Yelp Stock Spikes in August Table of Contents Move to Mobile Gives Reviews Company Advantage Over Google

Street Fight's monthly insights on the market potential of hyperlocal businesses September 2012, Issue 6

Yelp Stock Spikes in Yelp (NYSE:YELP) beat market expectations twice relationship with consumers through its application, August in August, announcing better than expected and thus begin to take substantive market share

Facebook Shows Signs of earnings for Q2 and seeing a 23% surge in its stock from the search giant. Local Push price following the expiration of the company’s lockout period. Many expected Yelp’s price to dip as It’s in this context that Google acquired Frommers’ Payments Race Heats Up inside investors cashed out large equity holdings (à travel guide business earlier this month from With Major Partnerships la Groupon (NASDAQ:GRPN) and Facebook publisher John Wiley & Sons (NYSE:JW.A) for a \ (NASDAQ:FB)), but the company’s leadership sold reported $25 million. The acquisition, which comes Investor Perspective – virtually zero stock and short-sellers were forced to a little less than a year after the company snapped Private Markets cover bets by buying stock, adding to the spike. up local reviews company Zagat, builds on its

Investor Perspective – While the surge says more about investor discipline continued push into the content business, Public Markets than long-term value, Yelp is one of the few particularly in the local space. We see Google’s hyperlocal companies that have shown sustained push into local content as part of a wider mobile Acquisition Spotlight: Yext growth over the past six months with its stock price strategy that looks to integrate local information Sells Felix Business to up 47% since its March 1 public offering. deeply into Google-owned services like its mobile IAC’s CityGrid Media assistant product Google Now. In order to build the

Part of Yelp’s success is due to growth in key integrated search and discovery products that *** trends that underlie its model – namely, the shift in succeed on mobile, Google needs to have deeper What is Street Fight? local search from desktop to native applications on control over not only which content is surfaced but mobile devices. That’s an important indicator for how consumers interact with it, making ownership Street Fight is a media, the company because Yelp’s competitive position in a necessity. the mobile market is far stronger than on the web, events, and research where the traditional search engines still dominate While Frommers’ traditionally played in the travel company focused on the discovery. On mobile, and particularly in local, rich vertical, the type of atomize location-specific business of hyperlocal content – reviews, photos, menus etc. - is an content, which Google will leverage is largely content, commerce and essential part of the search experience, making the agnostic to use case in the local web. The question technology. The Street link referral model, in which a search engine directs for Google will center on whether it can adapt the Fight website publishes users to third-parties, largely uncompetitive. company’s editorial structure to fit the needs and news, commentary, case Instead of relying on Google's (NASDAQ:GOOG) realities of Google’s business model. While Zagat algorithms to feed users to its site, the mobile and Frommers’ premium content may add some studies, and how-to environment allows Yelp to build a direct value to Google’s product, we believe that articles to help the sustainable hyperlocal content models must be hyperlocal ecosystem Hyperlocal Struggles After IPOs rooted in solid user-generated environments. achieve sustainable Yelp Continues To Outperform Successful hyperlocal companies like Foursquare business models. and Yelp have managed to scale quickly because Yelp% Angie's%List% Groupon% 30.00 they focus on developing environments in which,

*** users generate content rather than static editorial structures in which content costs continue to 25.00 The Hyperlocal Investment increase with size. Report is a subscription- Stock Price Stock only newsletter. Purchase 20.00 Street Fight View: Look for Yelp’s user base to individual copies for $99 continue to grow as it benefits from a partnership 15.00 with Apple that gives it a prominent position on the apiece, or sign up for an iPhone 5 coming out this month, and continues to annual $799 subscription. 10.00 expand internationally. Margins will likely stay the Click here to subscribe. same as the company pours capital into sales and marketing costs to enter new markets, but once the 5.00 land grab tapers off, we believe the company is well-positioned to upsell existing clients on value- 0.00 added services like food delivery. Mar Apr May June July Aug

The company will likely be able to undercut competition by packaging these services with its existing subscription offerings -- a key product as the company moves from selling search ads to providing a complete local marketing tool set. Over the next 4-6 months, investors should keep an eye on merchant engagement in international markets and watch for forthcoming mobile monetization products from the company, which will have a big impact on revenue projections down the road. !

Facebook Shows Signs of Local Push

Local Search and Discovery Provides Big Opportunity for Social Network

Facebook (NASDAQ:FB) strengthened its hyperlocal marketing product in August, simplifying the self-serve ad creation tool used by small and medium-sized businesses while pressing users to integrate location deeper into content. With pressure continuing to mount from investors to accelerate revenue growth, the social network appears to be exploring its still-untapped hyperlocal opportunity.

