Street Fight's monthly insights on the market potential of hyperlocal businesses
September 2012, Issue 6
Yelp Stock Spikes in August
Table of Contents
Move to Mobile Gives Reviews Company Advantage Over Google
Yelp Stock Spikes in
August
Yelp (NYSE:YELP) beat market expectations twice
in August, announcing better than expected
earnings for Q2 and seeing a 23% surge in its stock
price following the expiration of the company’s
lockout period. Many expected Yelp’s price to dip as
inside investors cashed out large equity holdings (à
la Groupon (NASDAQ:GRPN) and Facebook
(NASDAQ:FB)), but the company’s leadership sold
virtually zero stock and short-sellers were forced to
cover bets by buying stock, adding to the spike.
While the surge says more about investor discipline
than long-term value, Yelp is one of the few
hyperlocal companies that have shown sustained
growth over the past six months with its stock price
up 47% since its March 1 public offering.
Facebook Shows Signs of
Local Push
Payments Race Heats Up
With Major Partnerships
Investor Perspective –
Private Markets
Investor Perspective –
Public Markets
Acquisition Spotlight: Yext
Sells Felix Business to
IAC’s CityGrid Media
Part of Yelp’s success is due to growth in key
trends that underlie its model – namely, the shift in
local search from desktop to native applications on
mobile devices. That’s an important indicator for
the company because Yelp’s competitive position in
the mobile market is far stronger than on the web,
where the traditional search engines still dominate
discovery. On mobile, and particularly in local, rich
content – reviews, photos, menus etc. - is an
essential part of the search experience, making the
link referral model, in which a search engine directs
users to third-parties, largely uncompetitive.
Instead of relying on Google's (NASDAQ:GOOG)
algorithms to feed users to its site, the mobile
environment allows Yelp to build a direct
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30.00
***
Angie's%List%
Groupon%
25.00
20.00
15.00
10.00
5.00
0.00
© 2012 Hyperlocal Industries
Mar
Apr
May
June July
Aug
relationship with consumers through its application,
and thus begin to take substantive market share
from the search giant.
It’s in this context that Google acquired Frommers’
travel guide business earlier this month from
publisher John Wiley & Sons (NYSE:JW.A) for a
\
reported $25 million. The acquisition, which comes
a little less than a year after the company snapped
up local reviews company Zagat, builds on its
continued push into the content business,
particularly in the local space. We see Google’s
push into local content as part of a wider mobile
strategy that looks to integrate local information
deeply into Google-owned services like its mobile
assistant product Google Now. In order to build the
integrated search and discovery products that
succeed on mobile, Google needs to have deeper
control over not only which content is surfaced but
how consumers interact with it, making ownership
a necessity.
While Frommers’ traditionally played in the travel
vertical, the type of atomize location-specific
content, which Google will leverage is largely
agnostic to use case in the local web. The question
for Google will center on whether it can adapt the
company’s editorial structure to fit the needs and
realities of Google’s business model. While Zagat
and Frommers’ premium content may add some
value to Google’s product, we believe that
sustainable hyperlocal content models must be
rooted in solid user-generated environments.
Successful hyperlocal companies like Foursquare
and Yelp have managed to scale quickly because
they focus on developing environments in which,
users generate content rather than static editorial
structures in which content costs continue to
increase with size.
Street Fight View: Look for Yelp’s user base to
continue to grow as it benefits from a partnership
with Apple that gives it a prominent position on the
iPhone 5 coming out this month, and continues to
expand internationally. Margins will likely stay the
same as the company pours capital into sales and
marketing costs to enter new markets, but once the
land grab tapers off, we believe the company is
well-positioned to upsell existing clients on valueadded services like food delivery.
The company will likely be able to undercut competition by packaging these services with its existing
subscription offerings -- a key product as the company moves from selling search ads to providing a
complete local marketing tool set. Over the next 4-6 months, investors should keep an eye on merchant
engagement in international markets and watch for forthcoming mobile monetization products from the
company, which will have a big impact on revenue projections down the road. !
Facebook Shows Signs of Local Push
Local Search and Discovery Provides Big Opportunity for Social Network
Facebook (NASDAQ:FB) strengthened its hyperlocal marketing product in August, simplifying the self-serve
ad creation tool used by small and medium-sized businesses while pressing users to integrate location
deeper into content. With pressure continuing to mount from investors to accelerate revenue growth, the
social network appears to be exploring its still-untapped hyperlocal opportunity.
