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Yelp’s IPO Will Test the Flaws in Its Business Model

Original post by MICHAEL LUCA via HBR

Yelp’s IPO filing comes hot on the heels of successful IPOs and high valuations for Angie’s List and Groupon. Yelp’s timing reflects both a tech-friendly market and the company’s current position as the dominant consumer-review web site. Yelp has 22 million reviews, and the supposedly imminent onslaught of competing review sites has yet to materialize. But is Yelp really poised for long-run success? My research shows that there are points in its favor — but there are others that should raise investors’ concern.

First, the positives:

Yelp works. Yelp is relevant only to the extent that it affects readers’ choices of where to go. The evidence shows that it does. In a recent paper, I combined Yelp ratings with restaurant revenues for every restaurant that operated in Seattle during Yelp’s entire run there. The data suggest that a one-star increase in a restaurant’s Yelp rating leads to a 5% to 9% increase in revenue. How do we know that it is in fact Yelp that matters, and not some other information source? To support the causal inference, I exploited the fact that Yelp rounds ratings to the nearest half-star. I found that restaurants receive a jump in sales after a rating is rounded up. So Yelp is driving sales, at least for independent restaurants. Positive ratings don’t help chain restaurants, which already have strongly established brands.

It gets its content for free. Even more impressive than Yelp’s impact has been its ability to generate 22 million reviews without paying for them. Yelp has been extremely effective at leveraging social incentives to make people work for free. It created a network of “elite” reviewers, whose reviews tend to be less erratic and closer to restaurants’ long-run averages. Yelp hosts special events to reward these prolific reviewers. It’s not clear whether upstart review companies would be able to replicate this excitement about reviewing.

Search is moving away from Google. Google recently acquired Zagat, creating a major competitive threat to Yelp. One concern is that Yelp will be hurt as it falls down the Google search rankings (and Yelp acknowledges that most of its search traffic comes from Google). When Yelp began in 2004, this would have been a devastating prospect. And to some extent, it still is. But new ways of searching for products may start to change this dynamic. For example, many people find restaurants on Yelp using smartphone apps, circumventing the standard Google search process. This trend will only increase with time.

Now the factors working against Yelp:

It’s easy to write fake reviews. Yelp and Angie’s List follow very different business models. Angie’s List charges readers to view its content, while Yelp’s reviews can be accessed for free (and the company makes money by allowing businesses to advertise). Angie’s List has a strict quality assurance process; Yelp lets virtually anyone review. The ease of leaving reviews on Yelp has led to a larger number of reviews, but it has opened the door for businesses to leave fake reviews — for themselves, their friends, and their competitors. In a world where we know who is writing the reviews (your Facebook friend, for example), this is not a problem. In a world where reviewers are fairly anonymous, it is.

Legitimate reviews may be filtered out. More worrisome than the fake-review problem is Yelp’s solution: It uses a program to filter out seemingly bogus reviews. This is fine, in principle. But it becomes more troubling when you look at the data. In a recent sample, nearly one out of every five reviews was filtered. Looking only at the five restaurants featured on the front page of Yelp’s Boston site, roughly 13% of reviews were filtered out. Worse, the reviews were filtered fairly evenly across the restaurants. This means one of two things: Either all five have been trying to game the system, only to be outfoxed by Yelp, or Yelp’s algorithm is so coarse that it wipes out a lot of legitimate reviews. While fake reviews clearly exist, it is unlikely that all of these restaurants have been trying to game the system. Combine that with allegations of Yelp sales staff’s being overly aggressive in pushing their paid offering, and Yelp’s filter can be all the more frustrating for restaurants. There is no evidence that Yelp favors advertisers, and related lawsuits have been dismissed. However, the filtering process does give credence to concerned business owners who note that legitimate reviews have been filtered from their restaurants.

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December 14, 2011 | Techmeetups

Startup Marketing:
The Power Of Social Proof and How to Use it to Double Sales

Original post by Keith Griffis via B2C

As you begin to build your business and attempt to attract customers you quickly realize that everyone is a skeptic. This is especially true if you are are new to your market and not well known before taking the leap to owning your own business. People want “Social Proof” that your product is worth their hard-earned money and time.