In the months leading to its IPO in June, COO Sheryl Sandberg was outspoken about the role local

advertisers would play in Facebook’s growth even as the company’s consumer facing product remained

dormant. August saw the first substantial movement by the company in the hyperlocal space since it rolled

out a self-serve offers product to select businesses across the US in June.

Right Borrell Associates projects local spend on Local Social Spend: 2011 -2016 social media to nearly triple by 2016 with a 21%

COGR.

$3,500 With local social spend projected to exceed $8.3 billion by 2015 and nearly 70% of SMBs already $3,000 using Facebook, the company is well positioned to $2,500 generate substantial revenues from a well-executed local play. To fully leverage its opportunity $2,000 however, Facebook cannot simply target its way to

success. It will need to expand its consumer-facing (Millions) Media Social on $1,500 hyperlocal offerings in order to increase its hyperlocal inventory. That is, content with local $1,000 intent, not simply a tacked-on geo-tag. The check- in, for example, is so valuable not simply because it $500 gives brands access to a consumer’s location, but $0

because it identifies a user as a “local consumer.” Spend Local Project 2011% 2012% 2013% 2014% 2015% 2016%

The Instagram acquisition, which was approved by Source: Borrell Associates the FTC in August, will likely play an important role in the company’s local strategy. Earlier this month, case that monetizes on mobile extremely well, and the photo-sharing service retooled its application to with mobile set to eclipse desktop in total local leverage the massive amount of latent location data search queries, the play would mesh well with the already being collected with shared content. Unlike companies growing mobile audience. Facebook’s other content formats – status updates, wall posts, likes etc. – photos are deeply tied to the As we’ve discussed in previous editions of this places where they are taken, and as marketing report, local search as a fulfillment tool is quickly content, are becoming important metadata in local becoming commoditized as the consumerization of consumers’ search and discovery process. distributive computing makes accessing and organizing large location datasets feasible for Search is one of the big potential revenue streams smaller companies. We see marketing dollars for Facebook, and it began to move into the wider shifting away from traditional search toward space with the release of “sponsored results” discovery-oriented services that enable marketers earlier this month. With the company’s consumer to reach consumers earlier in the decision cycle. facing search product still in its infancy, the value Whereas objective data like name, address, and for advertisers remains unclear, but local discovery phone number traditionally drove value for may prove to be an easier space to disrupt as marketers, subjective information like social companies like Yelp have already broken Google's content and rich data like photos will become the (NASDAQ:GOOG) ubiquity among users. Local key to the value proposition in local search and search provides the type of end-of-the-funnel use- discovery.

Street Fight View: While we believe that Facebook has a large opportunity in the local space, do not expect to see substantial revenue generated until the company improves its consumer-facing offerings in

order to build up its hyperlocal inventory. Instagram will provide a boost, but we believe the acquisition of a

proven hyperlocal player like Foursquare could quickly position Facebook as a major target for marketing spend. !

Payments Race Heats Up With Major Partnerships Square, PayPal Score Big Partnerships, Placing Pressure on Loyalty Plays 2.75% transaction fee with a flat monthly rate. August was a big month for the connected LevelUp, a Boston-based startup that raised $9 payments space as major players nailed down key from Deutsche Telecom in early August, erased partnerships, effectively pushing the space into the processing fees altogether to focus its monetization mainstream. After building a strong foundation efforts on loyalty and rewards campaigns. As Street among small businesses, Square jumped into the Fight has discussed in earlier reports, we believe enterprise space through a partnership with that interchange fees - the traditional revenue Starbucks that will see the startup manage all debit generator for payment companies - will play little, if and credit card transactions for the Seattle-based any, role in the payment industry’s revenue model company. EBay’s (NASDAQ:EBAY) PayPal followed within 24 months. suit later in the month, announcing a partnership with Discover (NYSE:DFS) that will allow the eBay Competitively, payments players are far better subsidiaries’ 50 million users to pay via PayPal at positioned than existing companies in the loyalty nearly 7 million merchants across the U.S. The and rewards spaces to drive value for merchants. partnerships set the stage for accelerated growth Control over the transaction allows payment over the next 6-8 months and point to a companies to a) integrate redemption into the repositioning among hyperlocal startups as payment process, b) identify high-value existing payment plays push into the loyalty and rewards customers and target with incentives in real-time, space. and c) serve as a platform on top of which, third- party lead generation companies can innovate. Part of what’s driving payments players into other While loyalty and rewards plays may see a window verticals is, among other reasons, a downward as connected payments players fight for market pressure on interchange fees. Square released a share, these non-payment players will likely be new pricing model for small businesses clients squeezed out as early adopters adopt payment earlier this month, which replaces the existing products.

