By Jim McCarthy Jan 21, 2010 0 comments

Why Yelp Needs $50 Million

There’s a story on techcrunch today that Yelp is raising $50 million, on top of the $30 million or so that they’ve already raised.

Part of it, apparently, is to give current employees some liquidity from their long-held stock.  Fair enough.  They’ve done a great job building a product that people really like.

If you're in the non-performance advertising business, whatever else you are, you're also this guy...

If you're in the non-performance advertising business, whatever else you are, you're also this guy...

But assume that’s less than half of it.  Why does a company like Yelp need tens of millions of dollars?  It’s not as though they are building factories or drilling in the arctic for bandwidth.  Their primary expenses are employees and various kinds of marketing, including marketing to advertisers.

Not that those aren’t expensive things, but still, the only conclusion I can draw, especially since they’ve already, presumably, used most of the $30 million raised to date, is that they plan to keep generating substantial losses from here forward.

Given that they’re in the ad-selling business, this wouldn’t surprise me.  If advertising were healthy, a business like Yelp should be massively profitable and taking all this money (with the exception of the liquidity part) would make no sense at all.

Amazon had big losses for a long, long time, but that’s because the infrastructure to make Amazon work is very large and very expensive.  Ebay and Google, whose basic business configuration more resembles Yelp, were profitable early and big.  If you look at success stories of this kind in the late 2000′s such as Yelp, Facebook and Twitter, the question you really have to ask is why they’re not fountains of money.  Sometimes they make claims that they are EBITDA positive or cash flow positive over some period of time, but they should be, at this stage of wide adoption and with more or less ‘virtual’ businesses, giant gushers of free cash.

I lay the fact that they are not at the feet of advertising.  Being in that business means that even at planetary scale, you might still lose money.

Bummer.

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