What is Social Proof?

Social Proof is the reassurance that others have decided to use your product or service, which proves it is worth considering. In fact, positive product reviews provide enough social proof that a potential customer is 63% more likely to purchase your product online if it is present at the point of purchase.

This behavior is human nature. We all have limited resources, whether it be time or money. We are always looking for ways to maximize our resources in order to achieve our goals. This could be as simple as getting the best stroller for your new baby that fits your lifestyle or just getting a great meal for a fair price. We look for others similar to us and to judge their satisfaction with the product or service being considered.

Leveraging Social Proof to Grow your Startup Company

This information is powerful. You now know exactly what your customers want: “Social Proof”. If you also know who your ideal clients or customers are, you can further leverage customer feedback to drive business to the write customers AND dramatically increase sales conversions without having to spend more on marketing advertising or anything really. You are simply maximizing profit from each sales opportunity.

So what are some simple and practical ways you can gather and use social proof in your startup business:

Add reviews to your Website

Reviews are one of the best ways to create and use social proof. The best part is that the reviews can be for your product or service or even just a positive comment on your blog. You can also reach out to others in your industry who or customers offline and highlight their experience both online an in your print marketing materials and ads.

Add Ratings to your Website

Ratings are great for products and blog posts. They work better with men than women. Women prefer the emotional connection of a review while men like the objective measure of ratings. Be aware though that you may need to ask people to provide feedback in order for them to rate your product, service, or blog post.

Gather Testimonials

Customers new and old love to be asked about their experience, whether good or bad. Find some good testimonials and plaster them all over the place. You should use them on your site, sales page, product brochures, and the back of business cards.

You should also consider getting testimonials from others in your marketplace that have complimentary products. This is similar to the quotes on the back of a new book. This will also help you attract those complimentary customers to your business when you use this person’s quote on your site.

Create an Active Facebook Fanpage or GooglePlus Account

This only works for businesses who have an audience on Facebook, but for them it can be powerful.

Create a Twitter Presence

On Twitter you have a follower list. This is essentially a simple measure of your influence. Twitter is much easier to navigate than Facebook and you can easily target your competitors “followers”. There is a big opportunity if your industry is on Twitter.

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December 10, 2011 | Techmeetups

3 Reasons
Why Startups Should Care About the Facebook IPO

Original post by Marshall Kirkpatrick via ReadWritWeb

The Wall St. Journal’s report today that Facebook will make an initial public offering on the stock market next year has been met with plenty of press comment on the expected size of the offering ($100B, huge) but seems to have left many other people unmoved.

It’s easy to feel cynical about Facebook, a lot of people do. The news may be important for more than just holders of the stock, though. It could prove very big for the whole tech startup world and for those who enjoy the innovation that startups create. Why? Because the Facebook IPO could mean more and bigger startup acquisitions, more support for more startups and an infusion of smart money and experience into radically new tech experiments.

1. Early Facebook Employees Will Flood the Startup World With Smart Money & Experience

The best thing that came out of Web 1.0 for the next generation of startups was either the Google IPO or the PayPal Mafia. Hopefully a lot of the money that early Facebook employees take from that company’s IPO will be pushed back into the web to fuel the next generation of startups. In theory at least, it should be very smart money – not dumb money at all. Not even just smart money, but experience and connections.

There’s a good thread on Quora (ironically, itself a great little startup spun out by very early Facebook employees) on the “PayPal Mafia” type experience.

Venture Capitalist John Greathouse says there that there are a number of conditions that a company’s early employees need in order to spawn the creation of a meaningful wave of startups after they get a big win.

“Capital from past venture successes. Pertinent experience – folks who have helped drive the bus, not gotten a ride in the back. Operators who are still hungry enough to ‘do it again.’ A desire to work together again.”The people who fit the bill for spawning new startups are usually the Entrepreneurial Lieutenants, who make good money in a past venture, but not huge money.”