In the months leading to its IPO in June, COO Sheryl Sandberg was outspoken about the role local
advertisers would play in Facebook’s growth even as the company’s consumer facing product remained
dormant. August saw the first substantial movement by the company in the hyperlocal space since it rolled
out a self-serve offers product to select businesses across the US in June.
Right Borrell Associates projects local spend on
social media to nearly triple by 2016 with a 21%
COGR.
The Instagram acquisition, which was approved by
the FTC in August, will likely play an important role
in the company’s local strategy. Earlier this month,
the photo-sharing service retooled its application to
leverage the massive amount of latent location data
already being collected with shared content. Unlike
Facebook’s other content formats – status updates,
wall posts, likes etc. – photos are deeply tied to the
places where they are taken, and as marketing
content, are becoming important metadata in local
consumers’ search and discovery process.
Search is one of the big potential revenue streams
for Facebook, and it began to move into the wider
space with the release of “sponsored results”
earlier this month. With the company’s consumer
facing search product still in its infancy, the value
for advertisers remains unclear, but local discovery
may prove to be an easier space to disrupt as
companies like Yelp have already broken Google's
(NASDAQ:GOOG) ubiquity among users. Local
search provides the type of end-of-the-funnel use© 2012 Hyperlocal Industries
Project Local Spend on Social Media (Millions)
With local social spend projected to exceed $8.3
billion by 2015 and nearly 70% of SMBs already
using Facebook, the company is well positioned to
generate substantial revenues from a well-executed
local play. To fully leverage its opportunity
however, Facebook cannot simply target its way to
success. It will need to expand its consumer-facing
hyperlocal offerings in order to increase its
hyperlocal inventory. That is, content with local
intent, not simply a tacked-on geo-tag. The checkin, for example, is so valuable not simply because it
gives brands access to a consumer’s location, but
because it identifies a user as a “local consumer.”
Local Social Spend: 2011-2016
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$0
2011% 2012% 2013% 2014% 2015% 2016%
Source: Borrell Associates
case that monetizes on mobile extremely well, and
with mobile set to eclipse desktop in total local
search queries, the play would mesh well with the
companies growing mobile audience.
As we’ve discussed in previous editions of this
report, local search as a fulfillment tool is quickly
becoming commoditized as the consumerization of
distributive computing makes accessing and
organizing large location datasets feasible for
smaller companies. We see marketing dollars
shifting away from traditional search toward
discovery-oriented services that enable marketers
to reach consumers earlier in the decision cycle.
Whereas objective data like name, address, and
phone number traditionally drove value for
marketers, subjective information like social
content and rich data like photos will become the
key to the value proposition in local search and
discovery.
Street Fight View: While we believe that Facebook has a large opportunity in the local space, do not
expect to see substantial revenue generated until the company improves its consumer-facing offerings in
order to build up its hyperlocal inventory. Instagram will provide a boost, but we believe the acquisition of a
proven hyperlocal player like Foursquare could quickly position Facebook as a major target for marketing
spend. !
Payments Race Heats Up With Major Partnerships
Square, PayPal Score Big Partnerships, Placing Pressure on Loyalty Plays
August was a big month for the connected
payments space as major players nailed down key
partnerships, effectively pushing the space into the
mainstream. After building a strong foundation
among small businesses, Square jumped into the
enterprise space through a partnership with
Starbucks that will see the startup manage all debit
and credit card transactions for the Seattle-based
company. EBay’s (NASDAQ:EBAY) PayPal followed
suit later in the month, announcing a partnership
with Discover (NYSE:DFS) that will allow the eBay
subsidiaries’ 50 million users to pay via PayPal at
nearly 7 million merchants across the U.S. The
partnerships set the stage for accelerated growth
over the next 6-8 months and point to a
repositioning among hyperlocal startups as
payment plays push into the loyalty and rewards
space.
Part of what’s driving payments players into other
verticals is, among other reasons, a downward
pressure on interchange fees. Square released a
new pricing model for small businesses clients
earlier this month, which replaces the existing
2.75% transaction fee with a flat monthly rate.
LevelUp, a Boston-based startup that raised $9
from Deutsche Telecom in early August, erased
processing fees altogether to focus its monetization
efforts on loyalty and rewards campaigns. As Street
Fight has discussed in earlier reports, we believe
that interchange fees - the traditional revenue
generator for payment companies - will play little, if
any, role in the payment industry’s revenue model
within 24 months.
Competitively, payments players are far better
positioned than existing companies in the loyalty
and rewards spaces to drive value for merchants.
Control over the transaction allows payment
companies to a) integrate redemption into the
payment process, b) identify high-value existing
customers and target with incentives in real-time,
and c) serve as a platform on top of which, thirdparty lead generation companies can innovate.
