. Its users are increasingly coming via mobile phones, which are reputedly less amenable to ads. On top of all that, Stoppelman took Yelp public last March, at a time when investors punished web 2.0 companies like naughty children.

Stoppelman calls Yelp "my baby," and his deep desire to create a great urban guide is key to its success. | Photo by Jeff Minton

Despite this daunting list, Stoppelman operates like someone who knows something nobody else does. With 84 million monthly visitors and 33 million reviews in 96 markets around the world, Yelp has built a business that's the envy of its rivals. Third-quarter revenue was $36.4 million, tiny compared to Groupon's ($568 million in its second quarter) and Facebook's ($1.26 billion). But those figures are up 63% from a year ago, and investors see great potential; while Facebook's stock was at one point down more than 50% and Groupon's is off 80%, Yelp's stock has held its value since its IPO. Its market cap is approximately $1.6 billion.

The company is far from perfect: It's not yet profitable (though its losses have narrowed slightly), and it needs to convert more businesses into paying customers without raising their ire. But as Yelp's competitors struggle to adapt to the mobile Internet, Yelp seems only to be getting stronger. In August, Stoppelman revealed that click-through rates for Yelp's mobile ads are higher than those on desktop computers. That makes sense—customers searching on their phones, as I was when I found Peter, are often on the verge of buying something—and it implies that Yelp may well be able to increase revenue even more quickly as its mobile traffic grows. "Everyone is panicked about the transition to mobile," Stoppelman says over lunch at his office in October. "I don't lose any sleep whatsoever."

To understand why Yelp is well positioned in the fight to digitize local advertising, first consider the prevailing attitude of the competition. "Local is the holy grail of the Internet," Sheryl Sandberg, COO of Facebook, told analysts during the company's first earnings call in July. "The problem with local businesses is they are just not very tech savvy."

Her curious suggestion that local businesses are somehow to blame for failing, as she put it, to "adapt things... that we would think they would obviously adapt," doesn't hold up to scrutiny. Local businesses are, in fact, buying online ads—$19 billion worth in 2012, according to Gordon Borrell, whose eponymous research firm specializes in local media. They're just not buying much on Facebook or Google.

When Stoppelman and his cofounder, Russel Simmons, launched Yelp in 2005, with $1 million in seed capital from their former boss at PayPal, cofounder Max Levchin, its early competitors—Insider Pages and Judy's Book, which together raised roughly $20 million from VCs—attempted to blanket the country almost immediately. Facebook and Google, similarly, have made the same mistake of wanting to flip a switch and have local advertising be a national business.

Stoppelman and Simmons, by contrast, focused on growing organically in a single city, San Francisco. "Our bet," Stoppelman says, "was to focus on content quality and the community that's required to create that content." Starting that April, Simmons and Stoppelman invited their users to an open bar event at the Armani Cafe in San Francisco. A hundred people, most of whom had never met in real life, showed up and partied together. "We were like, Huh, this is interesting," says Simmons, who served as Yelp's CTO before leaving to start a new company in 2010. While Insider Pages and Judy's Book tried to woo reviewers with Starbucks gift cards, Yelp's parties became a monthly occurrence and, eventually, a formal program known as the Yelp Elite Squad. Stoppelman's team selected invitees based on the quality of their reviews, pushing users to compete for what became a coveted honor.

By the fall of 2005, a strategy had begun to crystallize: Stoppelman and Simmons would try to replicate the San Francisco model in Chicago, New York, and Boston—and eventually in smaller cities. "I was like, Really? We're going to grow party by party?" Levchin says incredulously. "But they were rigorous about recording the process it takes to go from nothing to a dominant position in a region or a city. That's the Yelp playbook." For the first five years, Stoppelman went to almost every Yelp Elite party. They were wild affairs, and they worked, seeding the site with tens of thousands of reviews.

Thanks to Yelp's success, Stoppelman, who grew up in the D.C. suburbs, has become extremely rich. He has roughly $200 million in Yelp stock to his name, Hollywood good looks—"Every single woman in San Francisco thinks she is his destiny," according to one blogger—and a disarming smile. Yet he is the kind of guy who tends to get lost in a roomful of people. Last fall, Stoppelman attended New York's Fashion Week as part of a Yelp promotion. "I don't think this will become an annual habit for me," he reported matter-of-factly in a head-scratching, though prototypical, Yelp review full of observations of questionable relevance. He noted his problems with ticket pickup and the staffers charged with managing the flow of people.
Stoppelman doesn't pose for fashion ads like Tumblr's David Karp and Foursquare's Dennis Crowley, and he doesn't cultivate a public persona like the tempered goofiness of Groupon's Andrew Mason or the trying-too-hard regular guyness of Facebook CEO Mark Zuckerberg. He lives alone in San Francisco's Marina District and works at a small desk in the middle of Yelp's open office. His beloved dog, an eight-year-old vizsla named Darwin, sits beside him.

