But a closer look at Yelp's IPO prospectus shows the company looks more Groupon-y than many investors would be comfortable with. For one thing, Yelp has consistently posted a loss. In the first nine months of 2011, it showed an operating loss of $7.4 million, equal to 15% of its $40.3 million revenue in that period. To date, Yelp has accumulated $32 million in losses. (Zynga, by contrast had a 10% operating margin in the first nine months of 2011.)
Slowing revenue growth, one of Groupon's recent concerns, isn't afflicting Yelp so much. In 2009, Yelp's revenue grew by 113%. In 2010, the growth rate slowed somewhat to 85% but held steady at 80% for the first nine months of 2011. Yelp's most recent quarter saw revenue grow 18% from the previous quarter, compared with a 9% growth rate for Groupon. Although Yelp is older than Groupon, it's growing twice as fast sequentially.
Still, Yelp faces some problems that Groupon doesn't. For one, its operating costs are rising. Yelp's sales and marketing costs were equal to 67% of its revenue last quarter, up from 63% in the previous quarter. Similarly, product-development costs rose to 16% of revenue from 14% and administrative costs rose to 21% from 18%.
Even more alarming, Yelp has yet to generate cash flows. Its operations aren't yet financing themselves. Cash flows from operations were a negative $296,000 in the first nine months of 2011, although that figure was down from negative $6.4 million a year earlier. While Groupon has been cash-flow positive since 2009, Yelp's operations appear to be burning through cash even as it's going public.
Yelp is a popular and growing startup that needs to raise capital to finance its future growth. Unfortunately, its years of losses and historical inability to generate cash from operations suggest the IPO is being rushed. That's too bad for the company, given the recent sense of disenchantment with money-losing web IPOs.
For some time, the promise of the social web made companies like LinkedIn and Yelp seem like investor safe havens in an uncertain economy. But maybe not anymore. A profitable company like Zynga could still receive a warm welcome in the IPO market. But weaker companies are likely to get kicked around. The yelps that result won't be happy ones.