Business paradigm shifts and free tequila shots

Yelp has two ambitions: Have fun and seize as much of the $100 billion local ad market as possible. Fortune's Jeffrey O'Brien reports on a hot Web startup.

By Jeffrey M. O'Brien, Fortune senior editor

(Fortune Magazine) -- "I'm making a ton of money from Yelp, and it's freaking me out." Woe is Christopher Hall, the 34-year-old owner of Splitends, a hair salon in Orange County, Calif. Its chic décor is more architectural firm than beauty parlor. He has appeared on a reality show, in the L.A. Times, and on TV news segments. He's photogenic and has a quick wit. He serves beer to customers. So business, unsurprisingly, was decent as soon as he opened the place last December. Until March 6. That's when things got crazy.

Now he's literally in pain from all the coiffing. "I've been doing hair for 16 years, and I'm busier than I've ever been," he says. "Saturday I came in at 6:30 a.m., left at 8 p.m., and did 22 people. I woke up Sunday and my hands were all swollen. I had to put them in an ice bucket."

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Yelp founders Stoppelman (sitting) and Simmons in their native habitat, i.e., a San Francisco club
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Most Yelpers give San Francisco's Delfina high marks. But one diner says he found a roach; the owner says sabotage.
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Thanks to reviews by Lau (head in sink), Hall has so much business he has to ice his hands on weekends.

What happened March 6? That was the day Anita Lau wrote about Splitends at Yelp.com, an online platform for user reviews of everything from dive bars to funeral parlors. Lau has posted 2,036 reviews and 1,340 photos, has collected 790 compliments on her work from fellow Yelpers, and along the way has amassed the power to put bodies into barbershop chairs. She gave Splitends the maximum five stars, praising Hall and saying, "I absolutely love my haircut."

The review started a logroll of new clients for the stylist and a couple dozen subsequent five-star critiques. "I've taken out ten ads in OC Weekly this year and have gotten maybe one call," says Hall. "I get anywhere from five to 15 calls a day from Yelpers. They come in and then write reviews. Then other people see the reviews, think it must be great, and call. It's its own little biosphere. It feeds itself."

For those outside California, let's back up a bit. Yelp is part social network, part localized review site - think Facebook meets Zagat - and it's fast becoming the web's gift to small business. A platform for ratings of anything with a postal address, Yelp offers the service industry new insight into what the chattering masses are saying. The name "Yelp" comes from a friend of the founders who simply liked the word. But it also serves as a nifty contraction of "yellow pages," which reveals the company's ambitions: a land grab on the $100 billion that's spent every year on local advertising.

"There's an information shortage when it comes to local businesses," says co-founder and CEO Jeremy Stoppelman. "If you look at the yellow pages, what are you seeing? You're seeing how much money a business spent to buy a big ad. We're a place for a conversation between the prospective customer and the business owner."

Many well-funded companies have tried to tackle local search over the years, using a mix of strategies. There's the directory model, which involves a massive sales force upselling business owners to ever bigger, flashier ads. There's the Citysearch tactic of creating proprietary content and selling ads against it. And then there's the search-engine route of crawling everyone else's content and automating the ad sales. Yelp is taking a different road: crowd-sourcing. For years Zagat has been compiling anonymous user reviews, but Yelpers get to fully express their feelings and make names for themselves.

Employing the same user-generated content model that powers YouTube or Craigslist, Yelp can reach into a city's every nook to reveal hidden car washes, dentists, plumbers - the sorts of unsexy but necessary services that make up our daily lives. When we discover something wonderful (or horrible), we love to tell our friends about it. We also turn to people we trust when we need a good recommendation. Yelp is enabling those conversations to happen on a massive scale.