While loyalty and rewards plays may see a window
as connected payments players fight for market
share, these non-payment players will likely be
squeezed out as early adopters adopt payment
products.
Street Fight View: Look for the downward pressure on interchange fees (for the SMB market) to continue
as competition within the payment space heats up. We believe that connected payments companies will
likely adopt a subscription model, which bundles basic payment processing with ancillary local marketing
services like offers and loyalty solutions.
It’s unclear when a company like eBay will begin to connect its payment product PayPal Here with its local
marketing entity PayPal Media Network (formerly Where) and local product search service Milo, but the
revenue upside is substantial. Over the next 12-18 months, we will likely see a land grab within the SMB
market as payment players look to build up inventory before expanding their product. !
Investor Perspective – Private Financing
Local Bonus, Quick Pay, Hopper, and CoachSurfing
From: First Analysis
Hyperlocal business models finding venture backing in August consisted of a blend of content oriented sites
and utility services. The size of funding rounds continue to be all over the map with content plays generally
securing larger rounds to backstop developing monetization strategies.
Local loyalty solutions provider LocalBonus received $900,000 in seed financing led by Pay Ventures. Actinic
Ventures and other angels participated in the round. The company’s approach is to enable the consumer to
obtain points (redeemed for cash) using their own debit/credit card. The consumer simply registers a card
with LocalBonus and receives rewards when transacting with participating local merchants. The simplicity of
the model is likely to have appeal for consumers. The more challenging aspect of the local loyalty solutions
market in general is demonstrating to local business an ability to help them grow by either increasing
transaction frequency, size, or both.
© 2012 Hyperlocal Industries
Parking industry mobile payment platform QuickPay
upped its funding total to $3.5 million with new
money from Andreessen Horowitz and Advanced
Technology Ventures. In addition to allowing
consumers to pay for local parking services via
phone app, text message, or voice, the QuickPay
platform enables parking providers to add services
including
loyalty
programs,
coupons,
and
validations. Intuitively, we like the value proposition
for consumers with this model, so monetization
through local advertising is not quite as important
as with some other mobile payment models we’ve
seen. However, our view is all mobile transaction
processing models will have to set as a priority the
monetization of data assets contained within the
platform. This is where operating models can get
expensive, requiring follow on investments.
Key Funding: August 2012
Travel oriented start-ups continue to attract
interest from venture investors due to size of the
market
and
the
strength
of
consumer
engagement. Social travel facilitator CouchSurfing
raised $15 million from existing and new investors,
which include General Catalyst Partners and Menlo
Ventures. Travel data company Hopper raised $15
million from OMERS Ventures, Brightspark
Ventures, and Atlas Venture. Travel is a “high cost
of failure” type of purchase for consumers, with
much time/effort being invested up front to ensure
a
satisfying
experience.
TripAdvisor
(NASDAQ:TRIP) was the first digital property to
address this market dynamic in a meaningful way,
but there will likely be others given the
differentiated nature of travel habits/preferences
among consumers broadly.
Source: Capital IQ, Architect Partners
FA view: The network effect of bringing consumers and businesses together for utility platforms like
QuickPay and LocalBonus to succeed can take significant time and capital to develop but offers the promise
of stable/recurring revenues and well defined unit economics. In contrast, content platforms like
CouchSurfing offer capital efficiency but monetization strategy becomes a key investor consideration. !
Investor Perspective – Public Markets
Hyperlocal Stocks See Volatility as IPO Dust Settles
From: First Analysis
Market performance of the publicly traded companies in and around the hyperlocal space was mixed in
August. While the NASDAQ index was up 5.7% for the month, many companies performed slightly better
including broadcast and print media properties Fischer Communications (NASDAQ:FSCI) (11.6%) and
Gannett (NYSE:GCI) (8.2%). Constant Contact (NASDAQ:CTCT) was up 16.8% and Yelp was up 9.7%.
Not faring so well were shares of Angie’s List (NASDAQ:ANGI) (-26.5%), Facebook’s (NASDAQ:FB) (16.9%), and Groupon’s (NASDAQ:GRPN) (-37.7%). and Angie’s List saw trading restrictions expire on
about 45% of its fully diluted share base causing shares to slide meaningfully as insiders/employees sold
positions. Facebook experienced something similar but with the added dimension of a venture backer/board
member (Peter Thiel) having sold the vast majority of his position so soon after going public. Regardless,
lock-up expirations are an issue every public company deals with at some point and are inherently shortterm considerations for investors when deciding when to buy and sell a stock.