Greathouse says there are a “fairly predictable list” of companies today that could fit the bill, including Twitter, Zynga, Google and Facebook.

Greathouse goes into more detail in a blog post he wrote on the joy of getting the band back together again. It’s a good read.

“Entrepreneurs are pathological,” he concludes. “Most of them simply cannot help themselves and are thus repeatedly drawn back to the startup world. They often temporarily ‘check out’ from the startup treadmill but many of them ‘never leave’. Savvy investors and young entrepreneurs take advantage of this phenomenon by joining Serial Teams and helping them leverage their past successes to achieve new startup victories.”

That’s likely to be an important part of the story of the Facebook IPO.

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December 9, 2011 | Techmeetups

Measuring Offline Vs. Online Word-of-Mouth Marketing

Original post by MIKAL E. BELICOVE via Entrepreneur

The now commonly held notion that social media-related marketing is a requirement for business success may not carry as much water as once thought.

Despite all the technological advances in recent years, especially in the realm of social media, a recent study suggests that the vast majority of public discussion about products, brands and services occur in everyday word-of-mouth encounters with others, not online.

A yearlong study from the New Brunswick, N.J.-based research firm the Keller Fay Group, which included more than 32,000 participants, found that 91 percent of respondents’ information about brands came as a result of face-to-face conversations or over the phone. Just seven percent of word-of-mouth conversations about brands occurs online.

The report shows that a well-rounded approach to word-of-mouth marketing and consumer participation is every bit as important as blogs, Facebook posts and tweets in getting the message out, says Chris Laird, CEO of Tremor, Procter & Gamble’s in-house word-of-mouth marketing organization, which commissioned the study.

Your customer or potential buyer needs a reason to engage, a reason to care and a reason to tell others about your brand. It comes down to having something sharable that you can get out there, Laird says. Here are his three tips for getting the most out of word of mouth:

Drive real-world conversation. Laird suggests that companies use social media tools to drive conversations out into the real world. In other words, discover ways to find and engage customers in online and offline conversations. As an example, the survey shows that 60 percent of respondents said they were “highly likely” to make a purchase based on an offline word-of-mouth interaction about a brand. Match that figure against engagement brought about by your social-media tools and you start to see why offline word of mouth is so much more valuable.
Not only that, but the study shows that 67 percent of references to brands in offline conversations turn out to be positive in nature — yet another good reason for businesses to promote such personal engagements.
Have a plan for on and offline. A well-defined marketing plan should include a multi-channel approach with blueprints for both online and offline elements.

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November 30, 2011 | Techmeetups

Interview with Andrew Humphries, UK’s Tech City

Original post by Travis Oberlander via socaltech

(Editor’s note: Los Angeles has always had strong ties to business in the UK, and the UK government has been very active in reaching out to Los Angeles technology firms in recent years. On the invitation of UK Trade and Investment, socalTECH Contributing Editor Travis Oberlander has traveled this week to London for us, to compare and contrast the efforts in the UK to establish their own technology center with our own efforts in Southern California.)

This week, entrepreneurs from all around the world have converged upon East London to attend the Tech City Entrepreneurs Festival. The festival is part of an ongoing initiative by the British government to encourage development and growth in the city’s tech startup community. We caught up with Andrew Humphries, the Tech City Champion, to learn more about growth and ambitions of London’s Tech City.

What is the Tech City Investment Organization?

Andrew Humphries: The Tech City Investment Organization or TCIO is the result of an initiative announced by David Cameron, the Prime Minister in November of 2010. He’d seen the development that was going on in Tech City, the organic growth of technology,

digital and creative businesses that was happening in an area to the east of the City of London, stretching out to the Olympic Park. Basically realizing that, although there was an organic cluster growing, if the government could get involved and provide a level of support and encourage that growth, that we could actually develop that faster and encourage investment from overseas businesses and create more employment more quickly. So the TCIO was created to encourage that growth and publicize the opportunity.

