Yelp Helps Kill the IPO Market


Poor Yelp. The company does something (sort of) innovative and nobody notices.

While Apple was busy applying the Steve Jobs reality distortion field on tech journalists, Yelp quietly announced it had secured a Series E financing deal worth $100 million over several years.

On any other day, the announcement would have raised eyebrows for the sheer size of the investment.

But the real interesting part of the equation isn’t the size of the round. It’s the fact that the company raised only $25 million in new equity. The rest of the round is going to buying out the shares of vested employees and “other eligible shareholders.”

This type of hybrid financing is becoming increasingly popular among large, late-stage technology companies. Secondary investors such as Millennium Technology Ventures have played a role in facilitating employee liquidity for some time, helping companies such as eHarmony, Facebook and Zappos set up plans to convert employee stock and options into cash.

This is the first time a buyout shop has played the role of secondary purchaser in such a transaction.

More importantly, financings like this obviate the need for startups to go public.

An IPO used to be a financing event, the one place where a startup could go to reliably raise $50 million or more. Providing a payday to investors and employee stockholders was an added benefit. Anybody who wanted to buy a house or put their kids through college could quickly liquidate their equity stake in the company.

Venture capitalists, though their own success in the run-up to the dotcom boom obviated the need for companies to turn to the public market for massive financing rounds. This is how the “venture overhang” was invested—in ever-larger financings. The number of bigger-than-$25 million venture rounds increased to 250 in 2007, up from 55 in 1997, according to data from Thomson Reuters (publisher of PEHub.com). Not even the rise of cleantech can account for that type of gain.

Now Yelp has made it clear that startups don’t need public market IPOs to keep their employees liquid.

And yet nobody can figure out why the IPO market is toast. The NVCA says in its “Four Pillar” plan that the death of the boutique investment banks and Sarbanes-Oxley killed the IPO market. Accounting firm Grant Thornton blames decimilazation, trading rules and e*Trade.

But if you really want to see an IPO rebound, you’re going to have to rev up the DeLorean to 1.21 gigawatts and take it back to a time when venture capitalists and other private investors didn’t have the cash to finance massive growth rounds or the ability to buyout the employees and other shareholders.