Street Fight View: Look for the downward pressure on interchange fees (for the SMB market) to continue as competition within the payment space heats up. We believe that connected payments companies will likely adopt a subscription model, which bundles basic payment processing with ancillary local marketing services like offers and loyalty solutions.

It’s unclear when a company like eBay will begin to connect its payment product PayPal Here with its local marketing entity PayPal Media Network (formerly Where) and local product search service Milo, but the revenue upside is substantial. Over the next 12-18 months, we will likely see a land grab within the SMB market as payment players look to build up inventory before expanding their product. !

Investor Perspective – Private Financing Local Bonus, Quick Pay, Hopper, and CoachSurfing From: First Analysis

Hyperlocal business models finding venture backing in August consisted of a blend of content oriented sites and utility services. The size of funding rounds continue to be all over the map with content plays generally securing larger rounds to backstop developing monetization strategies.

Local loyalty solutions provider LocalBonus received $900,000 in seed financing led by Pay Ventures. Actinic Ventures and other angels participated in the round. The company’s approach is to enable the consumer to obtain points (redeemed for cash) using their own debit/credit card. The consumer simply registers a card with LocalBonus and receives rewards when transacting with participating local merchants. The simplicity of the model is likely to have appeal for consumers. The more challenging aspect of the local loyalty solutions market in general is demonstrating to local business an ability to help them grow by either increasing transaction frequency, size, or both.

Parking industry mobile payment platform QuickPay Key Funding: August 2012 upped its funding total to $3.5 million with new money from Andreessen Horowitz and Advanced Technology Ventures. In addition to allowing consumers to pay for local parking services via phone app, text message, or voice, the QuickPay platform enables parking providers to add services including loyalty programs, coupons, and validations. Intuitively, we like the value proposition for consumers with this model, so monetization through local advertising is not quite as important as with some other mobile payment models we’ve seen. However, our view is all mobile transaction processing models will have to set as a priority the monetization of data assets contained within the platform. This is where operating models can get expensive, requiring follow on investments.

Travel oriented start-ups continue to attract interest from venture investors due to size of the market and the strength of consumer engagement. Social travel facilitator CouchSurfing raised $15 million from existing and new investors, which include General Catalyst Partners and Menlo Ventures. Travel data company Hopper raised $15 million from OMERS Ventures, Brightspark Ventures, and Atlas Venture. Travel is a “high cost of failure” type of purchase for consumers, with much time/effort being invested up front to ensure a satisfying experience. TripAdvisor (NASDAQ:TRIP) was the first digital property to address this market dynamic in a meaningful way, but there will likely be others given the differentiated nature of travel habits/preferences Source: Capital IQ, Architect Partners among consumers broadly.

FA view: The network effect of bringing consumers and businesses together for utility platforms like QuickPay and LocalBonus to succeed can take significant time and capital to develop but offers the promise of stable/recurring revenues and well defined unit economics. In contrast, content platforms like CouchSurfing offer capital efficiency but monetization strategy becomes a key investor consideration. !

Investor Perspective – Public Markets Hyperlocal Stocks See Volatility as IPO Dust Settles

From: First Analysis

Market performance of the publicly traded companies in and around the hyperlocal space was mixed in August. While the NASDAQ index was up 5.7% for the month, many companies performed slightly better including broadcast and print media properties Fischer Communications (NASDAQ:FSCI) (11.6%) and Gannett (NYSE:GCI) (8.2%). Constant Contact (NASDAQ:CTCT) was up 16.8% and Yelp was up 9.7%.

Not faring so well were shares of Angie’s List (NASDAQ:ANGI) (-26.5%), Facebook’s (NASDAQ:FB) (- 16.9%), and Groupon’s (NASDAQ:GRPN) (-37.7%). and Angie’s List saw trading restrictions expire on about 45% of its fully diluted share base causing shares to slide meaningfully as insiders/employees sold positions. Facebook experienced something similar but with the added dimension of a venture backer/board member (Peter Thiel) having sold the vast majority of his position so soon after going public. Regardless, lock-up expirations are an issue every public company deals with at some point and are inherently short- term considerations for investors when deciding when to buy and sell a stock.

