Dependence on Reviews

Our success depends on the quality of the reviews, photos and other content that we show on our platform, including whether they are helpful, up-to-date, unbiased, relevant, unique and reliable. If users do not value the content on our platform, they may stop or reduce the use of our products, and traffic to our website and on our mobile app will decline. If our user traffic declines, our advertisers may stop or reduce the amount of advertising on our platform. As a result, our business could be negatively affected if we fail to obtain high quality content from our contributors, or if the content we display is perceived to be unhelpful, out-of-date, biased, irrelevant, not unique or unreliable. We must therefore ensure that our products and features are attractive to users, and encourage them to contribute. In addition, users who contribute content to our platform may provide content to our competitors or subsequently remove their content from our platform. If they do so, the value of our content may decline relative to other available products and services, and our business may be harmed.

While we attempt to filter or remove content that may be offensive, biased, unreliable or otherwise unhelpful, we cannot guarantee the effectiveness or adequacy of these efforts. If we fail to filter or remove a significant amount of content that is biased, unreliable, or otherwise unhelpful, or if we mistakenly filter or remove a significant amount of valuable content, our reputation and brand may be harmed, users may stop using our products and our business and results of operations could be adversely affected.

Relying on Internet Searches

Our success depends in part on our ability to attract users through unpaid Internet search results on search engines like Google, Yahoo! and Bing. The number of users we attract to our website from search engines is due in large part to how and where our website ranks in unpaid search results. These rankings can be affected by a number of factors, many of which are not in our direct control, and they may change frequently. For example, a search engine may change its ranking algorithms, methodologies or design layouts. As a result, links to our website may not be prominent enough to drive traffic to our website, and we may not be in a position to influence the results. In some instances, search engine companies may change these rankings in order to promote their own competing products or services or the products or services of one or more of our competitors. Our website has experienced fluctuations in search result rankings in the past, and we anticipate fluctuations in the future. Any reduction in the number of users directed to our website could adversely impact our business and results of operations.

Google in particular is the most significant source of traffic to our website accounting for more than half of the visits to our website from Internet searches during the nine months ended September 30, 2011. Our success depends on our ability to maintain a prominent presence in search results for queries regarding local businesses on Google. Google has removed links to our website from portions of its web search product, and has promoted its own competing products, including Google’s local products, in its search results. Given the large volume of traffic to our website and the importance of the placement and display of results of a user’s search, similar actions in the future could have a substantial negative effect on our business and results of operations.

Yelp needs to maintain and expand its base of advertisers

In the nine months ended September 30, 2011, substantially all of our revenue was generated by the sale of advertising products. Our ability to grow our business depends on our ability to maintain and expand our advertiser base. To do so, we must convince prospective advertisers of the benefits of our products, including those who may not be familiar with our products (such as those in new markets). We must also convince existing and prospective advertisers alike that our advertising products work to their benefit. Many of these businesses are more accustomed to using more traditional methods of advertising, such as newspapers or print yellow pages directories. Failure to maintain and expand the advertiser base could harm our business.

Our advertisers do not typically have long-term obligations to purchase our products. In addition, we rely heavily on advertising spend by small and medium-sized local businesses, which have historically experienced high failure rates and often have limited advertising budgets. As a result, we may experience attrition in our advertisers in the ordinary course of business resulting from several factors, including losses to competitors, lower priced competitors, perceptions that our advertising solutions are unnecessary or ineffective, declining advertising budgets, closures and bankruptcies. We must continually add new advertisers both to replace advertisers who choose not to renew their advertising or who go out of business, or otherwise fail to fulfill their advertising contracts with us, and to grow our business. Our advertisers’ decisions to renew depend on a number of factors, including the degree of satisfaction with our products and their ability to continue their operations and spending levels. The ratings and reviews that businesses receive from our users may also affect advertising decisions by current and prospective advertisers. For instance, favorable ratings and reviews, on the one hand, could be perceived as obviating the need to advertise, and unfavorable ratings and reviews, on the other, could discourage businesses from advertising to an audience they perceive as hostile or cause them to form a negative opinion of our products and user base which could discourage them from doing business with us. If our advertisers increase their rates of non-renewal or if we experience significant advertiser attrition or contract breach, or if we are unable to attract new advertisers in numbers greater than the number of advertisers that we lose, our client base will decrease and our business, financial condition and results of operations would be harmed.

Yelp Growth Strategy

Yelp intends to grow its platform and our business by focusing on the following key growth strategies:

Growth in Existing Markets. Within existing markets, we will seek to increase the number of reviews, attract more users, increase usage of current users and attract more businesses.