© 2012 Hyperlocal Industries
Groupon’s sustained share price woes are a different matter altogether. Oftentimes when a public
company’s shares decline as far (over 80% since IPO) and as fast (less than a year) as Groupon’s there is
little the company can do to reverse market fortunes apart from making pretty significant changes in the
way the business is either managed, positioned in the marketplace, or both. Talent acquisition and
retention generally become more challenging as the value of equity incentives declines potentially leading
to loss of key managers and a general brain drain that keeps the company from moving forward
strategically.
Below: Angie’s List, Groupon fall by over a quarter; Attracting new investors as a means of finding
support for a stock in this position is another
Dexone, Supermedia spike on news of merger
challenge. Institutions with buy and hold strategies
look at the stock charts of companies like Groupon
The Hyperlocal Stock Index:
and tend to avoid them in fear of “catching the
falling knife” believing the market has formed an
August 2012
opinion of the company and their decision to invest
(7/1 -8/1)
won’t change that. Absent new information or a
Company
Market Cap Share Price Quote Chg.
change in direction led by the CEO or the board of
Angie's List (NASDAQ: ANGI) 548.77 M
9.56
-26.5%
directors it is difficult for new institutional money to
AOL (NYSE:AOL)
3.17 B
33.67
5.7%
become engaged. Without new money coming in to
Facebook (NASDAQ: FB)
40.60 B
18.05
-16.9%
support the stock, it drifts further downward and
Groupon (NASDAQ: GRPN)
2.76 B
4.15
-37.7%
the cycle becomes reinforcing. The process
Local.com (NASDAQ:LOCM)
43.08 M
1.98
-8.3%
Reach Local (NASDAQ: RLOC) 377.05 M
12.57
7.3%
generally continues until a catalyst is introduced to
Yelp (NYSE: YELP)
1.53 B
22
10.2%
reverse it.
DexOne (NYSE:DEXO)
90.93 M
1.74
58.2%
SuperMedia (NASDAQ:SPMD)
61.12 M
3.7
60.9%
eBay (NASDAQ:EBAY)
63.01 B
47.47
7.2%
605.64 M
19.55
16.77%
8.2%
Constant Contact (NASDAQ:CTCT)
$3.38 B
15.26
Google (NASDAQ:GOOG)
Gannett (NYSE:GCI)
$223.61 B
685.09
8.2%
Yahoo (NASDAQ:YHOO)
$18.30 B
14.65
-7.5%
$317.18 M
35.66
11.6%
Fisher (NASDAQ:FSCI)
Source: Street Fight
FA view: Share prices of some hyperlocal
companies may continue to experience volatility in
the short-term as ownership stakes transition from
private to public hands. Price volatility and public
company maturity tend to be inversely related.
Significant and prolonged share price declines
generally require a substantive catalyst in order for
the market to change its view. !
Acquisition Spotlight
Yext Sells Felix Business to IAC’s CityGrid Media
From: Architect Partners
On August 20, 2012, CityGrid Media (subsidiary of IAC/InterActiveCorp (NASDAQ: IACI)) agreed to acquire
the pay-per-call advertising business of Yext, named Felix, for an unconfirmed $30mm.
Target Description
Yext launched Felix in 2009 as a pay-per-call local advertising service. What makes Felix unique is its
patent-pending engine that uses speech recognition technology to listen to all the calls received by a local
business. It then transcribes and analyzes the calls, separating those received from consumers from those
received from wrong numbers, telemarketers and job seekers. Rather than paying for non-customer phone
calls, businesses only pay for potential customer calls. Felix provides presence and listings to its enterprise
and small business customers across 200 different websites, mobile apps and media properties such as
SuperPages, Local.com, PhysicalTherapists.com and Dogster. Yext separated Felix into a subsidiary earlier
in 2012, as it shifted focus onto its newest service called PowerListings. Marchex (NASDAQ: MCHX) and
RingRevenue are competitors to Felix, in addition to numerous competitors offering basic click-to-call
capabilities without voice analysis.
Based in New York City, Felix has approximately 85 employees who will be joining CityGrid Media with this
acquisition. Yext has raised $65.8mm in six rounds of funding, with investors including Marker,
CrunchFund, Sutter Hill Venturesi, Institutional Venture Partnersw (IVP), WGI Group (Michael Walrath) and
angel investors including Howard Lerman, Brian Distelburger and Brent Metz.
© 2012 Hyperlocal Industries
Buyer Description
CityGrid, an online media company, connects
Internet and mobile publishers with local
advertisers.