The only luxuries Stoppelman seems to allow himself are nice clothes—he's nattily attired in a pair of herringbone pants and a designer T-shirt when we meet—and a strong point of view. Either in conversation or on Yelp, where he has written more than 1,000 critiques, Stoppelman will gladly offer up his two cents on the best and worst airport terminals, hardware stores, you name it. "I've always been opinionated and a bit of a loudmouth," he says. "I'm willing to express my views to anyone, even when they're contrarian," by which he means especially when they're contrarian.

Perhaps the most contrary move Stoppelman has made as Yelp's CEO has been to embrace what's been anathema to his web 2.0 contemporaries: He hired a sales force. "Yelp was the first tech company to embrace the human part of the business," says Jeremy Levine, one of Yelp's first investors and a New York-based VC with Bessemer Venture Partners. "At Google and Facebook, it's all about computers," he continues, explaining how the tech giants set up automated systems so they wouldn't need to hire salespeople. "Small businesses won't just show up and try to figure out complex tools." Borrell, the local advertising expert, concurs: "Small businesses tend to fall back on their trusted sales reps, the guy they meet at the Little League field and the Kiwanis club."

Although Stoppelman hasn't raided any Masonic lodges for sales talent, he has lifted his approach from the granddaddy of local advertising, the Yellow Pages. He has more than 500 salespeople working in offices in London, Phoenix, and San Francisco, and Yelp's advertising program is similar to the Yellow Pages, too: Businesses buy subscriptions for several hundred dollars a month in order to promote their reviews and to add special tweaks to their profiles.

While critics knock Facebook for its low advertising rates, which are said to be about $1 for every thousand impressions in the United States, Yelp has the opposite problem: It gets accused of charging too much. "Yelp is a rip-off for small advertisers," wrote the analyst Rocky Agrawal just before Yelp's IPO. He calculated that Yelp's customers pay rates that work out to roughly $500-per-thousand impressions, prices that would make even a magazine publisher blush.

Yelp's sales force has also made the service controversial among a vocal subset of its clients. Business owners have complained about pushy sales tactics and suggested that offers to advertise on Yelp come with an implicit threat to punish those who declined them. A class-action lawsuit, which was dismissed last year by a federal judge, alleged that Yelp was tampering with reviews. Stoppelman has suffered reams of bad press—an article in the East Bay Express dubbed Yelp "extortion 2.0."

Thing is, the majority of Yelp's customers and advertisers don't seem to mind. In August, Yelp reported that it had 32,000 paying clients, more than double the total from last year. An additional 791,000 businesses have free accounts where they can post pictures and respond to users' reviews. Stoppelman's approach generated revenue for Yelp while those one-time contemporaries, Judy's Book and Insider Pages, struggled to stay solvent. And it belied the Silicon Valley conventional wisdom that web 2.0 startups should first build an audience through viral growth, and worry about revenue later.

Yelp's sales force would be meaningless if the reviews weren't useful. "As people came onto the site, they would try to outdo each other," Simmons says. "There was this increase in length and quality." Yelp initially limited critiques to a few hundred characters, but every month or so, Stoppelman would ask Simmons to double the limit to try to keep up with the users' critical enthusiasm. Today, reviews max out at 5,001 characters and often include a comical level of detail. For proof, I recommend the YouTube series "Real Actors Read Yelp," particularly episode 2, in which Therese Plummer (The Good Wife) enacts a reviewer's praise for an Indian restaurant's "tender, moist pieces of dark meat chicken, smothered in this delicious sauce with tomatoes, honey, cardamom, and what I'm assuming was a pound of laxatives." Yelp reviews may be plagued with frequent misspellings, overexuberance, and curious digressions, but they are generally accurate.

The company's genius is in taking these idiosyncratic assessments and making sense of them. Yelp's review algorithm gives each establishment an average star ranking and filters out shills and less experienced critics. "Typically, the push back about Yelp is, What does some college kid know about restaurants?" says Michael Luca, an economist at Harvard Business School who has studied the company. "People tend to assume that crowdsourced information is so erratic that it's impossible to extract meaningful signals from it. But that's not true."

Luca has the data to prove it. In a recent study, he compared Yelp ratings of restaurants in Washington State with actual sales figures reported to the state's Department of Revenue. He found that a one-star improvement in a business's Yelp rating was associated with, on average, a revenue increase between 5% and 9%. By comparison, an unrelated study found that an A-grade in hygiene is only worth a 5% revenue bump. (Restaurant owners: Please do not replace your busboys with online community managers.) Luca's research, along with a similar study by two University of California, Berkeley, economists, argues that this jump is no accident. An increase in Yelp rankings means higher revenue for restaurants.

Stoppelman gets excited when I mention Luca's research and points out an interesting wrinkle in the study: Whereas independent restaurants received an outsize benefit from good Yelp reviews, chain restaurants appeared to be unaffected by their reviews, either good or bad. "That's something we theorized about early on," Stoppelman says, his voice rising. "We thought that the main reason somebody ends up at Starbucks is that they don't want to deal with the possibility that the independent coffee shop isn't any good. But with Yelp, you have that confidence."