Groupon’s sustained share price woes are a different matter altogether. Oftentimes when a public

company’s shares decline as far (over 80% since IPO) and as fast (less than a year) as Groupon’s there is little the company can do to reverse market fortunes apart from making pretty significant changes in the

way the business is either managed, positioned in the marketplace, or both. Talent acquisition and retention generally become more challenging as the value of equity incentives declines potentially leading

to loss of key managers and a general brain drain that keeps the company from moving forward strategically.

Below: Angie’s List, Groupon fall by over a quarter; Attracting new investors as a means of finding Dexone, Supermedia spike on news of merger support for a stock in this position is another challenge. Institutions with buy and hold strategies look at the stock charts of companies like Groupon The Hyperlocal Stock Index: and tend to avoid them in fear of “catching the August 2012 falling knife” believing the market has formed an opinion of the company and their decision to invest (7/1 -8/1) won’t change that. Absent new information or a Company Market Cap Share Price Quote Chg. change in direction led by the CEO or the board of Angie's List (NASDAQ: ANGI) 548.77 M 9.56 -26.5% directors it is difficult for new institutional money to AOL (NYSE:AOL) 3.17 B 33.67 5.7% Facebook (NASDAQ: FB) 40.60 B 18.05 -16.9% become engaged. Without new money coming in to Groupon (NASDAQ: GRPN) 2.76 B 4.15 -37.7% support the stock, it drifts further downward and Local.com (NASDAQ:LOCM) 43.08 M 1.98 -8.3% the cycle becomes reinforcing. The process Reach Local (NASDAQ: RLOC) 377.05 M 12.57 7.3% generally continues until a catalyst is introduced to Yelp (NYSE: YELP) 1.53 B 22 10.2% reverse it. DexOne (NYSE:DEXO) 90.93 M 1.74 58.2% SuperMedia (NASDAQ:SPMD) 61.12 M 3.7 60.9% FA view: Share prices of some hyperlocal eBay (NASDAQ:EBAY) 63.01 B 47.47 7.2% companies may continue to experience volatility in Constant Contact (NASDAQ:CTCT) 605.64 M 19.55 16.77% the short-term as ownership stakes transition from Gannett (NYSE:GCI) $3.38 B 15.26 8.2% Google (NASDAQ:GOOG) $223.61 B 685.09 8.2% private to public hands. Price volatility and public Yahoo (NASDAQ:YHOO) $18.30 B 14.65 -7.5% company maturity tend to be inversely related. Fisher (NASDAQ:FSCI) $317.18 M 35.66 11.6% Significant and prolonged share price declines Source: Street Fight generally require a substantive catalyst in order for the market to change its view. !

Acquisition Spotlight Yext Sells Felix Business to IAC’s CityGrid Media

From: Architect Partners

On August 20, 2012, CityGrid Media (subsidiary of IAC/InterActiveCorp (NASDAQ: IACI)) agreed to acquire the pay-per-call advertising business of Yext, named Felix, for an unconfirmed $30mm.

Target Description

Yext launched Felix in 2009 as a pay-per-call local advertising service. What makes Felix unique is its patent-pending engine that uses speech recognition technology to listen to all the calls received by a local business. It then transcribes and analyzes the calls, separating those received from consumers from those received from wrong numbers, telemarketers and job seekers. Rather than paying for non-customer phone calls, businesses only pay for potential customer calls. Felix provides presence and listings to its enterprise and small business customers across 200 different websites, mobile apps and media properties such as SuperPages, Local.com, PhysicalTherapists.com and Dogster. Yext separated Felix into a subsidiary earlier in 2012, as it shifted focus onto its newest service called PowerListings. Marchex (NASDAQ: MCHX) and RingRevenue are competitors to Felix, in addition to numerous competitors offering basic click-to-call capabilities without voice analysis.

Based in New York City, Felix has approximately 85 employees who will be joining CityGrid Media with this acquisition. Yext has raised $65.8mm in six rounds of funding, with investors including Marker, CrunchFund, Sutter Hill Venturesi, Institutional Venture Partnersw (IVP), WGI Group (Michael Walrath) and angel investors including Howard Lerman, Brian Distelburger and Brent Metz.