Expand to New Geographic Markets. We are active in the United States, Canada and Europe, and we see a significant opportunity to continue expanding our footprint in new markets, both domestically and abroad. While we have not yet begun to sell advertising in our international markets, we intend to begin hiring an international sales force in 2012.

Platform Expansion. We plan to continue to innovate and introduce new products for our website and mobile app and to introduce our content and solutions on new platforms and distribution channels, such as automobile navigation systems, web-enabled televisions and voice-enabled mobile devices.

Enhance Monetization. We intend to grow our sales force and expand our portfolio of revenue-generating products in order to reach more businesses and increase the amount they spend on our advertising products.

Yelp Operatin Loses

But since Yelp inception, it has incurred significant operating losses, and, as of September 30, 2011, we had an accumulated deficit of approximately $32.1 million. Although our revenues have grown rapidly, increasing from $12.1 million in 2008, to $47.7 million in 2010, we expect that our revenue growth rate will decline in the future as a result of a variety of factors, including the maturation of our business and the gradual decline in the number of major geographic markets, especially within the United States, to which we have not already expanded, and you should not rely on the revenue growth of any prior quarterly or annual period as an indication of our future performance. We also expect our costs to increase in future periods as we continue to expend substantial financial resources on:

• product and feature development;
• sales and marketing;
• our technology infrastructure;
• domestic and international expansion efforts;
• strategic opportunities, including commercial relationships and acquisitions; and
• general administration, including legal and accounting expenses related to being a public company.

These investments may not result in increased revenue or growth in our business. If we are unable to maintain adequate revenue growth and to manage our expenses, we may continue to incur significant losses in the future and may not be able to achieve or maintain profitability.

Yelp dependence on a strong brand

Yelp business depends on a strong brand, and any failure to maintain, protect and enhance our brand would hurt our ability to retain or expand our base of users and advertisers, or our ability to increase their level of engagement.

We have developed a strong brand that we believe has contributed significantly to the success of our business. Maintaining, protecting and enhancing the “Yelp” brand is critical to expanding our base of users, advertisers and partners and increasing their engagement with our solutions, and will depend largely on our ability to maintain consumer trust in our solutions and in the quality and integrity of the user content and other information found on our website and mobile app, which we may not do successfully. If we do not successfully maintain a strong brand, our business could be harmed.

Our trademarks are an important element of our brand. We have faced in the past, and may face in the future, oppositions from third parties to our applications to register key trademarks in foreign jurisdictions in which we expect to expand our presence. If we are unsuccessful in defending against these oppositions, our trademark applications may be denied. Whether or not our trademark registration applications are denied, third parties may claim that our trademarks infringe their rights. As a result, we could be forced to pay significant settlement costs or cease the use of these trademarks and associated elements of our brand in those or other jurisdictions. Doing so could harm our brand or brand recognition and adversely affect our business, financial condition and results of operation.

Yelp Strengths

Yelp is one of the leading providers of information about local businesses. We believe that our success is largely attributable to the breadth, depth and overall quality of the more than 22 million reviews contributed to our platform. These reviews helped us draw approximately 61 million unique visitors to our website, on a monthly average basis for the quarter ended September 30, 2011. In addition to the reviews available on our platform, other key strengths contributing to our success include:

• Passionate Community. We foster and support vibrant communities of contributors in the markets in which we operate, creating an environment that is conducive for people to write thoughtful and detailed reviews about local businesses. These local communities are hard to replicate, and they generate the detailed and passionate reviews for which we are known.
• Leading Brand in Local. Our exclusive focus on local has helped us to establish a powerful brand identity for local search. To maintain our strong brand, we will continue to foster communities of contributors, strive to ensure the richness and authenticity of reviews and increase the speed and accuracy of local business search.
• Powerful Network Effect. Our platform helps people find great local businesses to meet their everyday needs. As more people use our platform, more of them write reviews. Each review that a user contributes helps expand the breadth and depth of the content on our platform, in turn drawing in more consumers. This increase in consumer traffic improves our value proposition to local businesses as they seek low-cost, easy-to-use and effective advertising solutions to target a large number of intent-driven consumers.
• Proven Market Development Strategy. We have a track record of successfully building out new markets, which is a key driver of our growth and our leadership position.
• Local-Focused Sales Force. We have been able to attract and train a highly specialized and effective internal sales force. Members of our sales force benefit from our powerful business model and brand, as they have easy access to approximately 19 million U.S. local businesses and approximately 529,000 claimed local business locations worldwide on our platform.
• Proprietary Technology. Our highly skilled engineering team has developed superior search and review filtering technologies, which, together with ongoing innovation, help us attract a large base of contributors, consumers and local businesses.
• Attractive Business Model. Reviews contributed by our users enable us to benefit from low content creation costs. Based on the breadth of content and variety of advertising solutions on our platform, we have been able to attract a large audience of consumers with almost no traffic acquisition costs and a diverse customer base of local business and national brand advertisers.