The power of those reviews stands in marked contrast to deals at Groupon, which was the darling of the Internet in 2009 and 2010. At that time, Groupon (which also hired an aggressive sales force) seemed to eclipse Yelp, raising hundreds of millions of dollars and attracting a $6 billion acquisition offer from Google with the promise of helping local businesses create demand through coupons. "We faced questions on an almost hourly basis of 'how can you let this opportunity pass you by?'" says Peter Fenton, an investor in Yelp and a partner at Benchmark Capital.

Stoppelman tested a Groupon-style approach for several months, but ultimately decided that email blasts with daily deals would damage Yelp's review database. "Groupon is about discounted stuff," he says. "We're about great stuff and sometimes great stuff is expensive." Stoppelman's insight would be subsequently borne out. The web is littered with accounts of companies that found themselves in a cash-flow crunch after offering discounts through Groupon. And another academic study, by researchers at Harvard and Boston University, found that businesses running Groupon offers tend to see their online reputations, as depicted in such data as Yelp ratings, suffer. "A lot of product founders tend to be interested in the next shiny object," Fenton says. "Jeremy has a kind of productive paranoia; he's constantly asking what could go wrong. That kind of discipline is rare."

Stoppelman's personality may be as valuable to Yelp as its reviews. "He's very analytical and pretty stubborn. At times it can be frustrating," Levchin says of Stoppelman. He remembers when the young programmer publicly rebuked him after a boardroom coup at PayPal ousted Elon Musk, Stoppelman's first boss. "He was the guy throwing barbs at me from the back of the room, saying, 'Terrible idea, dumb decision,'" Levchin recalls. Rather than fire Stoppelman, he promoted him to VP of engineering. "His work ethic was great," he says. "He was smart and thoughtful and aggressive."

His confident, at times headstrong, leadership has shone through in his dealings with Google. In late 2009, as Yelp was being battered by negative press and Groupon was the new hot startup, Google came calling. The search giant offered Stoppelman a price reported to be more than $500 million. He admits he was tempted. Not only would a sale make him and many of his employees rich, it would also address one of Yelp's nagging limitations: It derives roughly 75% of its web traffic from search engines.

But just before Stoppelman signed the deal in early 2010, he received another offer, reportedly $1 billion from Yahoo. "The negotiation went from looking out and envisioning faster growth, a stronger brand, and more or less local invincibility to a conversation about what the company is worth," he says. "That wasn't why I engaged the process in the first place, so I just shut it down." Instead, he began talking to Elevation Partners, the private equity firm cofounded by U2 frontman Bono, about raising another round of financing.

During a long call with Elevation executives, Yelp's office manager burst into the conference room and handed Stoppelman a sticky note with the words STEVE JOBS IS ON THE LINE. Stoppelman excused himself and paced the office as he waited for the Apple founder to be patched through to his cell phone. "Don't sell," Jobs told him. "Google is evil."

Stoppelman had already ended the Google talks, but he admits, "I was a little twitchy afterward." Not that the Elevation partners knew it: Stoppelman returned to the meeting and finished the negotiation, closing $25 million in financing for Yelp.

Since Stoppelman spurned Google, the search and advertising giant has seemingly done everything in its power to kill "my baby," as Stoppelman sometimes calls his company. It launched Google Places (now renamed Google+ Local), a Yelp knockoff that includes links to pretty much every online review site but Yelp. It acquired Zagat for $151 million—a sort of proto-Yelp that has been publishing user-generated reviews in book form since the late 1970s. When the Senate Judiciary Committee held hearings in September 2011 to assess whether Google engages in anticompetitive practices, Stoppelman testified that his company received threats that Google would remove Yelp entirely from its search index. Meanwhile, Facebook has joined the fight to blunt Yelp, touting Promoted Posts, a new advertising program aimed at local businesses, and testing a Yelp-like star-rating system.

None of these actions has slowed Yelp. Stoppelman made a deal with Apple to integrate Yelp reviews in its new Maps app (the one that replaced Google Maps), meaning that the hundreds of millions of iPhones and iPads using Maps on the latest iOS operating system are now Yelp users. Yelp's stand-alone apps, which attract 7 million users a month and are among the most popular free downloads in the Apple and Android stores, are now responsible for 40% of Yelp's searches. On weekends, when people are away from their computers and on the town, the figure is above 50%. "On mobile platforms we have a direct relationship with the user," Stoppelman says. "That disintermediates search," which is a fancy way of saying, it screws over Google.

Not even the stock market, which has torched most social media offerings, has been an impediment. An hour after Stoppelman rang the opening bell to celebrate going public, Jim Cramer, the hedge-fund manager turned pundit, was on CNBC barking at him and comparing Yelp to dotcom burnouts such as Webvan and eToys. Stoppelman laughed off the barbs and made his case. The stock soared 60% on its first day.

That evening on Mad Money, Cramer seemed to regret his tone and in an unusually subdued final segment, he revised his negative review of Yelp. He called Stoppelman "a terrific guy."

Almost six months later, in late August, the company faced another big test on the day when insiders could first sell their shares. None did. The stock got an additional boost. Stoppelman, once again, quietly played the winner.

Grooming: Tamara Brown/Artists Untied; Prop Styling: Eric Hollis; Wardrobe Styling: Micah Bishop/Artists Untied