There's any number of reasons the site could fail. But so far the enthusiasm Yelp has generated indicates otherwise - usage is up nearly 400% to 1.8 million users a month, according to Nielsen/NetRatings. In San Francisco the dining and nightlife scene has been all but completely trolled, analyzed, and pontificated upon (or "Yelped," for short), and the site has recently caught fire in Chicago, New York, and L.A. In those cities it has begun changing the way local businesses do their marketing.

The word most often used to describe Yelp - other than some variation on the ever-flexible brand itself, which can be intoned positively, as in "I Yelped that awesome crepe wagon," or negatively, "That bitchy waiter totally got Yelped!" - is "addictive." Anita Lau drives around Southern California in an SUV with a vanity plate that reads I [heart] YELP. The plate is unique. The sentiment isn't.

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A charismatic 29-year-old with a boyish smile and a self-deprecating streak, Stoppelman started the company in 2004 with longtime friend and CTO Russel Simmons, 28. (No, not the hip-hop impresario. This Russel has only one "L.") After their last employer, PayPal, was sold to eBay (Charts, Fortune 500), the co-founders cashed out and began kicking around startup ideas with a former colleague, PayPal co-founder Max Levchin. One day Stoppelman was looking for a doctor but had no clue how to find a good one. That gave him and Simmons an idea for a convoluted automated system in which people could e-mail friends asking for recommendations on, say, local doctors, and the answers would be logged at a communal site for everyone to see. Levchin floated the duo $1 million to build out the plan. It went nowhere. But the co-founders noticed an interesting tendency among the early users. People were writing unsolicited reviews of their favorite businesses just for fun. So Yelp switched tack. "I remember the moment that Russ said, 'There should be a way for you to write your own reviews without asking questions,'" Stoppelman recalls.

Actually, Stoppelman and Simmons weren't just looking for a new doctor. A pair of unrepentant party boys - they did tequila shots during the Fortune photo shoot - they were in a perpetual search for the greatest restaurants and clubs in San Francisco. To get Yelp off the ground, they decided to mix business and pleasure, and started hosting Yelp parties at local establishments. The parties got people talking. (Flickr is littered with raucous snapshots from Yelp events featuring bar dancing and an endless train of women hanging all over the co-founders.) More important, the revelry got people writing reviews, building up the site's content.

Today Yelpers seem to live on the site, messaging one another about their social lives, reacting to reviews, and planning get-togethers. That's the social-networking part. As is the case on most social networks, Yelp is rife with self-conscious patter. But there's a point to all the yammering: finding cool stuff that's not too far away. It's a mission everyone seems to take seriously.

"One of the first surprises was the length of reviews and the attention to detail," says Simmons. "People think they have to write reviews of a certain quality or there's no point. A lot of them are funny. Some are poetry. I saw one review in the form of an IM conversation with Skeletor" (the latter, of course, being the superevil, skull-faced archnemesis of He-Man, Master of the Universe).

In 2005, Stoppelman and Simmons raised $5 million from Bessemer Ventures, the VC firm behind Verisign and Skype, among others, and then last November another $10 million from Benchmark Capital, whose hits include eBay and Red Hat (Charts). The company's strategy is to build a rabid following in any given market. Once an establishment has a good number of reviews, a Yelp salesperson calls to make sure the establishment's owner is aware of all the chatter going on, offers a Yelp window sticker, and, of course, tries to sell an ad. Ads and sponsorship packages range from $200 to $2,000 a month.

Stoppelman is coy about how well Yelp is doing on the business side. The company is generating revenue, though he won't say how much. He does acknowledge that profits are a ways off. "Someday we'll make money," he says, smiling, adding only that Yelp has all the funding it needs.

The obvious question: If the content costs nothing and the marketing is word-of-mouth, where is Yelp spending its $16 million? Well, salespeople are expensive. The company is always adding servers to handle growth and is in a desperate search for more engineers in San Francisco. Given the reputations of Stoppelman and Simmons, it'd be easy to accuse the co-founders of spending their funding on bar tabs. Except that lately an awful lot of their drinks seem to be on the house.