Capital Chaos

Yelp! (San Francisco, CA) is about to announce its latest round of funding for $15M led by DAG Ventures (Duff Ackerman & Goodrich) according to TechCrunch.  The company which has created one of the more successful local review sites has started to post some very significant numbers so far this year in terms of traffic but revenue is still rumored to be shy of $10M. 

This latest round of funding appears to be pegged at $200M which would give them a valuation of roughly 20X revenue.  The reason I have been trying to focus on valuation lately is because we are starting to see valuations climb a lot higher than I would describe as “comfortable”.  With Google’s stock taking a beating from its high of $700 p/sh, and its valuation now just shy of 9X revenue, I getting increasingly nervous that the VC’s who are investing at these inflated valuations are going to create another bubble. 

Yelp! is a great site and a very valuable tool but like any other business, it needs to mature and prove out a model before it should be valued anywhere near 20X revenue.  The company was founded in 2004 and has now raised a total of $31M between then and now.  While I can appreciate the need for the higher valuation - because if you create valuation too high from the start, you have to perpetuate it to garner greater value, it’s just not practical.

The site claims to have had 8.3M unique visitors last month according to the TechCrunch article.  That would value a user at roughly $24 which seems a bit high.  The CPM rate for ads is nowhere near that so you have to ask what is driving the metric?  On top of this, the company is in a very competitive space going up against the likes of YellowBot, CitySearch, Yahoo Local and Google Local.  The fact that Yelp! is somewhat agnostic to a platform (not a Yahoo or Google property) actually helps the company but there are also more niche sites evolving like Seamless Web (acquired by Aramark), menuepages.com and others. 

I happen to love Yelp! and I dont find fault with the founders Jeremy Stoppelman or Russel Simmons.  They have done a great job at putting Yelp! on the map.  The issue is with the valuation and how it can be justified over time.  The VC’s have an exit strategy in mind and it looks more and more like this is being designed to be an acquisition target rather than an IPO given the valuations.

_________________________________________________

DAG (Duff Ackerman & Goodrich) Ventures (Palo Alto, CA) bills itself as a “venture capital partnership” which invests in companies with proven technology from the prototype stage onward.  These guys have seen a lot of deals and invested in some pretty interesting companies in the areas of IT, Life Sciences and Energy Technologies. 

Some of the more notable investments are: Friendster, Glam, Segway, Plaxo and others.  Unlike many of their brethren in the Valley, these guys keep a pretty low profile in terms of the firm, their process and what they are about. There are two firms inside of DAG - Private equity and a venture group - both of which serve as independent companies. DAG Ventures invests in early stage companies which typically have defensible technology in large and/or evolving markets. 

Since they do appear to follow the “30 Mile” area rule, make sure you are in the area if you want to pitch these guys.

Contact:
251 Lytton Avenue, Suite 200
Palo Alto, CA 94301
Telephone: (650) 543-8180