Whoever Buys Yelp Will Inherit The Lawsuits

In light of today’s reports that Google and maybe other companies are negotiating to buy Yelp, we wonder what an acquisition would mean for the various lawsuits that are filed against Yelp’s users.

Foster City dentist Yvonne Wong, for instance, sued a Los Altos couple — Tai Jing and Jia Ma — for defamation last year in Santa Clara County Superior Court, after they posted a highly negative review about her work on their son. She also wanted to sue Yelp, but held off when she found out that the site might be immune under the 1996 Communications Decency Act, which allows websites a lot of leeway in publishing material posted by third parties.

In September, meanwhile, another dentist, Gelareh Rahbar, filed a similar suit in San Francisco Superior Court against one of her patients, Jennifer Batoon, after Batoon posted a negative review of Rahbar’s work.

Rahbar’s suit was struck down under California’s anti-SLAPP (Strategic Lawsuits Against Public Participation) law, which allows Californians to speak out on matters of public interest, but Rahbar has asked the court to reconsider. A hearing is scheduled for January 7.

Wong’s case was allowed to go forward and Jing and Ma appealed — a decision is due any day. A third suit, filed by San Francisco chiropractor Steven Biegel against his patient, a San Francisco artist named Christopher Norberg, was settled last year.

Yelp generates extremely strong feelings among business owners, especially in San Francisco where it started. Some love the review service. But, for awhile, there was a steady drumbeat of negative media stories about Yelp that were usually generated by disgruntled business owners who would call reporters and complain, often anonymously because, they said, they feared backlash from Yelp.

Accusations that Yelp would allow business owners to pay Yelp to manipulate their reviews and put the good ones on top were never proven, but some business owners were convinced that it was happening, and it was never clear from the outside exactly how Yelp operated. The company has an algorithm to sort and cull reviews that it says it is constantly working to improve.

Yelp this year started allowing business owners to respond to their reviews, which has seemed to calm bad feelings and help Yelp with its popularity problems, according to Mark Goldowitz, the Berkeley attorney who represents the defendants in both these cases.

Whoever buys Yelp, though, is going to inherit a host of unresolved issues over what people should be allowed to say about each other online — issues that will linger for years to come.

Separately, I think it’s a good time for Yelp to sell. The company hasn’t raised capital for nearly two years — there was an expansion round of $15 million in February of 2008, according to Thomson Reuters, taking its total to $30 million. It now has competition, both from small companies and from Google, and it’s hard to see how Yelp can get big enough to achieve the world domination that the founders envisioned when they started the company five years ago.

Bigger companies are needed to carry this particular torch forward.

Below, if you’re curious, is Rahbar’s complaint.

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3 Comments

  • Yes, it’s definitely a good time for Yelp to *sell.* But it’s a lousy time for Google to be buying.

    This is why Google’s Corp Dev department (and most corp dev departments) should be summarily canned. $500 million dollars? Really? If Google invested $500M, do you think they could effectively compete with Yelp? I think so. Hell, give me $500M to invest, and I’ll beat the crap out of Yelp. Price is what you pay, value is what you get.

    Outside the Bay Area and New York, Yelp’s reach is limited at best. How much profit could they really be generating, and at what cost vs. Google’s small business reach with adsense? Let’s assume $500M is the right number, and we’re paying 20x forward cash flow, which is a pretty hefty multiple. $25M in free cash flow next year? Which would imply revenues of what, $60M-$70M if their margins were outrageously good? If they had any hope of doing that much in profit, their VCs wouldn’t want to sell and they’d be fending off secondary purchase offers left and right.

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  • “Hell, give me $500M to invest, and I’ll beat the crap out of Yelp.”

    No. You wouldn’t. Building a business takes intelligence and discipline across concept, execution, management and capitalisation. Relegating all the value to a single one, capitalisation, even assuming you are qualified and able to run the business, is fool-hardy.

    “Outside the Bay Area and New York, Yelp’s reach is limited at best.”

    This is where the extra FCF comes from. Yelp has a solid name, an excellent business model and an algorithm that Google hasn’t been able to beat on its own. With Google’s scaling power, however, it could easily build into a powerful business.

    We also have no idea about internal projects at Google that may have strong synergies with what Yelp is doing. One external project that comes to mind is Google Maps – marrying its recommendation service with advertisements could be a profitable model for Google.

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