CityGrid owns and operates local
consumer
properties
including
Urbanspoon,
Citysearch and Insider Pages. The company was
founded in 1995 and is based in West Hollywood,
CA. CityGrid Media operates as a subsidiary of
IAC/InterActiveCorp (NASDAQ: IACI).
Felix will join CityGrid’s portfolio but will continue to
operate as an independent business under Yext cofounder Brent Mentz, who is joining IAC as CEO of
Felix.
Transaction Parameters
Although deal terms were not formally disclosed,
TechCrunch reported the deal to be worth about
$30mm. Felix is reportedly on track to earn nearly
$30mm in revenue this year.
Transaction Value
TV/Revenue Multiple
$30mm
1.0x
Key Acquisitions: August 2012
Value
($mm) Summary
Redpoint Ventures; Sutter Hill Ventures;
Pinnacle Ventures; The Contrarian
Group, Inc.; Opus Capital
DCM; Lightspeed Venture Partners
$34
Cash-gift service which connects credit and debit
cardholders with national and local merchants.
$14
Provides digital loyalty programs and cards for
businesses and cardholders.
Menlo Ventures; Correlation Ventures;
Innovation Endeavors; Collaborative
Fund; Grade-A Investments
Atlas Venture L.P.; Brightspark Holdings,
Inc.; OMERS Ventures
$14
Provides peer-to-peer car sharing marketplace
that enables car owners to rent their cars.
$12
Developing a search engine for planning travel
trips.
Advanced Technology Ventures;
Accelerator Ventures; Andreessen
Horowitz; Fontinalis Partners, LLC
Redpoint Ventures; Sutter Hill Ventures;
Pinnacle Ventures; The Contrarian
Group, Inc.; Opus Capital
$4
Cloud-based mobile parking access and revenue
control system that integrates with any legacy
parking infrastructure.
Cash-gift service which connects credit and debit
cardholders with national and local merchants.
Frommer Travel
Guides
Cloud Nine Media
© 2012 Hyperlocal Industries
Below: 16 M&A transactions were announced
within the hyperlocal industry in August, down from
22 in July
SuperMedia
(Nasdaq:SPMD)
BLiNQ Media
The Hyperlocal Investment
Report
Editor: Steven Jacobs
Contributor: Architect Partners
Contributor: Todd Van Fleet,
First Analysis
The acquisition of Felix advances CityGrid’s mission
of empowering local businesses with valuable tools
to effectively acquire and manage customers.
Acquiror
Treat Technologies
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Strategic Rationale
Target
Felix
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Comparable transactions focused on expanding
hyperlocal capabilities include Constant Contact
(NASDAQ:CTCT) acquisition of SinglePlatform;
BazaarVoice’s
(NASDAQ:BV)
acquisition
of
PowerReviews; the Hibu’s (formerly Yell Group)
acquisition of Moonfruit; Intuit’s (NASDAQ:INTU)
acquisitions of Demandforce and AisleBuyer;
Groupon’s
(NASDAQ:GRPN)
acquisitions
of
Ditto.me, Breadcrumb, Kima Labs, Adku and
Zappedy; Home Depot’s (NYSE:HD) acquisition of
Red
Beacon;
ReachLocal’s
(NASDAQ:RLOC)
acqusititions of DealOn and SMBLive and Reply!’s
acquisition of MerchantCircle. Also, given Felix’s
speech
recognition
technology,
Apple’s
(NASDAQ:AAPL) acquisition of Siri and Nuance’s
acqusitions of Transcend Services, Vlingo, SpinVox
and Jott Networks would also be comparable.
$34
Using advanced voice recognition and call analytics technology, bundled with an easy-to-use interface, Felix
enables merchants to market themselves with an innovative and sophisticated pay-per-action phoneadvertising product. According to CityGrid’s CEO Jason Finger, the acquisition fits into their focus to build
customer acquisition tools for merchants, and increases closed-loop transaction services supporting local
advertising for SMBs.
AP View: In Yext’s official blog post, co-founder Howard Lerman retold his meeting with Ben Horowitz
from Andreessen Horowitz about a year ago. Although the venture capitalist declined the investment, he
suggested Lerman to sell the profitable Felix business (90% of their revenue at that time) to invest in
Yext’s newest “blockbuster” product PowerListings. Lerman finally took that advice and has made his intent
clear: focus all of Yext’s financial and intellectual capital on PowerListing, a service which syncs business
location information across multiple platforms and allows local businesses and enterprises to easily manage
their online presence. Launched a little over a year ago, Yext has synced 2.5 million updates for over
70,000 customer locations, including tens of thousands of small businesses and ten Fortune 100
companies. Yext recently raised $27mm at a $270mm valuation. !