Buyer Description Comparable transactions focused on expanding hyperlocal capabilities include Constant Contact CityGrid, an online media company, connects (NASDAQ:CTCT) acquisition of SinglePlatform; Internet and mobile publishers with local BazaarVoice’s (NASDAQ:BV) acquisition of advertisers. CityGrid owns and operates local PowerReviews; the Hibu’s (formerly Yell Group) consumer properties including Urbanspoon, acquisition of Moonfruit; Intuit’s (NASDAQ:INTU) Citysearch and Insider Pages. The company was acquisitions of Demandforce and AisleBuyer; founded in 1995 and is based in West Hollywood, Groupon’s (NASDAQ:GRPN) acquisitions of CA. CityGrid Media operates as a subsidiary of Ditto.me, Breadcrumb, Kima Labs, Adku and IAC/InterActiveCorp (NASDAQ: IACI). Zappedy; Home Depot’s (NYSE:HD) acquisition of Felix will join CityGrid’s portfolio but will continue to Red Beacon; ReachLocal’s (NASDAQ:RLOC) operate as an independent business under Yext co- acqusititions of DealOn and SMBLive and Reply!’s founder Brent Mentz, who is joining IAC as CEO of acquisition of MerchantCircle. Also, given Felix’s Felix. speech recognition technology, Apple’s (NASDAQ:AAPL) acquisition of Siri and Nuance’s Transaction Parameters acqusitions of Transcend Services, Vlingo, SpinVox and Jott Networks would also be comparable. Although deal terms were not formally disclosed, TechCrunch reported the deal to be worth about Strategic Rationale $30mm. Felix is reportedly on track to earn nearly $30mm in revenue this year. The acquisition of Felix advances CityGrid’s mission of empowering local businesses with valuable tools Transaction Value $30mm to effectively acquire and manage customers. TV/Revenue Multiple 1.0x Below: 16 M&A transactions were announced within the hyperlocal industry in August, down from 22 in July Key Acquisitions: August 2012

Value Target Acquiror ($mm) Summary

SuperMedia Redpoint Ventures; Sutter Hill Ventures; $34 Cash-gift service which connects credit and debit (Nasdaq:SPMD) Pinnacle Ventures; The Contrarian cardholders with national and local merchants. Group, Inc.; Opus Capital Felix DCM; Lightspeed Venture Partners $14 Provides digital loyalty programs and cards for businesses and cardholders. Treat Technologies Menlo Ventures; Correlation Ventures; $14 Provides peer-to-peer car sharing marketplace Innovation Endeavors; Collaborative that enables car owners to rent their cars. Fund; Grade-A Investments BLiNQ Media Atlas Venture L.P.; Brightspark Holdings, $12 Developing a search engine for planning travel Inc.; OMERS Ventures trips. Frommer Travel Advanced Technology Ventures; $4 Cloud-based mobile parking access and revenue Guides Accelerator Ventures; Andreessen control system that integrates with any legacy Horowitz; Fontinalis Partners, LLC parking infrastructure. Cloud Nine Media Redpoint Ventures; Sutter Hill Ventures; $34 Cash-gift service which connects credit and debit Pinnacle Ventures; The Contrarian cardholders with national and local merchants. Group, Inc.; Opus Capital The Hyperlocal Investment Report is a subscription-only newsletter. Purchase individual copies for $99 apiece, or sign up for an annual $799 Using advanced voice recognition and call analytics technology, bundled with an easy-to-use interface, Felix subscription. Click here to enables merchants to market themselves with an innovative and sophisticated pay-per-action phone- subscribe. advertising product. According to CityGrid’s CEO Jason Finger, the acquisition fits into their focus to build customer acquisition tools for merchants, and increases closed-loop transaction services supporting local Read more news and insights advertising for SMBs. on hyperlocal at the Street

Fight website; get essential hyperlocal headlines in your AP View: In Yext’s official blog post, co-founder Howard Lerman retold his meeting with Ben Horowitz inbox every morning with from Andreessen Horowitz about a year ago. Although the venture capitalist declined the investment, he Street Fight Daily; and explore suggested Lerman to sell the profitable Felix business (90% of their revenue at that time) to invest in our events and research. Yext’s newest “blockbuster” product PowerListings. Lerman finally took that advice and has made his intent clear: focus all of Yext’s financial and intellectual capital on PowerListing, a service which syncs business The Hyperlocal Investment location information across multiple platforms and allows local businesses and enterprises to easily manage Report their online presence. Launched a little over a year ago, Yext has synced 2.5 million updates for over Editor: Steven Jacobs 70,000 customer locations, including tens of thousands of small businesses and ten Fortune 100 Contributor: Architect Partners Contributor: Todd Van Fleet, companies. Yext recently raised $27mm at a $270mm valuation. ! First Analysis