Yelp headed down the IPO road

Consumer-review site reportedly hires Goldman Sachs, Citigroup to head public offering

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Yelp, the online site that allows real people (and, let's face it, plenty of ringers) to review local businesses, is preparing to do what everyone expects it to do: Try to make a killing by going public.

The San Francisco-based company reportedly has engaged Goldman Sachs and Citigroup to underwrite an initial public offering of shares, according to anonymous sources cited by the New York Times's DealBook blog:

The offering, which is expected to value the company at $1.5 billion to $2 billion, will probably come to market in the first quarter of next year, a person close to the company said. Yelp is expected to file its prospectus by the end of this year.

While Yelp has made no secret of its desire for an eventual IPO, the impetus to hire some handlers may have come from Groupon's successful public offering last Friday. Despite heavy criticism of its heavy losses and slowing growth, Groupon (NASDAQ: GRPN) managed to raise $700 million in the largest U.S. tech IPO since search giant Google (NASDAQ: GOOG) raised $1.67 billion in its August 2004 ticker debut.

Groupon's shares climbed over $31 almost immediately after they were offered Friday, and then almost as quickly fell back to $26, below the opening price of $28 but 30% above the IPO offer price of $20. (Prediction: Even the $20 offer price will be but a fond memory to Groupon's early public shareholders. Shares were down nearly 5% to 23.68 on Wednesday morning, and they're headed below $20 for good by year's end, if not sooner.)

Founded in 2004, Yelp relies on consumer reviews of local businesses, with restaurants and clubs being among the most numerous. So the content basically is free, and revenue is generated by selling ads to local businesses.

Yelp's traffic has grown to more than 63 million monthly unique visitors, and more and more are checking Yelp reviews via mobile devices.

But Yelp also faces challenges similar to Groupon's, particularly low barriers to entry for the online review/local ad market. That usually means heavy spending on marketing to preserve and grow market share.

It's hard to determine precisely what Yelp is worth, but according to DealBook, "Its last financing round, which closed in January 2010, valued the company at $500 million."

One thing that troubles me is the selection of Goldman Sachs as a lead underwriter. If Yelp management had only consulted their own review site -- if they had "eaten their own dog food," as the saying goes -- well, they might have gone in a different direction.

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