Yelp Market Development

As of September 30, 2011, Yelp was active in 43 Yelp markets in the United States and 22 Yelp markets internationally. In the markets we have entered, review growth and consumer activity are generally followed by revenue generated from local businesses. To illustrate the development of our markets as they scale, we highlight below our review and revenue metrics for three cohorts of Yelp markets in the United States: the Yelp markets that we launched in 2005-2006; the Yelp markets that we launched in 2007-2008; and the Yelp markets that we launched in 2009-2010.

Yelp Business: Industry Overview

Every day, hundreds of millions of consumers make decisions about where to spend their money at local businesses. According to the U.S. Census Bureau, in the United States alone, there are over 27 million local business locations, which we believe represents a multi-trillion dollar market for commerce. According to BIA/Kelsey, a market intelligence firm, local businesses are estimated to have spent $19.6 billion on online advertising and $113.6 billion on traditional offline advertising in 2010. We believe several secular trends will increasingly challenge the traditional ways in which local businesses have connected with consumers and will offer opportunities for solutions like ours.

Online Reviews are Gaining Credibility. With the growth of the Internet, online reviews have become a regularly relied-upon source of information. According to a 2011 survey of U.S. consumers conducted by Cone Communications, a public relations and marketing agency, 87% of respondents said that positive information they read online reinforced their decision to purchase a product or service and 64% of respondents said that they go online to search for customer or user reviews.

Local Advertising is Moving from Offline to Online. Over the past decade, the advertising market for local businesses has undergone rapid and fundamental changes. Consumers who at one time turned almost exclusively to the yellow pages, newspapers, magazines and other forms of offline media for information about local businesses are now increasingly relying on online resources. As consumers move online, local businesses are shifting their ad spending from traditional media sources to online advertising.

Mobile Connected Devices and Apps are Proliferating. Mobile devices provide an ideal platform for people to search for local businesses due to their ability to identify consumer location and provide all the benefits of digital content to consumers on the go. IDC, a market research firm, estimates that there will be over 1 billion smartphone shipments worldwide in 2015.

Why Consumers Choose Yelp

Yelp believes consumers are drawn to our platform because Yelp reviews reflect recent, firsthand experiences from the community that help consumers find the best local businesses for their everyday needs. The Yelp platform is free and easy to use and has broad demographic appeal, serving local communities in the United States and internationally.

Yelp Reviews. Yelp reviews are core to the Yelp experience and a key point of differentiation from competing services. The passionate and detailed reviews on Yelp form a rich database from which consumers can draw relevant information about how and where to spend money locally.

Some of the distinguishing characteristics of Yelp reviews include:

• Breadth. Our users have contributed over 22 million reviews covering a wide range of local business categories.
• Depth. We feature full-text reviews, providing detailed, searchable information about local businesses with greater depth of content than most competitive offerings. As of September 30, 2011, the reviews on our platform contained an average of more than 100 words. In addition to more than 22 million reviews, we collect photos, “check-ins” and other detailed information about local businesses. The in-depth nature of these reviews and other information allows Yelp to provide useful responses even to very specific queries from consumers.
• Relevant and Recent. Our platform is continually updated with fresh content from the community. Our contributors submitted over 25,000 reviews per day during the quarter ended September 30, 2011.
• Trusted and Credible. The credibility of Yelp reviews is a critical component of our value proposition and brand. We ensure that all reviews are written by users with public Yelp profiles, and we encourage local businesses to respond to positive and negative reviews alike. We also use proprietary, automated filtering software to help us showcase the most helpful and reliable reviews among the millions that are submitted to our website.
• Superior Search and Discovery. The combination of our proprietary search technology and our content enables consumers to receive especially relevant results for highly specific local searches.
• Mobile. Our mobile app is an ideal way for people to discover great local businesses. It combines our reviews and other relevant information with knowledge of the consumer’s location in an integrated experience. Our mobile app also provides new ways to contribute content to our platform through features that let consumers “check-in” at local businesses and submit photos and “quick tips” directly from their smartphones.