What are some of the specific things that the TCIO has done to achieve its goals?

Andrew Humphries: There are four key things that we are doing. The first is the kind of thing that we’re doing today at the Entrepreneurs Festival which is to encourage young, overseas and British businesses that Tech City is the place to live, work, start and grow their businesses. Second thing that we do is encourage large organizations, companies like Google, Intel and Facebook, to invest in Tech City. They may not put a development lab here or whatever it happens to be but, certainly, the kinds of nascent businesses that we’re talking to need those kinds of businesses to partner with and to sell to and so we encourage those larger businesses to become involved. The third thing that we do is encourage finance. We’re talking to angel investors, VCs and banks to make sure that there are finances available for the kinds of businesses that we’re attracting so that they can scale and grow. Finally, the fourth thing that we’re doing, is to encourage the skills that these kinds of businesses need in terms of development staff and young people learning the kinds of technologies that they need to learn. So we’re working with the Universities, colleges and schools to make sure they’re putting the right programs in place to develop the skills that will fuel the growth in the future.

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November 23, 2011 | Techmeetups

Sean Parker and Jim Breyer Slam Silicon Valley Funding Glut

Original post by Liz Gannes via All Things D

Early Facebook exec Sean Parker and Accel partner Jim Breyer today criticized the surplus of early-stage funding in Silicon Valley, saying that freely available money spreads talent too thinly among too many Internet start-ups and makes it less likely for new companies to have a major industry impact.

“A lot of those early-stage investors, they’ll fund literally anything” Parker said, calling the phenomenon “the assembly line approach to investing,” where an idea comes in and an investment comes out. Meanwhile, later-stage investors are themselves funding early-stage investors to access their deal flow.

Breyer, who is a Facebook board member and an investor in Parker’s pre-launch start-up Airtime, agreed with Parker and said the early-stage frenzy “will end badly.”

Breyer noted that the “spray-and-pray” mentality is especially prevalent in Silicon Valley and somewhat present in New York City and Beijing, but thankfully not in the rest of the world.

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November 22, 2011 | Techmeetups

Use AngelList for customer development…and then raise money.

Original post by Jason Freedman via HumbledMBA

When I first heard about AngelList, I thought it would never work. They had grabbed some of the top investors in the tech world and put them on a distribution list for entrepreneurs to spam? How could that possibly work?

And then we started hearing about a startup here and there getting a little funding from someone off of AngelList. I couldn’t tell whether it was bad startups finding dumb money or just personal connections orchestrated personally by Nivi and Naval. Either way, I didn’t take it that seriously. I was in the middle of our FlightCaster acquisition; raising a round of funding was the last thing on my mind. Whenever people asked me for fundraising advice, I was never down on AngelList, but I never remembered to bring it up. It just wasn’t relevant yet.

It is now. Mark my words, 2012 will be the year AngelList explodes with traction.

AngelList is for real. It’s here to stay. And it’s going to totally change the way we all raise money. I don’t know if Nivi and Naval planned it this way from the beginning, but they’ve turned AngelList into Facebook for startups. It’s not just a funding list, it’s a full blown social network specifically designed for social credibility in startups.

Before I explain, I’ll give you the super quick primer on AngelList for those of you that haven’t use it.

Startups go on AngelList and create a profile for each entrepreneur and for their startup. The startup profile includes a very brief screenshot section, a place to post advisors, current investors, and some financial information that has privacy toggle settings. Investors can create a profile that post their previous investments, their areas of expertise, and what types of investments they like to make.

So far, pretty simple stuff. Well-executed and clear. There are a bunch of other little features on the profiles like status updates, references, etc. But overall, it’s still very similar in content to Crunchbase.

The magic comes in how the social dynamics of AngelList are managed. AngelList uses Twitter-style following instead of Facebook-style friending. Anyone that wants to follow a startup or an investor can follow them. We’ve seen this show before. On Twitter, your follower count is a pretty significant indicator of social proof. On Angel List, it works the same way.

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November 14, 2011 | Techmeetups